Swatch Sees Weakening Demand in the Critical Chinese Market

(Bloomberg) -- Swatch Group AG fell the most in more than two years after Switzerland’s largest watchmaker reported market turbulence in China that contributed to a slowdown in the fourth quarter.

The stock fell as much as 8.2 percent, the steepest decline since July 2016. Expensive timepieces are one segment of the luxury-goods market that’s sputtering as high-end Chinese consumers turn their attention to Louis Vuitton bags and Gucci fashion.

As the market leader in China, which buys up about half the timepieces Switzerland produces, the maker of Omega and Blancpain watches is at greatest risk of a downturn, which also threatens to weigh on Richemont. Meanwhile, Swatch’s cheaper brands face increased competition from the Apple Watch, and the company is finding it needs to expand in e-commerce to lure more millennial shoppers.

Swatch Sees Weakening Demand in the Critical Chinese Market

“The problem is in the low-end watches and its exposure in the greater China region,” wrote Jon Cox, an analyst at Kepler Cheuvreux in Zurich.

The company is getting hit harder than Richemont, which has been more cautious about how many timepieces it sells to third-party retailers and is more focused on higher-end brands such as Cartier, according to Rogerio Fujimori, an analyst at RBC Capital Markets. Richemont earlier reported that sales growth in China accelerated to more than 10 percent in the final three months of 2018.

Swatch reported 2018 operating profit that was 11 percent lower than analysts’ estimates as demand weakened in the last quarter and production bottlenecks cut into sales of Omega and Longines timepieces.

Inventory Backlog

Unfinished watches from those brands added to an inventory figure that reached 6.9 billion francs ($7 billion). Stock in trade was also boosted by the Harry Winston brand’s purchase of a $50 million diamond. Swatch pledged to resolve the production problems in the first half, and the company forecast healthy growth in 2019.

A forecast by the Federation of the Swiss Watch Industry sounded a note of caution. Exports rose at their fastest pace in six years in 2018, the group said this week, but shipments to China slumped in December.

Swatch’s Tissot this year will launch its long-awaited T-Touch smartwatch, a product that runs on a proprietary operating system and has faced several delays.

©2019 Bloomberg L.P.