January 30, 2020 / 6:20 AM / 22 days ago

Swatch Group sees no quick rebound in key Hong Kong market

ZURICH (Reuters) - Swiss watchmaker Swatch Group (UHR.S) said on Thursday it expected its key Hong Kong market to remain challenging this year after a marked drop in sales there for the world’s biggest watchmaker in 2019.

FILE PHOTO: A logo of Swiss watchmaker Swatch is seen outside a shop at the Bahnhofstrasse in Zurich, Switzerland, July 15, 2016. REUTERS/Arnd Wiegmann

Swiss watch sales have underperformed other luxury goods as political protests shook Hong Kong, smartwatches took market share from similarly priced Swiss watches and changes in distribution took their toll.

“Group management expects healthy growth in 2020 in all markets in local currency, with the exception of Hong Kong SAR,” the company based in Biel in western Switzerland said in a statement on Thursday.

Net profit fell almost 14% to 748 million Swiss francs ($773.1 million) in 2019, and the operating margin declined to 12.4%, from 13.6% a year ago, Swatch Group said, proposing an unchanged dividend of 8 francs per bearer share and 1.60 francs per registered share for 2019.

Sales dropped 2.7%, or 1.8% at constant currency, to 8.24 billion francs, hit by a sharp decline in Hong Kong, where the group has over 90 retail stores, Swatch Group said.

Shares were indicated to open 4% lower, based on pre-market trading, extending a decline over the last week due to worries over the outbreak of the fast-spreading coronavirus in China that affects watchmakers’ biggest customer group, the Chinese, and the important travel retail channel.

“The stock is going to come under pressure as the margin is worse than anticipated and you have news flow on coronavirus getting worse and it is going to impact consumer sentiment and macrodata. Swatch Group is the de facto China play in European consumer,” Kepler Cheuvreux analyst Jon Cox said.

Cox said, however, that the group was making lots of efforts to cut costs, the cash flow had improved and the coronavirus fears would likely fade soon.

Swatch Group, with its cheap Swatch plastic watches, Tissot sports watches and high-end Omega timepieces, is doing less well than peer Richemont (CFR.S) because of its higher exposure to entry-price pieces that are under pressure from smartwatches, and weaker position in the fast-growing jewelry segment.

Richemont reported a 4% rise in sales in the quarter to Dec. 31, helped by double-digit growth in China and South Korea, which offset tumbling sales in Hong Kong and Japan.

Luxury goods giant LVMH (LVMH.PA) reported a slowdown in sales growth in the final quarter of 2019 as revenue in Hong Kong dropped sharply.

Editing by Michael Shields and David Evans

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