ZURICH, Switzerland — Swatch Group’s net profits collapsed last year as the Western world’s biggest watchmaker by sales grappled with plunging margins caused by falling demand in key markets and the strong Swiss franc.
Group net earnings virtually halved to 593 million Swiss francs, or $602 million, in 2016 from 1.12 billion Swiss francs, or $1.16 billion, in 2015 — significantly below market expectations. The closely watched operating margin dropped to 10.7 percent — the lowest level in 20 years — from 17.2 percent in 2015.
Revenues fell by almost 11 percent to 7.55 billion Swiss francs, or $7.66 billion, from 8.45 billion Swiss francs, or $8.79 billion, the previous year. All dollar rates are calculated at average exchange for the period in question.
Related Articles
The decline prompted a 10 percent cut in the dividend to 6.75 Swiss francs, or $6.81 at current exchange, although the group retains a healthy cash pile of about 1.1 billion Swiss francs, or $1.11 billion.
You May Also Like
The disproportionately high fall in earnings compared with revenues stemmed from the company’s determination not to slash employment, in spite of the sharp industry downturn. Swiss watch exports, the only aggregate industry figures available, fell by almost 10 percent to 19.41 billion Swiss francs, or $19.7 billion, last year on the back of a massive decline in demand from Hong Kong — the single main market — and slowing sales in the U.S.
The drop has prompted other watchmakers, notably archrival Compagnie Financière Richemont, to cut jobs at many leading brands and take extraordinary measures — including buying back and destroying retailers’ and wholesalers’ surplus stock — to reduce a big overhang of timepieces in the previously booming Asian market. Disappointing results at some Richemont brands last year may also have contributed to the replacement, made public this week, of three senior brand chief executives.
Industry executives are hopeful the downturn has reached bottom. Swatch Group said sales had improved encouragingly in the final quarter of 2016, prompting it to express confidence about renewed growth this year. Likewise, many Richemont brand bosses, speaking at last month’s SIHH watch show in Geneva, said Christmas and January sales had comfortably beaten expectations.
“The months of November, December and January showed, particularly in mainland China, very good growth in the watches and jewelry segment, with a substantial improvement in operating margin,” Swatch Group said in a statement. “Based on the positive development of the last three months, healthy growth is expected for the year 2017.”
However, investors reacted adversely, in spite of the upbeat outlook. By midmorning, Swatch Group shares were trading down 1 percent at 347.20 Swiss francs, or $351.05, having earlier lost almost 5 percent. But sentiment shifted in afternoon trading following an analysts’ call with chief executive officer Nick Hayek, and the shares closed in Zurich up 1 percent at 354.20 Swiss francs, or $358.10.
“The 2016 results are behind expectations and the 10.7 percent margin is the lowest since 1997. While staff costs fell by 2 percent, other expenditures rose by 3 percent,” noted analyst René Weber of Bank Vontobel in Zurich.
Nick Hayek, chief executive officer of Swatch Group, stressed the group’s commitment to its manufacturing base, despite last year’s lower capacity utilization, and its determination to continue investing in further company-owned retail outlets. Swatch Group said such stores now accounted for about 30 percent of revenues.