(S)watch Out

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What's going on?

What’s Swiss crossed with watch? Swatch – which, on Wednesday, reported a 70% increase in profits for the first half of 2018, compared to last year.

What does this mean?

The maker of Harry Winston and Tissot watches, among others, grew its sales by 15% more than the first six months of last year, partly thanks to increased demand from Asian and American customers. Swatch’s bosses might be mopping their brows in relief: it seemed like smartwatches were taking over for a second. Apple now sells more watches than anybody, but it looks like there’s still room for the classics. Surprisingly, Swatch had millennials to thank for some of the increased demand for its timepieces – perhaps the novelty of talking to your mom on your watch has worn off.

Why should I care?

For you, personally: It’s all about risk vs. reward.

Swatch managed to grow its profit by nearly five times as much as its sales, partly because it’s got high “operating leverage” – a measure of how revenue is converted into profit. A company with high operating leverage – usually due to high fixed costs (i.e. things it has to pay regardless of how it’s doing, like salaries and rent) – suffers a big drop in profit if sales fall because the high costs will eat more into the cash coming in. A company with low fixed costs (a.k.a. low operating leverage) can cut any flexible costs to more easily weather the storm. On the other hand, companies with high operating leverage stand to win big when more money starts rolling in, because they won’t have to suddenly spend more (on things like staff and infrastructure) but companies with low operating leverage will – meaning more money in the bank when Swatch clocks off.

The bigger picture: Millennials are hot property.

American Express (Amex) is another brand hoping to reconnect with millennials. JPMorgan Chase’s “Sapphire Reserve” credit card has been wooing millennials with perks like travel credit (hey, Uber) and airline lounge access. But Amex is making changes to get sought-after millennials’ attention back.

Originally posted as part of the Finimize daily email.

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