EUR 850.00 For Business Accounts Only

Morningstar | Swatch's 1H Lacklustre But Actions to Tackle Oversupply Encouraging; Shares Attractive

We are maintaining our fair value of CHF 358 for narrow-moat Swatch as the company reported weak semiannual results. Despite this, we see shares as attractive at current levels.

Revenues were down by 3.7% at constant exchange rates (this compares with 4% growth in Swiss watch exports from January to May 2019), while operating profit declined by 13%. The decline came after a tough comparison base in 2018 (12.6% revenue growth at constant exchange rates in first-half 2018), and was well expected by the market, in our view. We are encouraged that the company took steps to reign in grey market channels in first-half 2019, which had a triple-digit-million negative effect on sales for this period. As highlighted in our special report on Richemont “Why Richemont could be a portfolio crown jewel” in May 2019, the availability and average discounts of Swatch’s brands in the secondary channels are still above its Richemont group and independent peers. We believe Swatch was slower than its peers when tackling the oversupply issues and we are are encouraged by more active actions in this respect. Strong organic sales in own-retail channels signals that brand appeal remains strong. The company also reduced its headcount by 300 people (less than 1% of workforce). This, in our view, underscores the commitment to higher cost discipline compared with the past (personnel expenses were still up 3% in first-half 2019).

Capital expenditures were up 6% and its inventory position continued to swell (up 2.6%) as a result of suspended deliveries to partners supplying grey markets. Operating cash flow was down 11% and free cash flow was down 27%.