Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

Nick Hayek, CEO of Swatch Group AG, has a habit of looking on the bright side. This time, the biggest of the Swiss watchmakers may actually be right.

Hayek said on Thursday the first few months of this year had been "encouraging" compared with 2016, when sales fell 11 percent and net income by 47 percent. The company is aiming to increase sales by as much as 9 percent this year.

The Swiss watch market, which endured a torrid 2016 amid a crackdown on conspicuous consumption in China and economic and political uncertainty elsewhere, looks as if it has finally bottomed out. Sales in China are rebounding -- with shoppers even returning to Hong Kong -- while demand from the Middle East has also been strong.

Watching and Waiting
Swiss watch exports are falling less sharply, but are yet to turn positive
Source: Federation of the Swiss Watch Industry

Investors are sharing Hayek's optimism. Swatch shares are up almost 40 percent since the start of August. Rival Cie Financiere Richemont SA, which also saw an increase in sales over the Christmas season, is up 32 percent over the same period.

But both companies' valuations are now close to ten-year highs: Swatch trades at about 23 times estimated earnings, and Richemont 25 times, according to Bloomberg data.

Bling Bling
Hopes of a luxury revival have driven valuations of the Swiss watch makers sharply higher
Source: Bloomberg

If those valuations are going to be more than simply optimistic, the Swiss watch market will have to move into growth mode, and manufacturers will need to show they can boost their profitability.

Exports of Swiss timepieces have been shrinking for 19 months, the longest period on record. But the speed of that shrinkage has eased, and with stock markets racing ahead and political uncertainty receding, the conditions are certainly set fair for a revival in the coming months.

Swatch has two things going its favor. Its exposure to China, a problem when consumers there were reining in their spending, may now turn out to be a benefit. The watchmaker generates about 47 percent of sales from Chinese consumers, more than Richemont's 36 percent, according to analysts from Exane BNP Paribas.

Under Pressure
Maintaining watch production capability compressed Swatch's operating margin
Source: Bloomberg

Unlike Richemont, Swatch maintained its production capacity. That helped to cut its operating margin by half since 2014 -- but may be a boon if sales return. The last time the luxury industry endured a slump after the financial crisis of 2008, margins also shrank. But they quickly bounced back as Chinese demand boomed.

For Hayek's patience to be more than a case of hope over reality, though, those exports will need to start growing again in coming months. Set your watches now.

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