Swatch Group net profits fall 9.8% despite rise in sales and earnings

The Swatch Group, the world’s largest watch producer, reported a 9.8% drop in net profits for the half year (ended June 30), to about $139.5 million (231 billion Swiss francs), despite gains in gross sales and earnings.

The Biel, Switzerland, conglomerate also said it has lowered its full-year sales growth target to 5% to 8%, down from 10% to 12%. (Full-year sales for 2000 rose 18%). However, it said, final results depend on sales during Christmas, its most important selling season, and the financial and currency markets.

The Swatch Group report and financial analysts blamed the lower profits on several factors, including:

* Sluggish overall sales of it core watch division (down 0.6%); production problems leading to shortages for some new watches; weaker sales in the United States, and for the Swatch watch (the core of the group’s watch business), and a general slowdown in luxury goods spending around the world, due to the global economic slowdown.

* The troubled mobile phone industry, for which the Group’s electronic components division is a major supplier.

* A weak stock market. “Developments in the financial markets made it impossible to achieve an adequate level of profitability on invested funds,” said the Swatch Group report. In addition, last year’s results included an extraordinary income of $26.5 million (44 million francs) from a convertible bond, which is not applicable this year.

On a more upbeat note, the Swatch Group increased its half-year gross revenues to almost $1.2 billion. This is 2.3% higher than the record half-year figure for the first half of 2000 (which saw a 22% growth rate). If the effect of fluctuating currency rates is excluded, 2001’s half-year growth rate is 4%.

Operating income also rose in the first half to $190.2 million, a 1.6% gain which, says Swatch, “demonstrates the continuing operational strength of the Group.”

Watches. The Swatch Group’s watch division (providing about 70% of its turnover), saw its half-year sales drop 0.6%, to about $862.4 million. Its earnings, before interest and taxes, rise 4.9%, to $141.9 million. If the effect of foreign currency rates is excluded, though, it had a slight gain of 2%.

Some of this was due to weaker sales in the United States, which the Swatch Group blamed on “stock market turbulence, fears of a recession” and fewer Japanese tourists to Hawaii and the U.S. West Coast, which led to a “significant decline” in duty-free sales. (In contrast, the company said, almost all European markets reported growth.)

Among its 17 watch brands, Breguet, the luxury watch brand bought by the Group in late 1999, showed “excellent progression” in sales, says the report, However, some other brands showed “only modest growth” and the Swatch Group’s private label business was “once again sluggish,” the report says. Sales of Swatch watch-its popular low-cost fashion plastic watch that has helped spurred the Group’s growth for years and is the core of its watch business-were flat.

Another factor affecting its watch business was a backlog of in-demand new products -including Omega’s Co-Axial, Tissot’s T-Touch, new Blancpain and Rado watches, and Swatch’s Skin Chrono and Swatch jewelry – due to a “major shortage of production capacity,’ admits the report. However, its says, “substantial investment in our production facilities has increased production” of these models, leading to a considerable surge in turnover in June and July, compared with last year. Its production problem, says the Swatch Group, has been “more or less overcome, so that customers will receive ordered watches during the coming months.”

Retail. In other areas, Swatch Group continues to expand its international network of retail outlets. Plans are underway to open “mono-brand stores” for Breguet, Blancpain, Glashütte, Omega and Swatch and the Swatch Group’s new Tourbillion store concept in various European countries. (There are already several stores in France.) “The successful concepts will be gradually introduced in the USA and the Far East,” says the report without giving a timetable.

In a addition, “after the first successful marketing tests, work will continue on the expansion [of the Group’s new jewelry lines] under the brand names Breguet, Léon Hatot, Omega, and Swatch.”

The Swatch Group also plans to open its own distribution company in Mexico and Greece, the later in time for Olympic Games will be held in Athens in 2004. (The Swatch Group will be official timekeeper for the Olympic Games until 2010.)