July 22 (Bloomberg) -- Swatch Group AG, the maker of Omega and Tissot timepieces, reported the first drop in opening-half earnings in five years and said the outlook has become uncertain in Hong Kong, the biggest import market for Swiss watches.
Operating profit fell 8.8 percent to 830 million Swiss francs ($924 million), hindered by the strength of the Swiss currency and a fire that damaged a production workshop, Biel-based Swatch said today in a statement. That compares with the 849.5 million-franc average estimate of analysts surveyed by Bloomberg News. Revenue rose 2.4 percent to 4.1 billion francs.
The Swiss watch industry is struggling this year amid political protests in Hong Kong, which imports about a fifth of the timepieces that Switzerland produces. Pro-democracy demonstrations are increasing in the city, with a July 1 march that was the city’s largest in a decade. Rich Chinese consumers have increasingly traveled to Hong Kong in recent years to buy watches and avoid the mainland’s luxury taxes.
“Hong Kong will remain fragile in the second half,” Swatch Chief Executive Officer Nick Hayek said by phone today.
Hong Kong retail sales of watches, jewelry and expensive gifts dropped 25 percent in May, the second-largest decline in at least a decade, on lower tourist spending.
The city’s residents have also protested against the number of Chinese tourist arrivals. Hong Kong may limit visits from the mainland, city chief executive Leung Chun-ying said May 27.
Swatch fell 1 percent to 508 francs at 9:55 a.m. in Zurich, extending the stock’s drop this year to 14 percent.
“Sales looked a bit light of expectations,” said Jon Cox, an analyst at Kepler Cheuvreux in Zurich. “The fire impact is worse than originally anticipated.”
Delivery delays and non-deliveries due to the Dec. 29 fire cut gross sales by about 200 million francs, Swatch said today.
Currency effects reduced first-half sales by 188 million francs. The dollar was on average 4.9 percent weaker against the franc in the first half compared with a year earlier.
Hayek said in June that the company will likely fall short of double-digit sales growth this year amid unfavorable foreign-exchange rates. Currency swings may cut about 350 million francs to 500 million francs from full-year sales, he said at the time.
“We are not convinced that Swatch will see a significant improvement in revenue growth in the second half,” wrote Thomas Chauvet, an analyst at Citigroup Inc.
The maker of Tissot T-Touch and Longines watches said sales rose in all markets except for a “small” number of European countries. Chinese sales increased, following a crackdown on extravagant spending and gifts among government officials that weighed on sales in the previous year.
“The stronger sales trend noticed on the Chinese mainland continues,” Swatch said. “In contrast, the situation in Hong Kong is affected by a number of uncertainties.”
Swatch said an increase in marketing for the Omega brand at the winter Olympic games in Sochi, Russia, also weighed on operating profit in the first half.
The outlook in all regions and segments “remains very good and a promising second half is expected,” the company said.
Sales of watches and jewelry rose by a double-digit percentage in July, excluding currency shifts, Hayek said.
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