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The Swatch Group AG ADR SWGAY

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Do Post-COVID-19 Structural Changes Justify Luxurious Valuations?

Jelena Sokolova, CFA Senior Equity Analyst

Analyst Note

| Jelena Sokolova, CFA |

After a perfect storm in 2020, the luxury industry looks poised for a blue-sky scenario in 2021 as a strong sales rebound is driven by resilient luxury consumers' incomes, steady real estate, and strong equity markets as well as savings from previous coronavirus lockdowns, and the psychological need for people to reward themselves after a stressful time. As a result luxury share prices have rallied, leaving many industry players trading near record levels. Nonetheless, we could not identify structural changes in the industry post-COVID-19 that would justify sustainably higher growth and profitability, and hence, valuations. We believe the pickup in gross domestic product, or GDP, and luxury consumption in the U.S. is temporary. Although we expect Chinese consumers to continue driving the industry's growth, we don't expect post-COVID-19 acceleration, while the "common prosperity" drive by the Chinese government could temporarily hurt the industry through higher taxation and adverse sentiment over conspicuous consumption. Finally, although we expect online luxury sales to reach over 30% of the industry's sales over the next decade from low teens in 2019, we don’t expect this shift to meaningfully alter the industry's economics. Luxury companies are likely to preserve their pricing in the channel, thanks to growing control over distribution and the industry's inherent pricing power. While the online channel for the luxury sector looks more profitable than for mass apparel--thanks to higher average order values and lower return rates--the shift is unlikely to result in a major profit increase for companies that already have high in-store sales densities, such as LVMH's Louis Vuitton. Companies with lower sales densities, such as Hugo Boss, could benefit from the shift as long as they manage their store portfolios proactively.

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Company Profile

Business Description

Swatch Group’s biggest brands are Omega (number-two Swiss watch brand by sales after Rolex), Longines (the largest premium watch brand and number four by sales globally), Breguet, Tissot (the leader in midrange Swiss watches), and Swatch. Swatch group employs over 32,000 people, half of them in Switzerland. We estimate that Swatch Group makes about 28% of its sales from Omega, 18% from ultraluxury brands, 20% from Longines, 12% from Tissot, and 4% from Swatch. We estimate Omega and Longines to be the group’s most profitable brands.

Seevorstadt 6
Bienne, 2501, Switzerland
T +41 323436811
Sector Consumer Cyclical
Industry Luxury Goods
Most Recent Earnings
Fiscal Year End Dec 31, 2021
Stock Type
Employees 31,545