Pimp My Smartwatch

Swatch is struggling while LVMH says it can't make enough of its $1,500 Tag Heuers

Compare and contrast.

Contrasting Fortunes

Swatch shares have slumped as LVMH's gained in the past two years

Source: Bloomberg data

Swatch, the Swiss maker of Tissot and Omega watches, posted its first decline in sales for six years on Wednesday.

LVMH said it can't make its Tag Heuer Connected smartwatches fast enough to keep up with demand.

Swatch stock fell as much as 4.7 percent, while LVMH jumped as much as 7.4 percent.

But there's more to the contrasting fortunes of Swatch and LVMH than the rise of the smartwatch. Falling Hong Kong demand and the rise of the Swiss franc were much bigger contributors to Swatch's missing analyst estimates of full-year earnings.

Organic revenue growth at LVMH's watches and jewelry business slowed to 3 percent in the fourth quarter, from 10 percent in the first half. Of course, the business is LVMH's smallest, accounting for just 9 percent of sales. By contrast, Swatch gets 97 percent of its sales from watches and jewelry.

LVMH's Revenue

Watches are the smallest part of the luxury group

Source: Bloomberg data

Sales of fashion and leather goods, particularly at Louis Vuitton, were better than expected, a relief to investors concerned about the slowdown in China, and the impact of the terrorist attacks on Paris on the biggest luxury brands.

Yet there was another nugget that should hearten LVMH investors.

Chairman Bernard Arnault told investors not only was he wearing one of Tag Heuer's $1,500 Connected smartwatches, developed in partnership with Google and Intel, but that demand for them was far outstripping supply.

"We could make 100,000 a year and sell them all, but we simply haven't got the capacity," he said.

It won't disclose sales of or targets for the Connected watch -- it says because big competitors don't do so. But LVMH is trying to ramp up production, which will be crucial if it's to keep up with the growing demand for smartwatches -- especially with a new model due in coming months.

Compare that to Swatch's sales performance in the second half: Barclays estimates that once the effect of the rising Swiss franc is stripped out, sales fell by almost 5 percent in the period.

It could be a coincidence, given the headwind from China, that Swatch's sales have been particularly weak since Apple debuted its watch in April. Still, about 27 percent of Swatch's sales are in the 100-franc to 1000-franc price range, according to analysts at Exane BNP Paribas. Apple's product starts at about $350.

Industrywide, sales of Swiss watches in the 200-franc to 500 franc category have been particularly weak, falling by 15 percent year on year in December, according to the Federation of the Swiss Watch Industry.

Swiss Exports

Sales of watches overseas have been shrinking in recent months

Source: Federation of the Swiss Watch Industry

Swatch is fighting back with its own smartwatch, the Bellamy, which can make contactless payments. Swatch expects the model to deliver "very positive" sales in China and elsewhere. It will also introduce a smart version of its more expensive Tissot watch.

It's sufficiently confident to predict sales (in constant currencies) will increase 5 percent next year -- and announce a 1 billion-franc stock buyback.

Investors aren't persuaded by Swatch's ebullience. The stock has dropped by a third over the past two years, and short interest in Swatch's shares is near a record.

LVMH's euphoria is a reminder of what could happen if Swatch cracks the smart watch. It's also a warning that others like Apple and LVMH could get there first.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Andrea Felsted in London at afelsted@bloomberg.net

    To contact the editor responsible for this story:
    Edward Evans at eevans3@bloomberg.net

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