ZURICH (Reuters) - The world’s biggest watchmaker, Swatch Group UHR.VX, said it expects faster sales growth and better margins in the second half as its Omega brand is growing again in China while demand for Harry Winston jewellery is buoyant.
In the first half of the year, there have been double-digit percentage falls in Swiss watch exports to China and Hong Kong, which absorbed a quarter of the timepieces that left Switzerland between January and June.
“Omega has come back strongly in mainland China, it’s not growing at a double-digit pace, but it’s on a modest growth path again,” Chief Executive Nick Hayek said on Tuesday.
He added that he saw single-digit growth in the second half for the group’s high-end brands, including Omega, which analysts estimate accounts for about a third of group sales.
Hong Kong, the biggest market for Swiss watches, where people from mainland China shop to avoid high taxes at home, never really collapsed for Swatch’s brands, Hayek said.
“We’ve always had at least 5-7 percent growth there, also in the high end,” he said in a telephone interview.
He confirmed that the group’s strong mid-range brands, Longines and Tissot, as well as its colorful Swatch plastic watches should continue to grow in double-digits in the region.
Sales of costly watches in China have been hit by a government crackdown on gifts to officials and business leaders to facilitate transactions. France’s Hermes (HRMS.PA) said last week it had also been affected by this trend.
Gross sales at Swatch increased a slightly better-than-expected 8.7 percent to 4.181 billion francs ($4.47 billion) in the first half of the year, significantly less than the 14.4 percent growth seen in the year-ago period.
“The U.S. market is doing very well, the UK is improving and tourist shopping is supporting Italy,” Hayek said. “France is giving us a bit of a headache, without the tourists, there would be hardly any consumption there.”
He said the group might be able to achieve 9 billion Swiss francs in gross sales this year if the dollar rose a bit and if the group could build enough stock to satisfy high demand for jewellery made by the newly acquired Harry Winston brand.
It is currently Swatch Group’s priority to put production back on track at Canadian jeweler Harry Winston, which it bought for almost $1 billion this year, Hayek said.
“We need a lot of high-end products at Harry Winston so we can satisfy all these customers walking, for example, into our store on (New York‘s) 5th Avenue to buy necklaces and rings in the range of more than $10 million. So you can imagine that it is crucial that enough products are available in the store.”
Hayek said stocks at the brand were quite low now but he wanted to increase them to about $800 million to ensure he had $30-40 million in stock at each of the brand’s 23 stores.
Hayek said the group’s operating margin could bounce back to 24-25 percent in the second half after dropping to 22.7 percent in the first, hit by high expenses for the Basel watch fair and investment into new products, such as its mechanical Swatch watch Sistem51 and an antimagnetic Omega.
“I gave the green light to spend an additional 40 million francs on marketing in June just to promote our new products at Swatch, Omega and Longines. ... I don’t care if that hit our margin in the short term, it’s the long term that counts.”
Shares in Swatch were up 3.1 percent by 1132 GMT, outperforming a flat sector index .SXQP, after falling some 12 percent from May’s all-time high as markets were pricing in a forthcoming weak first half. Luxury goods group Richemont CFR.VX, which also hit a peak in May, has shed only 5 percent.
They trade at about 15.1 times forward earnings, according to Reuters data, at a discount to Richemont at 16.8 times and LVMH (LVMH.PA) at 16.7 times.
Citi analyst Thomas Chauvet said the expectations for a rebound in demand and margins in the second half were already largely priced in and he expected consensus to come down.
Net profit was up 6.1 percent to 768 million francs, ahead of a 728 million estimate in a Reuters poll, with analysts citing a better-than-expected financial result and a lower tax rate.
Editing by Anthony Barker