Jul 15, 2016
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French attacks slump European luxury goods shares, Swatch hits 6-1/2-year low

Jul 15, 2016

European luxury goods firms fell sharply on Friday, with Swatch slumping 13 percent to its lowest in 6-1/2 years after the world's biggest watchmaker warned its first-half profit would drop by 50-60 percent.

The Swiss watch industry is suffering a down turn caused by new buying habits, a drop in travel and a strong Swiss franc.

Shares in Swatch touched their lowest level since late 2009 after the company said it expected sales to fall about 12 percent in the first half, due to dwindling sales in Hong Kong and Europe.

"Let us remain at the sidelines for Swatch Group and the Swiss luxury goods sector," Baader Helvea analysts said in a note.

Swiss watchmakers are grappling with weak demand as fewer Chinese tourists shop for timepieces in Hong Kong and Europe and as a strong Swiss franc pushes up the production cost for "Swiss made" watches.

A deadly attack in the French city of Nice on Thursday night when a truck ploughed into crowds celebrating Bastille Day killing more than 80 people added to the pressure on luxury goods and travel companies.

"France looks difficult and is likely to stay difficult," Swatch Group CEO Nick Hayek told Reuters in a telephone interview.

"It is an important market. That is where tourists start their tours to most European countries."

Paris, hit by deadly Islamist attacks last November, is an important shopping destination for tourists, many from China, and the Swatch profit warning marked the start of what is likely to be a downbeat earnings season for the luxury industry.

"Nice is going to further hurt the sector. Tourists just won't want to come to Europe and particularly France during the summer," Kepler Cheuvreux analyst Jon Cox said.

Shares in Swatch, whose brands also include Omega and Longines, slid 11.6 percent to 256 Swiss francs by 0844 GMT, on top of a 17 percent fall so far this year and a 21 percent drop last year. Peer Richemont (CFR.S) also fell 3.9 percent.


Overall net sales at Swatch are likely to have dropped around 12 percent in the first half of 2016, the group said in a statement, dragging operating and net income down by 50-60 percent.

Adding to the pressure on margins, Swatch said it had no plans to cut staff and also planned to maintain investments in new products and marketing. Swatch employs more than 36,000 in over 50 countries.

The company also said it saw only limited scope to push through price increases.

"The indication for a decline in operating margin from 18 to 9 percent has to be seen as a disaster or some one-offs are included," Vontobel analyst Rene Weber said.

The company publishes full results on Thursday, July 21.

Hayek tried to put a brave face on the results.

"The first half is not so bad under the circumstances. Our profit about halved, but it's still a profit," Hayek said, adding positive developments in mainland China, the Olympic Games, where flagship brand Omega is official timekeeper, and a favourable comparison base should help in the second half.

"If you have a drop in sales to the extent that we have seen, you cannot make up for that even with the very good performance we have in many countries," he added.

Shares in other luxury goods companies fell, with Richemont down 3.3 percent and LVMH falling 2.5 percent.


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