Watches

# Executive Summary * The watch industry is being reshaped by severe geopolitical trade tensions, particularly U.S. tariffs on Swiss imports, which are disrupting supply chains and compressing margins. * A clear bifurcation in performance exists, with technology-led smartwatch companies experiencing explosive growth while traditional watchmakers face significant revenue and consumer headwinds. * Rapid innovation in AI and health monitoring is now the primary battleground for differentiation and market share in the high-growth smartwatch segment. * Weaker consumer confidence and macroeconomic pressures are suppressing discretionary spending, impacting sales volumes for both fashion and luxury watch categories. * In response to these pressures, strategic priorities have diverged: tech players focus on R&D investment, while traditional firms prioritize cost control, supply chain resilience, and balance sheet management. ## Key Trends & Outlook The most significant and immediate factor impacting the watch industry is the rise of geopolitical trade friction, headlined by the 39% U.S. tariff imposed on Swiss watches in August 2025. This policy triggered an immediate market shock, causing Swiss watch exports to the U.S. to plummet by over 55.6% in September 2025. This directly pressures gross margins by increasing the cost of goods and forces a fundamental re-evaluation of global supply chains and pricing strategies. Companies are responding differently: Movado Group is leveraging its strong balance sheet to build up U.S. inventory, Fossil Group cited tariffs as a key factor in its financial distress, and Zepp Health is mitigating the impact by shifting production to Vietnam. This tariff-driven uncertainty is the primary source of volatility for the next 6-12 months. The primary growth engine of the market is technological advancement in smartwatches, with the segment forecast to grow at a 10-15% CAGR, fueled by consumer demand for integrated health and fitness tracking. The key differentiator is no longer hardware alone, but the sophistication of the software, particularly AI-driven personalized insights. Zepp Health exemplifies this trend, embedding its proprietary Zepp OS with generative AI to offer advanced features, driving its +46% revenue growth. The largest opportunity lies in leveraging AI and proprietary software to create a defensible ecosystem in the high-growth smartwatch category, capturing both hardware sales and potential recurring service revenue. The most significant risk is margin compression and demand destruction stemming from escalating trade tariffs and persistent macroeconomic weakness, particularly for companies with inflexible supply chains and high debt loads. ## Competitive Landscape The watch industry is fragmenting into distinct strategic approaches driven by technology and market pressures. This is evident in the smartwatch market, where Huawei (21% share) has overtaken Apple (13% share) in Q1 2025, signaling significant leadership shifts. One prominent competitive model is the Technology-Driven, Vertically Integrated Ecosystem. Companies employing this strategy compete by building a proprietary technology stack, from in-house chip design to an AI-powered operating system, to create a differentiated user experience in the smartwatch category. The focus is on R&D, software, and building a brand synonymous with health and technology. Zepp Health's pivot to the self-branded Amazfit ecosystem, development of the Zepp OS with AI, and in-house SoC chip design are direct evidence of this strategy, creating a strong competitive moat and enabling rapid innovation. In contrast, the Diversified Portfolio of Owned and Licensed Brands represents another strategic approach. Companies here manage a broad portfolio of owned and licensed brands targeting various consumer segments in the fashion and accessible luxury markets, relying on design expertise, marketing prowess, and an extensive multi-channel distribution network. Movado Group's business, explicitly built on a mix of owned brands (Movado) and a large stable of licensed brands (Coach, Tommy Hilfiger), supported by a debt-free balance sheet, exemplifies this model. A third strategy is that of the Traditional Brand Player Undergoing Restructuring. These companies focus on the value of core, traditional watch brands while executing a deep operational and financial turnaround, involving aggressive cost-cutting, exiting non-core categories, and restructuring the balance sheet. Fossil Group's comprehensive Turnaround Plan, exit from the smartwatch market, and Chapter 15 filing to restructure debt perfectly embody this strategy. Ultimately, the key competitive battleground is between technological innovation, as demonstrated by Zepp Health, and brand management coupled with financial resilience, as seen with Movado Group, with some players like Fossil Group fighting for survival through restructuring. ## Financial Performance Revenue growth in the watch industry exhibits a sharp bifurcation in growth trajectories, ranging from +46% YoY growth to -8.5% YoY decline. This divergence is a direct result of the industry's key trends. Growth is almost entirely captured by companies succeeding in the technology-driven smartwatch segment, which benefits from AI innovation and health-tracking demand. In contrast, companies focused on the traditional watch market are contracting due to a combination of smartwatch competition, macroeconomic pressures on consumer spending, and tariff-related disruptions. This divergence is starkly illustrated by Zepp Health's (ZEPP) +46% YoY revenue surge in Q2 2025, fueled by its successful smartwatch strategy, while Fossil Group (FOSL) saw its revenue decline by 8.5% in Q1 2025 amid category softness and competitive pressures. {{chart_0}} Profitability reveals a divergence between the high gross margins of established brands and the operating margin pressure faced by many players, with gross margins ranging from 36% to over 61% and operating margins clustered near zero or negative. The challenge is converting brand value into bottom-line profit. Fossil Group's (FOSL) 61.3% gross margin demonstrates the pricing power of its brands, yet the company posted a -2.9% operating margin, revealing significant operational deleverage amid falling sales. This indicates that while brand equity can command premium pricing, macroeconomic headwinds and high SG&A costs are eroding operating profitability. {{chart_1}} Capital allocation priorities are split between investing for growth and managing financial distress. Capital allocation strategies directly reflect each company's competitive position. Tech leaders are investing heavily in R&D and strategic M&A to solidify their advantage. Conversely, pressured traditional players are forced to prioritize debt reduction and balance sheet preservation above all else. Zepp Health (ZEPP) is investing in its future through technology R&D and strategic acquisitions like Wild.AI, while Fossil Group (FOSL) is entirely focused on survival, using a Chapter 15 process to restructure $150 million in debt. The health of company balance sheets is a critical differentiating factor in this volatile environment, with positions ranging from no debt and over $200 million in cash to over $175 million in debt and active restructuring. Balance sheet strength is a key competitive advantage. Movado Group's (MOV) position, with over $200 million in cash and no debt, provides it with the stability and flexibility to navigate market uncertainty, a stark contrast to more leveraged peers. {{chart_2}}