ii view: Watches of Switzerland shares tick higher

First-half results to 27 October

• Revenue up 3% to £785 million
• Pre-tax profit down 39% to £41 million
• Net debt of £120 million, down from net cash of £16 million

Guidance:

• Continues to expect revenues of between £1.67-to-£1.73 billion or year-over-year growth of 9% to 12%
• Continues to expect adjusted profit margin growth of between 0.2% to 0.6% 

Chief executive Brian Duffy said:

"As previously outlined, in Q1 we increased showroom stock levels of key brands to enhance displays and client experience, particularly in the US. 

“Our newly acquired Roberto Coin business in North America has traded strongly since acquisition and is now making a good contribution to our Group. We are also encouraged by the performance of the Rolex Certified Pre-Owned programme and the sustained growth in our overall pre-owned business.”

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ii round-up:

Specialist retailer Watches of Switzerland Group (LSE:WOSG) today flagged improving sales as well as a strong start to third quarter festive holiday trading. 

A 24% jump in second-quarter US sales fuelled an overall group increase of 11%, up from a 2% decline during the first quarter. The Braunstone, Leicestershire, headquartered company continues to expect full year revenues of between £1.67-to-£1.73 billion or year-over-year growth of 9% to 12%.

Shares for the FTSE 250 company rose 14% in UK trading having come into this latest news down 30% year-to-date. That’s similar to fellow luxury retailer Burberry Group (LSE:BRBY) and comfortably below a 7% gain for the 250 index itself during 2024. 

Watches of Switzerland operates 217 stores across the UK, US and Europe via brands including Mappin & Webb and Goldsmiths in the UK and Mayors and Betteridge in the US.  

Despite a 3% increase in first half sales to £785 million, pre-tax profit fell 39% to £41 million, hindered by changes in the product mix and a lack of leverage over fixed costs. 

The retailer continues to forecast growth in the adjusted full year profit margin of between 0.2% to 0.6%, potentially up from late October’s 8.4%.

Group net debt of £120 million compared to year ago net cash of £16 million came following its takeovers of jewellery maker Roberto Coin Inc. and New York based e-commerce seller Hodinkee.

A holiday season trading update is likely mid-January. 

ii view:

Watches of Switzerland is the UK's largest retailer of Rolex, OMEGA, Cartier, TAG Heuer and Breitling watches with its overall store portfolio including 95 dedicated mono-brand stores working in partnership with Rolex, TAG Heuer, OMEGA, Breitling, Grand Seiko, Bvlgari and FOPE. 

Luxury watches accounted for 83% of overall sales during this latest period, with jewellery a further 12%, and servicing, repairs, and insurance the balance of 5%. Geographically, the UK and a few European outlets generated 55% of sales and the US the balance of 45%. 

For investors, the tough economic backdrop for consumers, including elevated borrowing costs, cannot be ignored. Supply chain issues for many industries persist. A previous move by Rolex to buy a rival watch retailer worried investors regarding the watch retailer’s relationship with this key supplier, while Watches of Switzerland, unlike rival high-end retailers, Burberry and Dr. Martens Ordinary Shares (LSE:DOCS), does not currently pay a dividend.

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On the upside, we have seen sequential revenue improvements for both the US and UK. Chief executive Brian Duffy previously expressed his confidence that its relationship with Rolex would not change despite its purchase of a rival retailer. Key showroom openings during the second half include the flagship Rolex boutique in Old Bond Street, London and Audemars Piguet Town House in Manchester, while luxury watches are arguably now seen as an investment as well as a status symbol and instrument to tell the time.

For now, and while some caution still looks sensible, encouraging trading and potential further overseas expansion are likely to keep existing fans of this specialist retailer staying patient. 

Positives: 

• Growing geographical diversity
• Offering exposure to hard assets in an inflationary world

Negatives:

• Uncertain economic outlook
• No dividend payment

The average rating of stock market analysts:

Buy