ZURICH Swatch Group (UHR.VX), the world's largest watchmaker, expects demand to pick up in the second half as it posted a forecast-beating first-half net profit, sending its shares 10 percent higher on Friday.
The group, best known for its colorful Swatch watches, said net profit fell to 301 million Swiss francs ($280 million), above the average estimate of 275 million in a Reuters poll, as a recovery in financial markets in the second quarter boosted its investments.
The sales development of the last few months and current order entries were showing signs of recovery, and second-half sales should be in line with the second half of 2008, with some brands seen posting a rise in sales, the Swiss company said.
Several Swatch brands, such as Omega, Tissot, Longines and CK Hamilton, had all posted higher profits in July compared with last year, Chief Executive Nick Hayek told Reuters.
Mid-range brands such as Tissot and Longines are holding up better as consumers favor less expensive marques, while limited exposure to the tough U.S. and Japanese markets is also helping the company.
"The very high-end brands such as Blancpain, Breguet and Glashuette are having a more difficult time -- not with respect to customers, they are buying -- but because retailers are scared about ordering watches costing $200,000, $300,000, $400,000," Hayek said.
"But retailers are starting again to strongly order these more expensive brands, too," he said.
Many retailers had stopped ordering new products to run down stock built up during the boom years, while some struggled to get the necessary credit to buy goods after credit markets tightened.
By 0913 GMT, shares in the group had risen 10.1 percent to 231.30 Swiss francs, easily outperforming a 1.5 percent rise in the DJ Stoxx personal and household goods index
"The company outperformed the sharply declining watch sector, and its margin and net profit decline were ahead of expectations," Vontobel analyst Rene Weber said in a note.
"The outlook for the second half indicating sales in line with the second half of 2008 is a strong statement, which is supported by first encouraging signs of an improvement," he said.
Shares in Swatch Group have risen strongly in recent weeks as investors turn optimistic about demand picking up.
With an improving macroeconomic outlook and signs of recovery in luxury consumption in emerging markets, Swatch was well positioned against most other luxury peers, said Citi analyst Thomas Chauvet.
First-half sales slipped 15 percent to 2.48 billion francs, outperforming Swiss watch exports, which fell 26 percent in the first six months of the year.
Luxury goods groups such as LVMH (LVMH.PA), Bulgari BULG.MI and Hermes (HRMS.PA) have all seen demand for watches dwindle, contrasting with more resilient demand for leather goods, such as handbags.
Swatch's operating margin dropped to 14.7 percent, but Hayek said it had risen to between 15 and 17 percent in July.
The company was ready to accept a lower margin as it seeks to keep skilled employees, he said. It cut costs by negotiating new contracts with logistics groups and airlines.
Swatch Group trades at 16.8 times 2010 earnings, while Swiss rival Richemont (CFR.VX) trades at 17.7 times
(Additional reporting by Silke Koltrowitz; Editing by Dan Lalor and Gilbert Kreijger)
($1 = 1.074 Swiss francs)