Swatch tumbles on profit warning

Shares in Swatch tumbled on Friday after the Swiss watch maker cautioned that sales and profit fell in the first half of the year.

The company said that sales are expected to have declined by some 12% in the first half of 2016 due to lower sales in important markets such as Hong Kong and Europe, particularly France and Switzerland.

Swatch said operating profit and net income are expected to be down around 50% to 60 not just because of the drop in sales but also as “the tradition and industrial long-term philosophy the Swatch Group to consider its employees not just as a cost factor but to keep them (also in spite of important cancellations of orders from third parties), to maintain investments in new products and marketing and to pursue a defensive price increase policy”.

Still, the company said developments in mainland China were positive.

RBC Capital Markets said: “This pre-announcement implies that 1H net sales should be around CHF3.7bn and operating profit should be around CHF340m (operating margin less than 10%). This implies a miss vs. consensus of ~6% at sales level and a miss of ~40% at operating profit level if we take the mid-point of its 50-60% profit decline guidance.”

It added: “Swatch Group has clearly faced a much tougher external environment and profitability erosion than we expected given its high fixed cost base and continued long-term investment policy. Shares will be under significant pressure today but a very strong balance sheet, lower capex needs, rising cash returns (~3% dividend yield and ~2% buyback yield) and ~25% short interest level are supportive.”

At 1115 BST, Swatch shares were down 11% to CHF257.90.