Swatch profits plunge as China luxury crisis bites

Swiss watch group Swatch saw its first half profits plunge due to the luxury market crisis in China and warned Monday the key market was likely to remain difficult throughout the rest of the year.

Profits tumbled 70.5 percent to 147 million Swiss francs ($164 million) on a 14 percent drop in sales to 3.4 billion francs.

Known for its brightly coloured plastic watches, Swatch also owns a number of luxury brands including Longines, Omega and Tissot, and said it was a drop in demand for upscale products that hurt its performance.

The decline in sales was “triggered by the sharp drop in demand for luxury goods in China” including Hong Kong and Macau, said the company.

Analysts surveyed by Swiss financial news agency AWP had expected a much higher net profit of 354 million francs.

Swatch shares were down 9.3 percent approaching midday while the Swiss SMI index was up 0.4 percent.

“Swatch Group is most exposed to Chinese middle-class consumers, who are clearly on the back foot,” Bernstein analyst Luca Solca said in a note to clients.

The deepening economic malaise in the world’s second-largest economy is being keenly felt by luxury firms, with Burberry ditching its chief executive on Monday after posting “disappointing” results mainly due to weak performance in China.

Swatch explained the poor performance by its decision to renounce layoffs and maintain its production capacity to be able to respond to a rebound in the market.

It said other measures it has taken to cut costs would begin to bear fruit in the second half of the year.

Overall, Swatch said “it expects the situation to improve strongly in the second half of the year.”

But the Chinese market will likely remain challenging for the entire luxury goods industry until the end of the year, it said.

“However, China’s potential remains intact,” said Swatch.

“The current situation presents the Group’s brands in the lower price segment with excellent opportunities for further growth and market share gains,” it added.

The company pointed to the Swatch brand bucking the negative trend and increasing its sales in China by 10 percent.