A selection of concept TAG wristwatches, produced by TAG Heuer, a luxury timepiece unit of LVMH Moet Hennessy Louis Vuitton SA, sit on display inside the company's plant in La Chaux-de-Fonds, near Neuchatel, Switzerland, on Friday, Jan. 16, 2015.Simon Dawson/Bloomberg
The Swiss National Bank spoiled the party for the country's luxury watchmakers just as they were preparing for some of the most lavish bashes of the year next week at the annual Geneva watch show.
The decision to end the minimum exchange rate between the Swiss franc and the euro means luxury timepiece makers in the Alpine country face one of their most challenging years. Shares of Richemont, the parent company of watch brands including Vacheron Constantin and IWC, declined 16 per cent Thursday in Zurich, the most in more than two decades, as the franc surged more than 15 per cent against the euro.
"It's an absolute disaster," said Jon Cox, an analyst at Kepler Cheuvreux in Zurich. "Swiss watchmakers have a substantial cost base. It will have a negative impact on margin and translated earnings. Watchmakers either need to increase prices or cut costs."
For an industry that derives its appeal from the "Swiss-Made" label, local production is creating a headache as costs to put together timepieces increase. Swatch Group AG chief executive officer Nick Hayek said the SNB has set off a "tsunami."
Sixteen of the world's most expensive watch brands, of which three-quarters are produced by Richemont, will showcase new timepieces next week at the annual Salon International de la Haute Horlogerie. Watchmakers spend as much as 30 million francs ($35-million) combined on marketing at the event, estimates Rene Weber, an analyst at Bank Vontobel AG.
IWC Party
One of the biggest highlights after sundown is IWC's red-carpet gala dinner where distributors and clients get to brush elbows with celebrities such as Ewan McGregor and Brazilian Victoria's Secret model Adriana Lima. The 147-year-old brand has been preparing to host about 800 guests at an invitation-only evening party Jan. 20.
The entertainment bill has now become more expensive. In addition, about half of Richemont's costs of goods sold are in francs, and as much as 30 per cent of its operating expenditure, Thomas Chauvet, an analyst at Citigroup Inc., estimates. Swatch, the owner of the Omega and Breguet brands, is even more exposed, with 85 per cent of production costs in francs, he said.
"It's certainly not good news when your currency becomes so strong when you're in export," said Jean-Claude Biver, head of LVMH Moet Hennessy Louis Vuitton SA's timepiece unit.
Shocked, Unexpected
All but a fraction of Swiss watches are exported, almost a third to the euro zone, Biver said in an interview.
"When one-third of your business is hit by a weak currency, you have to either increase prices, or you have to reduce your margins," he said. However, Biver said he can't raise prices by 10 per cent or 15 per cent. "I'm shocked, it was unexpected."
Patek Philippe announced plans this week to spend 450 million francs to expand its facilities in Geneva to have enough space for the next two to three decades.
Swiss watch exports may now decline this year, said Patrik Schwendimann, an analyst at Zuercher Kantonalbank, who had previously expected a slight increase.
The Swiss watch industry is exiting from what probably will rank as the second-worst annual performance since 2009. Full-year data isn't out yet, but exports of Swiss watches rose 2.3 per cent in the first 11 months of 2014, a far cry from growth rates that reached as much as 22 per cent in 2010. Richemont's Cartier brand last year started putting 230 employees on shorter work weeks to adjust to weaker demand.
Richemont Stagnation
Richemont reported Thursday in Geneva that revenue in the quarter through December stagnated for the first time in six years as protests in Hong Kong disrupted sales in the biggest market for Swiss watches.
The company's shares fell 6.7 per cent to 69.9 francs at the 5:30 p.m. close of trading in Zurich Friday. Competitor Swatch lost 7.1 per cent.
The one consolation watchmakers have is they're entering this crisis with bigger cash piles than ever before. Richemont's net cash position increased to a record €4.9-billion ($5.7-billion).
A 10 per cent appreciation of the franc against the euro cuts earnings at Swatch by as much as 18 per cent and at Richemont as much as 9 per cent, Helen Brand, an analyst at Barclays, estimates.
Richemont will respond by raising prices, wrote Melanie Flouquet, an analyst at JPMorgan Cazenove who cut her price target on the stock 16 per cent to 80 francs.
"It is too early to be beating the drums yet to go more overweight in our view, given the soft organic sales growth environment for luxury as a whole," she wrote.