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Zurich - When sales of Swiss watches began their long slide, Swatch chief executive officer (CEO) Nick Hayek refused to cut his workforce, saying he’d need skilled employees when demand bounced back. An anticipated rebound in the second half gives him a measure of vindication.
The maker of Omega and Tissot timepieces said Friday that it expects “very positive growth” in local currency terms for the rest of the year, adding to signs of recovery for the industry after the longest slump on record. Swatch said workers who have been operating at less than full speed would now come in handy, letting the company respond as demand bounces back in China and elsewhere.
“Of course we’re happy we kept our employees and capacity,” Hayek said in a phone interview. “That’s just our policy. While those decisions have weighed on our business, in the second half, that will radically change. Our operating income and profit will immediately benefit from the accelerating growth.”
Hayek also maintained his forecast of 7% to 9% sales growth at constant currencies in 2017, saying the second half would be driven by a combination of wholesalers becoming brave enough to order again, improvement in its production business, and Asian consumers.
“The growth in the first half reflects a really difficult first quarter, but the second quarter was really strong,” Hayek said. “Now we’re seeing an acceleration, so we will fight to catch up in the second half.”
The positive outlook, bolstered by more stable demand in Hong Kong, followed a soft first half in which earnings trailed analysts’ estimates. The results come after recent indications that the Swiss industry is recovering, with the main trade group reporting Thursday that exports rose in June for the third month in four. Swatch shares gained as much as 2.4% in early Zurich trading.
Hayek’s decision to maintain employment levels contrasted with the strategy of rival Richemont [JSE:CFR], which eliminated about 200 positions last year, mostly at its Cartier, Piaget and Vacheron Constantin brands. Other watchmakers, such as Movado, Ulysse Nardin, Parmigiani and De Grisogono, have also cut jobs.
“Swatch has maintained its headcount in spite of a difficult 18 months partly due to the nature of its production unit, which accounts for about 80 percent of components by volume,” said John Guy, an analyst at MainFirst Bank.
“Hayek refused to cut jobs during 2008 to 2009 and was vindicated when the industry bounced back strongly. It appears he has taken the same view this time around.”
Previous downturns
The Swatch chief, drawing on experience from previous downturns like the one that followed the global financial crisis and adhering to the traditions of an industry known for its patriarchal attachment to employees, insisted that keeping skilled workers made sense because it takes a long time to train them.
The staffing policy, maintaining global employment at around 35 000, has reduced Swatch’s profit margins, but Hayek has said he’s willing to take the long view.
“It may have meant we earned less for a while, but once volume comes back, we’ll earn more than average,” Hayek said.
As wholesalers restock, Swatch should be a “net beneficiary,” Guy said. While Richemont didn’t provide a forecast, it reported better-than-expected full-year earnings in May, also boosted by stronger demand in China.
Swatch’s operating profit rose 5.1% to 371 million francs, the Biel, Switzerland-based company said in a statement on Friday. Analysts expected 389 million francs. Last year, operating profit tumbled 54% to 353 million francs, a seven-year low, amid weak demand in Hong Kong, France and Switzerland.
Sales amounted to 3.76 billion francs, and rose 1.2% at constant exchange rates. In February, Hayek said sales may increase 7% to 10% in local currencies this year.
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