Swatch slumps after H1 profits drop on weak Chinese demand

Investing.com - Swatch (SIX:UHR) stock plunged Monday after the Swiss watchmaker saw its first half profits plunge due to the luxury market crisis in China and warned Monday the key market was likely to remain difficult throughout the rest of the year.

At 07:40 ET (11:40 GMT), Swatch stock fell over 10% to CHF169.05, down 26% year-to-date.

The Swiss company said net sales at current exchange rates dropped 14.3% to CHF3.45 billion ($1 = CHF0.8939) in the January-June period, well below the CHF3.75 billion consensus expected.

Operating profit fell to CHF204 million from CHF686 million a year earlier, with the operating margin contracting to 5.9% from 17.1%, while net profit tumbled to CHF147 million from CHF498 million.

The decline in sales was "triggered by the sharp drop in demand for luxury goods in China" including Hong Kong and Macau, said the company.

“This H1 appears worse than even a heavily short market was expecting. But almost as surprising is an upbeat H2 outlook based on Japan/US demand improvement and benefits from a cost-cutting program,” said analysts at Jefferies, in a note. 

Jefferies maintained a ‘hold’ rating, with a target price of CHF200.

“Sales saw a significant decline, despite the company's efforts to highlight in the press release that sales outside of China in local currencies were ‘at record level,’” said analysts at UBS, in a note. “Profits dropped even more declining by 70% y/y, due to the group's high fixed cost base.”

The press release states that the context in China is to remain challenging until the end of 2024, but thanks to initiation of a cost cutting program the group's situation is set "to improve strongly in the second half of the year,” UBS noted.

UBS maintained a ‘neutral’ rating, with a 12-month target price of CHF192.