Swatch Group 2016 Net Income Declined By Half But Optimistic For 2017

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In discussing the continuing challenges of the watch industry, the Swiss watch and jewelry maker Swatch Group helped quantify some hard data situations. The Swatch Group announces key figures as of December 31, 2016, and more details are presented in its annual report prior to March. The announcement was mostly to show a decline in the number of 2016, but “is expected to grow healthily in 2017 …” Headline data includes net income down 47% from CHF1.19 billion in CHF 593 million in 2009 to CHF 593 million.

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With 18 Watch & Jewelry brands representing a broad range of price segments from brands like Breguet and Harry Winston at the very high end to inexpensive plastic Flik Flak watches, the health of the Swatch Group is linked to that of the Swiss watch industry in numerous, symbiotic ways. We know the industry overall is currently struggling, but here are a few more Swatch Group figures: Net sales for the Watches & Jewelry segment (including Production) were CHF 7.305 billion, representing a decrease of 10.7% from the previous year, a performance reflected across the group that overall reported net sales down 10.6%.

The operating result (aka operating income, meaning profit after deducting operating expenses) of CHF 805 million represents a sobering 44.5% decrease from the previous year. Swatch Group specifically refers to “massive shortfalls” in third-party purchase and order volumes for things like watch movements and components – even though the group’s movement super supplier ETA was once confidently moving to cut off supply (as David Bredan fully explains here) to companies outside the Swatch Group.

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We get a sense of scrambling amid the industry-wide “crisis” at the other big Swiss luxury conglomerates as well. At Richemont, a major management shakeup announced in November last year recently continued with CEOs replaced at a number of top brands. At LVMH, the indefatigable Jean-Claude Biver recently added interim CEO at Zenith to his broad-ranging responsibilities and mission to make Swiss watches great again in any and every way possible. LVMH actually reported 5% growth in revenue for the year ended December 31, 2016. Seeing Richemont and LVMH’s frantic activity, followed by Swatch Groups notably poor 2016 results, one may reasonably ask what actions Swatch Group is taking in order to keep it together.

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As mentioned above, the Swatch Group’s announcement attempts to give shareholders cause for optimism. The operating margin (basically, a ratio of how much profit a company is making from each dollar of sales) was down (now 12.2% from the previous year’s 18.8%) for the year. The Swatch Group, however, points to an improvement of 2 percentage points in its operating margin for the second half of the year over the first half. (For more in-depth business and finance analysis on this subject, also check out this article on the site Watch Ponder by aBlogtoWatch contributor Aaron Stark.)

There’s more good(-ish) news. Just as Richemont noted back in November, the Swatch Group also confirms that some regions, like the Middle East and, particularly, Mainland China, saw strong sales growth in Watches & Jewelry at the end of 2016 and into 2017 – apparently being the main basis for 2017’s overall positive outlook. “Healthy growth” is also forecasted for the USA and Europe. That is a good portion of the globe and some bold optimism considering the numbers just released. Their Electronic Systems segment is also cited as an area of potential growth. Swatch Group Chairman Nick Hayek says that a 7-10% rise in revenue in 2017 can be expected in local currencies, while growth for the company will depend a lot on exchange rates, according to Bloomberg.

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The Swatch Group agrees with our assessment that the industry’s problems are not due to a lack of interest in Swiss watches. They seem to offer reassurances to employees and say that their e-commerce and extensive production chain is in a strong position to take advantage of consumer enthusiasm – but not so much why it failed to do so in recent years. You don’t need an MBA or even to know all the finance terminology to get the picture that the industry has been treading water, but after the recent SIHH 2017 watch industry trade show, we concluded that the Swiss are indeed “holding on tight.”

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The Swatch Group is also giving fans something to look forward to through promises that “2017 will roll out our brand through many new products.” Specifically, the 60th anniversary of ωSpeedmaster sees it as a “strong stimulus,” further commending their recent Success # SpeedyTuesday Limited Edition Watch. At the same time, Swatch has promised to launch a “unique new skin is very slim collection,” as well as second-generation Swatch Bellamy as a contactless payment device.

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