There is currently not much sign of the former "bling bling boom" following the coronavirus crisis. On the contrary, the bad news from the luxury sector is piling up. For example, the two luxury tailors Hugo Boss and Burberry recently backed away from their forecasts. And Swatch, the world's largest watch group, can also look back on an unpleasant first half of the year. The persistently weak demand for luxury goods in China was a particular problem for the group based in the canton of Berne. The stock market's reaction was clear: Swatch shares fell by a tenth, bringing the total loss for the year to more than a fifth.
The figures at a glance: The manufacturer of timepieces of the renowned brands Tissot, Longines and Omega, as well as the Swatch watches of the same name, reported a 14.3% drop in sales to CHF 3.45 billion for the first six months, which was well below the consensus forecast of CHF 3.75 billion issued by Visible Alpha. Operating profit shrank from CHF 686 million in the previous year to just CHF 204 million, reducing the margin from 17.1% to 5.9%. Net profit also fell by 70% to CHF 147 million.
CEO Nick Hayek blames the Middle Kingdom in particular for the weak performance. Only the Swatch brand was able to buck the negative trend in the country with an increase in sales of one tenth. According to the company's explanation for the below-average interim results, the significant decline in orders from third parties and from the group brands led to strongly negative operating results in production. According to CEO Hayek, China is likely to remain a challenge for the entire luxury goods industry until the end of 2024. However, the 69-year-old manager is not completely gloomy. In his opinion, there are currently "excellent opportunities" in the lower price segment for Swatch with its 17 watch brands. The first successes were already evident in June: the operating margin for the group as a whole rose to over 15% again.
The outlook for the rest of the year is also very hopeful. "The group assumes that the situation will improve significantly in the second half of the year," according to a press release. In particular, the cost-cutting measures introduced should then take effect. On the sales side, Swatch expects strong growth in Japan and the USA. The outlook in numerous European countries is also promising. By way of comparison, sales figures in markets outside China remained at the previous year's level in local currencies in the first half of the year.
This optimism is underpinned by recent insider purchases. The Hayek family collected around CHF 10 million worth of shares on the day of the presentation of the figures and bought a further CHF 20.6 million the following day. A company spokesman explained that the largest Swatch shareholder "fully supports the group" and increased its commitment at an attractive price. In the course of the multi-million purchases, there was a sharp turnaround in the share price and the share has since recovered more than half of its dive.
Despite the recovery, some holders of partial protection products, such as barrier reverse convertibles (BRCs), will have to deal with breached barriers. In order for holders of a BRC to receive the full nominal amount back, the underlying must be quoted at least at the strike at the end of the term. Depending on the strike level and the remaining term, this can be quite an ambitious undertaking. However, the time until a potential loss is realized can also be actively managed with so-called recovery solutions. These offer the opportunity to turn an impending loss into a profit - without the need for excessive increased in the share price.
The strategy works as follows: The BRC is sold and the resulting free capital is used to buy a recovery solution with a price in the range of the selling price of the old product. This allows the term to be extended and it generally takes less of a recovery in the underlying to exit the investment at the end without losses or even a profit. Barrier discount certificates with a European barrier are referred to as recovery products if the current price of the underlying is close to the barrier. In the case of Swatch shares, a stagnation or a moderate rise in the underlying above the barrier up to the expiry date is sufficient to recover the full nominal value at the end and thus recoup the losses incurred from the BRC. Depending on the level of the barrier, the product is structured either offensively or conservatively. As it is a European barrier, the structure allows the underlying to move freely during the term. The barrier only becomes active at the final fixing. The following three Barrier Discount Certificates on Swatch with barriers at 90%, 110% and 130% of the initial fixing on July 16, 2024 have been tradable on the BX Swiss since July 23.
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