As indicated by typical sales data, the demand from products of companies in this sector seems to be very weak and continuingly declining in the past several years due to mismatch between growth in compensation and economy and to unfavourable retail environment. 

Sector’s Current, Trend, Causes behind trend, and Future

Current and Trend

1. The demand for watches in US market seems to have been weak in the past three years as indicated by the continuingly declining sales to wholesale customers of those typical companies in this sector.

2. International market (Europe and Asia mainly) seems to have been contributing to the general growth in sales and to some extent offset declining domestic sales.

3. As a response to the soft sales/traffic, companies in this sector have pursued strategies such as lowering price for existing products to keep their share in US market or diversifying their products to compete in the key emerging markets.

4. Due to increasingly intensive competition in price, companies in this sector have experienced shrinking profitability.

5. Downturning trend seems to slow down its pace after entering 2018.

Causes behind the trend

1. Demand for products in this sector should have been fundamentally driven by factors such as population growth and household income. The decline in sale of store may imply a general decline in purchasing power of consumers. However, while the basic demand is supposed to be still solid, purchase above the basic demand may be reduced due to a natural decline in demand for watches as a result of shifting of preference of consumers and due to less random purchasing as a result of less stores visits. In addition, due to less pre-costs of online sales, the largely increasing numbers of online sites dilute sales of all existing sellers.

2. Shifting away from watches of preference of consumer in US may be a natural result of social development. The boom in emerging market is as well.

Industry Future

1. Retail industry’s chaos will eventually stabilized as the number of new competitors reaches maximum. Companies will probably find that their profitability can not come back to previously level and survivors may only be those who can perform well in e-commerce and emerging market.

General Financial Performance of Companies In the Sector

It seems that, based on the typical company data, the demand for watches in North America market in the past three years (declined 5-13% annually) has been very weak and declining quickly, primarily attributable to general decrease in demand and the declining store traffic from stores of their wholesale clients. However, performance in European and Asian market of watches products seems different with that in US market. For some of brands, their international sales, Europe and Asia, have grown quickly in 2017 so as to completely offset the decline of their sales in domestic market. This seems to be consistent with performance in other products categories and may reflect some common factors behind those US and international markets.

Companies, facing the unfavourable retail environment, have responded to the slowing down traffic by lowering price and shifting marketing focus on lower price products. However, while those methods seem to have worked better for some premium brands but their profitability seems to be damaged largely.

The typical companies’ gross margins are down from average 55% to about average 51% in 2017.  The SG&A as percentage of sales (including store occupancy and staffing costs) went up by about 480 basis points to about 46% in 2017; the typical operating margin went down from 14% to 4% in 2017. Companies’ cash flow thus significantly decreased during the same period.

The typical average stock price/sales ratio is about 0.9.

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