UPDATE: Swatch Posts Strong Earnings Despite Swiss Franc Concerns

Swatch Group AG (UHR.VX) Thursday warned about the dire effects of the soaring Swiss franc despite reporting record half year profit and sales figures.

The world's biggest watchmaker, whose brands range from the luxury Breguet to the eponymous plastic Swatches, said sales rose 24.2% to CHF3.36 billion in the six months to the end of June.

Net profit rose 24.5% to CHF579 million.

The Biel-based company said it expected continued strong growth in all segments and regions, but this was being constrained by the uncurbed rise of the Swiss franc.

The currency has risen to record levels this year as investors rushed to its safe haven status amid the European debt crisis. In the first six months of the year the currency has risen 2.6% against the euro and 10.5% against the dollar.

The "continuing over-valuation" of the Swiss franc knocked CHF387 million off first half sales, Swatch said. This was worse than the whole of 2010, when negative currency effects reduced sales by CHF164 million.

"The over-valued Swiss franc reduces margins at the Group's foreign distribution companies, while the high volatility makes exchange-rate related price adjustments difficult," Swatch said in a statement, adding that "the strength and volatility of the Swiss franc have to be considered as extremely problematic for Switzerland."

Expansion of its distribution and retail network, as well as the production business, contributed to the sales and profit growth in the first half, Swatch said.

The second half of the year looks "promising," Swatch said, with sales trends in July continuing the trend from the first six months.

The company said it is investing to reduce production bottlenecks and plans to increase capacity further to maintain growth, but warned that growth "will, however, be hampered by uncurbed speculation in the Swiss franc."

Analysts were impressed by the figures. The results were stunning given the strength of the Swiss franc, which remains the most likely challenge going forward, said Bank Vontobel in Zurich.

"Unlike other Swiss companies, the strong franc didn't prevent it reporting record results, and the outlook remains positive," said analyst Rene Weber.

At 1115 GMT, Swatch shares were up 06% at CHF426.8 on the SMI index which was down 0.9%. The stock has risen 2.4% since the start of the year.

-By John Revill, Dow Jones Newswires; [phone] (Neil MacLucas in Zurich contributed to this report); [e-mail]