The Swatch logo and numerals sit on a wristwatch face inside a watch store, operated by Swatch Group AG, in London, U.K., on Friday, Jan. 16, 2015. 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. Photographer: Chris Ratcliffe/Bloomberg
© Bloomberg

Swatch won a battle in 2017, taking market share off low-end rivals and swatting aside the threat from smartwatches. It exudes confidence about this year and its shares are rising again after spending 2015 and 2016 in the doldrums. Beware of hubris, though. The watch war has not ended.

On Tuesday, the Swiss company announced annual results that beat expectations, pushing its bearer shares up 4 per cent. In a statement peppered with adjectives such as “extraordinary” and “massive”, the group said its strategy of maintaining employment levels and keeping prices steady had paid off as sales and margins recovered. External pressures have also eased; short interest in the stock has declined, while the franc has weakened against the euro.

The second-half performance in particular was strong, with watch and jewellery sales rising 12 per cent. Sales of cheaper quartz-movement timepieces grew at a time when domestic exports in this category were falling. Globally, battery-powered watches do not seem to have been hit by smartwatches. Their impact has been felt more by the likes of Fitbit, whose shares have fallen three-quarters since their IPO in 2015. Exports of pricier mechanical watches, meanwhile, are recovering.

But Swatch is not out of the woods yet. A group operating margin of 12.6 per cent lies well below historic levels of over 20 per cent. Inventory remains elevated at over SFr6bn. The shares have re-rated as prospects have improved, but their price performance still compares unfavourably with both the Swiss market index and main rival Richemont over longer periods.

And what about those smart watches, which sell at similar price points to Swatch products? The first models were ugly, expensive and had limited functionality. Later iterations are better and seem to be selling well.

Yet Swatch has rejected working with Silicon Valley, as rival TAG Heuer has done, in favour of developing its own operating system and lobbying for tighter rules about “Swissness”. This response is risky. A flop by the new smart Swatch, due later this year, will mean the same for the shares.

The Lex team is interested in hearing more from readers. Is Swatch safe from disruption by smartwatch companies? Please tell us what you think in the comments section below.

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