ZURICH (Reuters) - Swatch Group (UHR.S) shares surged 5% after mid-year results on Wednesday in which the watchmaker issued a positive outlook regarding its biggest markets and reported progress in curbing grey market sales.
The maker of Longines, Omega and Tissot watches said it expected to reverse a first-half sales fall to post positive sales growth for the year.
The news was a tonic for shareholders who have been gloomy about the prospects for the watchmaker amid concern the U.S.-China trade war could hurt demand for luxury products.
“The Swatch Group anticipates strong growth in the second half of 2019, on the one hand, due to continuing solid demand in the most important markets, and on the other hand, due to the fact that the second half of 2018 was characterised by a poor fourth quarter,” it said.
The company has been carrying out “uncompromising actions” - against grey market dealers in Europe, the Middle East and South America this year.
The offensive against watches which are sold outside Swatch’s approved channels had a negative impact on sales in the first half running into the hundreds of millions of francs, the company said.
The campaign involved Swatch halting supply of watches to dealers who sold their products to the grey market. “In the long term, this will lead to positive effects in the major markets,” Swatch said.
“The news on tackling the grey market is really encouraging - you need to create the appearance of scarcity in luxury goods, otherwise they become commodities,” said Jon Cox, an analyst at Kepler Cheuvreux.
During the first six months Swatch said it had seen growth in major markets which include mainland China, Japan and the United States, and all price segments which run from plastic Swatch watches to the high-end Breguet brand.
But Hong Kong, the world’s biggest export market for Swiss watches, had been badly hit by political protests in recent weeks.
“Sales in Hong Kong, an important sales market with attractive margins, suffered from political turbulence,” the company said. “This resulted in a double-digit decline in sales.”
The Biel-based company said total sales fell 4.4% at current exchange rates to 4.078 billion Swiss francs (3.33 billion pounds). Net profit fell 11.3% to 415 million francs.
Analysts said the results were a mixed bag, with sales lower-than expected although profit was ahead of forecasts.
Traders in Zurich said the share price surge was due to short sellers buying the stock to cover their positions as well as relief regarding the better-than-expected profit.
Short sellers - who bet on a company’s stock losing value - had bought the stock which has lost 35% in the last 12 months.
“Overall, I am reassured and the stock is likely to react positively. It has been the de facto luxury short for hedge funds for a long time. Here there is certainly hope for the bulls,” said Cox at Kepler Cheuvreux.
Reporting by John Revill; editing by Jason Neely