I spent some time reviewing the Swatch Group 2022 Annual Report recently. To be more specific, I jumped into the financial statements and, by and large, skipped over the larger narrative in the 244 page document. That narrative is undoubtedly interesting, but sometimes a narrative distracts from the message sent by the numbers in various tables covering asset, liabilities and related financials. And, those numbers are actually audited by outside parties. The wordsmithing in a narrative doesn't necessarily have to follow requisite standards.
The box of a MoonSwatch, showing iconography used on the crown.Overall, the financial picture looks good for Swatch Group. The company increased its dividend, which they wouldn't do if there were a crisis. Net sales increased by roughly CHF 140 million and almost all of those net sales benefitted the Swatch Group bottom line. The operating result (one measure of profit) increased by CHF 115 million. In addition, this operating result was a larger portion of net sales, going from 15.9% in 2021 to 17.2% in 2022.
A fair bit of this result is likely attributable to MoonSwatch. Some reports indicate that over 1 million MoonSwatches have been sold. With a retail price of CHF 250, it is at least plausible that MoonSwatch revenue of CHF 250 million generated a big chunk of Swatch Group's overall CHF 115 million improvement in operating results. Put another way, I'm sure the Swatch Group is glad they avoided the branch of the multiverse in which they did not introduce MoonSwatch.
Here are a few other things from the financials that jumped out to me:
Hedging
Swatch Group reports that it held CHF 847 million in forward currency contracts in 2022. This signals that management has a careful approach to financial management. Earning different currencies from around the world can expose an organization to significant currency risk. For example, if Swiss currency were to gain value against a wide range of other currencies, then (on the spot market) those currencies would yield fewer francs, which would make it much more difficult to pay franc-denominated bills. Swatch Group is well-hedged, or insured, in this regard. Around 69% of the company's forward contracts are denominated in euros and the US dollar. We can also view these euro contracts as the cost, to Swatch, of Switzerland not joining the euro.
Poof: Current Financial Assets
In 2021, Swatch Group held CHF 388 million in "current financial assets." This is one part of the group's liquidity, or "cash on hand," that it has available to pay bills. At the close of 2022, this balance was zero. If I were a shareholder (full disclosure, I'm not), I would be curious about this development. The good news is that it looks like Swatch Group paid off a lot of debt in 2022 (current financial debts dropped from CHF 98 to 8 million). So there is some chance this liquidity shift was tied to a reduction in borrowing. Cash and cash equivalents did increase, so I tend to believe the company was simply using slightly less liquid assets to build cash and pay off debt. Overall, that arguably increases the group's liquidity.
All Hands on Deck
My Hodinkee X Swatch Sistem51 Blue Edition In 2021, Swatch group booked CHF 61 million in "short-time work allowances." According to ch.ch "If [a] company is temporarily in financial difficulties, [it] can reduce or totally suspend the work of [its] employees without having to lay them off" via the short-time work allowance program. Apparently, Swatch group made use of this option in 2021 and it cost them a fair bit. In the 2022 finanical report, Swatch group booked only CHF 1 million in short-time work allowances. This means the company was much more appropriately sized in 2022 compared to 2021, which is no doubt a welcome development for the group. Given that the company employed roughly 600 more workers at the end of 2022 (compared to year end 2021), it seems Swatch set goals that required an expansion of its workforce. The report also notes that just over half of its employees are women (I should note that the headcount figures are unaudited).
Hurray for the Red, White and Blue
Swatch group sales expanded at a fast rate in America, growing by 27% year on year. "Oceania," grew by a whopping 38% year on year, the largest expansion of any region in the report. Sales in Europe grew by 20%. There was some bad news in the largest market of all: Asia. There, sales decreased by roughly 9%. It remains to be seen if this region will rebound now that covid restrictions have seemingly eased there.
Clouds on the Horizon?
Swatch group registered an 8% inventory increase between 2021 and 2022. This is a fairly sizeable buildup in a short period of time. It is equivalent to more than CHF 450 million. A prior report seemed to suggest that this buildup of inventory was related to acquisition of raw materials in anticipation of future production. However, the 2022 financials suggest that a little over half of the new inventory, by value, was attributable to semi-finished and finished products. It remains to be seen if this is simply new product that the group properly anticipates selling in 2023 or whether it is unsold product from 2022 that has not found a home on wrists. This development is clearly something to keep an eye on as Swatch group releases interim reports in 2023.
Conclusion
The numbers suggest that Swatch Group had a good year in 2022. They employed more people, did not lay off many of those who were employed, saw a meaningful improvement in operating results, and increased their liquidity by reducing debt and increasing cash on hand. There are some reasons for the group to be optimistic given the potential for recovery of demand in Asia. There are also many opportunities to succeed with new releases this year, such as those associated with the Blancpain Fifty Fathoms 70th anniversary. However, given an upswing in inventory, the group should be somewhat cautious. Of late, there has been uncertaintly in the banking system, an uncertainty that has touched Switzerland itself. The watch industry isn't necessarily adversely impacted by such uncertainty, but it does suggest that caution may be the right approach in 2023 (for Swatch Group and others).
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News recently broke that watch brand Rolex was on the receiving end of a €91 million fine levied by French authorities. A view of Rolex's offices in France. Source: Google Maps. Generally, the headlines ascribed this fine to Rolex's alleged practice of prohibiting online sales of its watches. However, I've looked closely at the situation and I don't think those headlines are completely accurate (although they're probably what French authorities would want you to believe). I came to this conclusion after reading a Google translation of a 134 page report issued by the French Competition Authority on December 19, 2023. Generally speaking, such documents do not make for engaging reading. However, for those who know how successful Rolex has been at maintaining a comparatively high level of corporate secrecy, the French report provides a compelling and rare insight into some specific aspects of the brand's business. It is these insights which lead me to conclu
There comes a moment in the servicing of a watch that is probably easy to miss among the hundreds of steps required to remove a movement from a case, inspect the parts, repair anything amiss, lubricate all the pieces, and put the whole thing together again. A watch that Rolex's investigator bought at Beckertime for approximately $4,500. The lawsuit refers to this as "Counterfeit Watch One." That moment is when a watchmaker takes the dial and reattaches it to the movement. There is nothing particularly unique when it comes to the tools required or the tasks involved in this step. Instead, what is unique about this moment is that the watchmaker holds in their hand a mark that is not the property of the watchmaker and it is not exactly the property of the watch's owner. In the case of Vacheron Constantin, that mark is a Maltese Cross. For Audemars Piguet, it is the brand's initials. When it comes to Rolex, the mark is a widely recognized crown. If the reassembly
Among many avid watch collectors, the term "in house movement" seems to elicit eyerolling disdain. Pieces of an assortment, including balance spring, from a non-Swiss movement. There is a sizeable perception that "in house" is, in fact, nothing more than an unnecessary marketing ploy designed to tease more money out of the wallet of buyers (by way of definition, an "in house" movement means that the mechanism inside a watch was predominently manufactured by a brand itself, kind of like "we make our own bread" at a restaurant). I'll confess that I'd begun to think similarly, that is, until I read a 66 page report posted by the Swiss Competition Commision on May 10, 2023. Yes, this is the kind of thing an economist finds interesting on a weekend, or at least this economist. Before we get into the details of this report, in the interest of full disclosure I should say that the original document was in a different language: lawyerese.
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