Jul 21, 2014
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Swatch seen posting weak first half as iWatch threat looms

Jul 21, 2014

ZURICH, Switzerland - Swatch Group chief Nick Hayek has already spent months playing down the likely impact of Apple's long-rumored iWatch launch, but that may not deter further questions on the issue when the Swiss watchmaker delivers results this week.

The strong Swiss franc and one-off expenses for its Omega brand's timekeeping activities at the Sochi Winter Olympics are seen eating into Swatch's profits. And even if the world's biggest watchmaker gives an optimistic outlook, as it often does, it may not dispel iWatch-related worries.

Signs are mounting that Apple, which helped inspire the rapid growth of smartphones with its iPhone launch a few years ago, is aiming to land a similar coup with a wearable device offering access to online services and data.

It has poached executives from the luxury and fashion industry and applied for an "iWatch" trademark in Japan.

Sony and Samsung already have wearable devices on the market, but none of them has become a huge success, making it easy for watchmakers to dismiss any threat from what they see as gadgets.

An Apple smartwatch, however, might be a game-changer and Swatch Group, with its entry-price and fashion-oriented Swatch and Tissot brands, some of whose models come with touchscreens, is more exposed to such a product than its high-end rivals.

Analyst Mario Ortelli at brokerage Bernstein said in a study last week he estimated about 23 percent of Swatch Group's sales and about 11 percent of its earnings before interest and taxes (EBIT) could be put at risk by an iWatch. Revenue and EBIT could drop about 3 percent over the medium term, he said.

The threat is wider than just from Apple and JP Morgan analysts said in a recent study that smartwatches in general could threaten about 30 percent of Swatch's sales, which amounted to 8.82 billion Swiss francs ($9.8 billion) last year.

Priced in

Swatch Group declined comment beyond referring to earlier statements by Hayek on the matter.

Hayek has said he sees smartwatches as an opportunity because they entice young people to wear something on their wrist, but does not want the group to become a big player in the field - or follow eyewear maker Luxottica's (LUX.MI) example by striking up a partnership with a tech company.

Ten years ago, Swatch and Microsoft Corp (MSFT.O) launched a smartwatch called Paparazzi that used radio waves to access information, but the product did not meet with the hoped-for success and the partnership ended in a legal dispute.

Much of the risk may be already priced in after Swatch shares lost almost 13 percent this year, underperforming a 5 percent rise in the European personal and household goods index .SXQP and a 3 percent rise in peer Richemont.

They trade at 15.6 times forward earnings, at a discount to Richemont at 18.2 times and LVMH at 17.5 times, according to Reuters data.

But some saw scope for a further derating if any Apple offering gains consumer plaudits.

"Swatch is likely to suffer ... from potential multiple compression should Apple launch a particularly compelling smart watch product," Exane BNP Paribas analyst Luca Solca said in a recent study.

Solca nonetheless has an "outperform" rating on Swatch shares and said his base case scenario assumed little or no impact on Swatch or Richemont (CFR.VX) from smartwatches.

But he also has a "bear" case scenario of double-digit revenue declines at Swatch, in which earnings could fall by between 2 and 12 percent in 2016.

Swatch Group has not set a specific date for the release of its results. Twelve banks and brokerages polled on behalf of Reuters on average forecast a 10 percent drop in net income to 690 million francs.

$1 = 0.8982 Swiss Francs


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