Richemont, Swatch Rally on Optimism Worst Is Over in Watches (1)

Jan 12, 2017 6:01 am ET

(Bloomberg) -- Richemont and Swatch Group AG shares surged on optimism the Swiss watch industry may be bottoming out.

Richemont advanced as much as 9.4 percent to a one-year high after a gain in sales of timepieces at the Cartier maker’s own stores signaled that wholesale orders may stop declining. The Geneva-based luxury-goods maker also said sales to retailers are dropping less as demand in China has improved. Swatch rose as much as 8.5 percent to the highest since March.

The return to growth at Richemont’s retail business propelled an unexpected 5 percent gain in revenue excluding currency shifts in the three months through December, the Geneva-based company said Thursday. That’s a sign that the biggest downturn for luxury timepieces since the 1980s may be ending, analysts said.

“The worst is probably over for Richemont and Swatch, and for the Swiss watch industry with a lag,” said Patrik Schwendimann, an analyst at Zuercher Kantonalbank. “The likelihood that the Swiss watch industry will see growth in exports in the course of 2017 has increased. It’s reassuring that sales gained traction in the most important quarter of the year.”

Richemont has responded to withering demand by buying back unsold inventory from retailers and cutting jobs at Cartier, Vacheron Constantin and Piaget. 

Swatch shares have been among Europe’s most shorted over the past year, and almost a fifth of the company’s outstanding stock has been bet against, according to Markit Securities data. That could drive a “prolonged and technical squeeze,” according to John Guy, an analyst at MainFirst Bank AG. 

“The Swiss watch industry has reason to be more optimistic,” said Alessandro Migliorini, an analyst at Mirabaud Securities LLP. “The improvement is driven by Asia-Pacific, with the Chinese as the most important customer base, but the regional improvement is more widespread than that.”

Still, the industry isn’t out of the woods yet. Richemont’s watch sales were down 2 percent in the Christmas quarter due to the decline in wholesale, and exports of Swiss timepieces dropped 10 percent in the first 11 months of 2016.
Analysts had predicted flat sales for Richemont’s third quarter, according to the median estimate in a Bloomberg News survey.

Richemont’s total retail sales rose 12 percent. Wholesale revenue dropped 3 percent, compared with a 20 percent decline in the first half.

“The retail performance is in particular positive as this is the signal that underlying consumption is recovering and as such wholesale re-ordering could follow,” said Zuzanna Pusz, an analyst at Berenberg.

Other highlights:

  • Asia-Pacific revenue gained 10 percent, the first increase in two years
  • Jewelry revenue rose 8 percent, beating the 1.2 percent analysts had expected
  • Richemont said full-year net income will face a challenging comparative as the prior year includes a 639 million-euro gain related to the merger of Net-a-Porter and Yoox
  • Total revenue amounted to 3.09 billion euros ($3.3 billion), exceeding the 2.96 billion-euro estimate.

(Updates with wholesale revenue in second paragraph.)

--With assistance from Phil Serafino To contact the reporter on this story: Corinne Gretler in Zurich at cgretler1@bloomberg.net. To contact the editors responsible for this story: Matthew Boyle at mboyle20@bloomberg.net, Thomas Mulier, Paul Jarvis

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