Business Strategy & Outlook
The Swatch Group is the biggest vertically integrated Swiss watch manufacturer with 18 brands covering all price ranges, from entry to ultra luxury. Swatch-owned brands account for around 35% of Swiss watch exports, and the company supplies competitors with watch movements. Swatch Group’s luxury brands boast 100- to 200-year histories, iconic collections, and deep cultural heritage. Most of Swatch’s brands (at price points below $10,000) benefit from a cost advantage through scale and a higher degree of production automation. Swatch’s diversification in terms of brands and price points helps it to avoid the pitfalls that come with extending brands into categories where they don’t strategically belong, and to potentially capture positive mix as consumers trade up. However, a lack of control over distribution (around 70% of sales are wholesale) as a weak spot for the company. Distributors are more likely to engage in discounting to maintain cash flows when demand sours, which can be damaging for brands with long-shelf-life products.
The recent strong supply response from Swatch and its competitors to Chinese demand points to a lack of supply discipline. The supply discipline is one of the important moat-supporting factors for luxury brands, as it helps to preserve the brand exclusivity perception and ensure high returns on capital. The expect Swatch Group’s sales to grow at a 4.3% pace over the long term (versus low -single-digit growth over the prior decade) with mid-single-digit growth for its higher-priced watch brands such as Omega, Longines, Breguet and Blancpain, high-single-digit growth for jewelry brand Harry Winston and flat revenue for low-end watches (Tissot, Swatch, Mido, Hamilton and so on).
Financial Strengths
Swatch is in a strong financial position with CHF 2.5 billion in net cash at the end of 2020, with minimal financial debt and around CHF 2.6 billion in cash and marketable securities on the balance sheet. Further, over one third of inventories of Swatch Group, or over CHF 2.1 billion by value, are in precious metals and stones, recorded both in raw materials and as part of finished and semi finished goods. It is well-positioned to weather the COVID-19 crisis. Given the industry’s cyclicality, the financial prudence is appropriate. Cash flow improvement in future through operating leverage on fixed costs, cost discipline in the company—and especially within underperforming brands—and lower investment levels as productive and retail capacity has been built out in the past upcycle years. The free cash flow margin at around 10%, approximately in line with 2020-21 levels, as the investment cycle rolls over. They expect Swatch to remain mostly equity financed with low financial leverage.
Bulls Say
- Around three quarters of Swatch’s revenue and higher share of profits are from higher-end watch and jewelry brands, not directly affected by smartwatch competition.
- Harry Winston, among the few global brands in luxury jewelry, a niche with especially high entry barriers, offers growth and margin expansion potential.
- Swatch is increasingly taking action to tackle costs in low-end brands and limit gray market channels for high-end brands.
Company Description
Swatch Group’s biggest brands are Omega (number-two Swiss watch brand by sales after Rolex), Longines (the largest premium watch brand and number four by sales globally), Breguet, Tissot (the leader in mid range Swiss watches), and Swatch. Swatch group employs over 31,000 people, half of them in Switzerland. The Swatch Group makes about 28% of its sales from Omega, 18% from ultra luxury brands, 20% from Longines, 12% from Tissot, and 4% from Swatch. The Omega and Longines to be the group’s most profitable brands.
(Source: Morningstar)
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