July 15, 2016 / 5:30 AM / a year ago

Swatch warns profit to dive, French attack darkens outlook

ZURICH (Reuters) - Swatch Group (UHR.S), the world’s largest watchmaker, warned investors that profit would at least halve in the first six months of the year after sales fell in Hong Kong and Europe, sending its shares sharply lower.

Swiss watchmakers are grappling with weak demand as fewer Chinese tourists shop in Hong Kong and Europe where they have been deterred by the fear of Islamist attacks. A strong Swiss franc also pushes up the production cost for Swiss watches.

A deadly attack in the French city of Nice on Thursday night when a truck ploughed into crowds celebrating Bastille Day killing more than 80 people added to the pressure on luxury goods and travel companies.

“France looks difficult and is likely to stay difficult,” Swatch Group CEO Nick Hayek told Reuters in a telephone interview.

“It is an important market. That is where tourists start their tours to most European countries.”

Paris, hit by deadly Islamist attacks last November, is an important shopping destination for tourists, many from China, and the Swatch profit warning marked the start of what is likely to be a downbeat earnings season for the luxury industry.

“Nice is going to further hurt the sector. Tourists just won’t want to come to Europe and particularly France during the summer,” Kepler Cheuvreux analyst Jon Cox said.

Shares in Swatch, whose brands also include Omega and Longines, slid more than 12 percent at one point, adding to a 17 percent fall so far this year and a 21 percent drop last year. They traded 8.3 percent lower at 265.5 euros by 0720 ET, while peer Richemont (CFR.S) also fell more than 3 percent.

Watches of Swiss watchmaker Swatch are displayed at a shop at the Bahnhofstrasse in Zurich, Switzerland July 15, 2016. REUTERS/Arnd Wiegmann/File Photo

MARGINS WILT

Overall net sales at Swatch are likely to have dropped around 12 percent in the first half of 2016, the group said in a statement, dragging operating and net income down by 50-60 percent.

Adding to the pressure on margins, Swatch said it had no plans to cut staff and also planned to maintain investments in new products and marketing. Swatch employs more than 36,000 in over 50 countries.

The logo of Swiss watch maker Swatch is seen outside a store in Vienna, Austria, June 4, 2016. REUTERS/Leonhard Foeger/File Photo

The company also said it saw only limited scope to push through price increases.

“The indication for a decline in operating margin from 18 to 9 percent has to be seen as a disaster or some one-offs are included,” Vontobel analyst Rene Weber said.

The company publishes full results on Thursday, July 21.

Hayek tried to put a brave face on the results.

“The first half is not so bad under the circumstances. Our profit about halved, but it’s still a profit,” Hayek said, adding positive developments in mainland China, the Olympic Games, where flagship brand Omega is official timekeeper, and a favorable comparison base should help in the second half.

“If you have a drop in sales to the extent that we have seen, you cannot make up for that even with the very good performance we have in many countries,” he added.

Editing by Sunil Nair and Keith Weir

Our Standards:The Thomson Reuters Trust Principles.
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