What's going on?
Swiss watchmaker Swatch, who sells its eponymous brand as well as more upscale brands like Omega, warned on Friday that its profit for the first half of this year will fall by more than 50% versus last year. That’s a heck of a lot! Investors sent its stock price down 8% on Friday.
What does this mean?
Demand for luxury watches has declined partly as a result of China’s crackdown on conspicuous displays of luxury and a generally sluggish global economy. Watch demand is also facing competition from wearable devices like fitness bands and, of course, the Apple watch (although these are perhaps more of a burgeoning threat).
Why should I care?
For the stock: Swatch isn’t cutting costs – which is an aggressive strategy.
When a company’s sales decline meaningfully, it’s pretty normal that they look to cut costs by, say, laying off some workers or decreasing marketing expenses. But Swatch is doing neither of these things. Instead, it made clear that it doesn’t consider its employees “just a cost factor” and that it will continue to invest in new products (which might be a very good idea, given the threat that tech represents to the watch industry). It didn’t outline a turnaround plan but more details are expected when it fully releases its financial results in a few weeks’ time.
The bigger picture: The luxury goods industry is a prime example of how the health of the overall economy affects individual companies.
Other luxury goods companies (like Burberry and Hermès) are also experiencing falling sales and profits. Part of the problem is that the global economy isn’t booming and therefore pay isn’t going up very quickly. Spending money on fancy watches and designer handbags just isn’t a priority. This shows why investors pay so much attention to economic data – because it feeds directly through to companies’ profits!