ii view: why Watches of Switzerland shares ticked higher

Trading update for the first 18 weeks of the financial year

• Continues to expect revenues of £1.67-1.73 billion, or year-over-year growth of 9-12%
• Continues to expect adjusted profit margin growth of between 0.2% and 0.6% 
• Continues to target a more than doubling in sales and adjusted profit (EBIT) by the end of FY28

ii round-up:

Specialist retailer Watches of Switzerland Group (LSE:WOSG) today detailed trading in line with management expectations, with demand in both its key UK and US markets remaining strong. 

Full-year revenue growth of up to 12% is on track, with demand for key luxury brands, particularly for products on registration of interest lists, outstripping supply during this 18-week trading period.    

Shares in the FTSE 250 company, which have traded between 350p and 450p since mid-May, rose 8% in UK trading having come into this latest news down by almost a half year-to-date. That’s similar to fellow luxury retailer Burberry Group (LSE:BRBY) and comfortably below a near 8% gain for the FTSE 250 index itself in 2024. 

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Watches of Switzerland operates over 220 stores across brands including Mappin & Webb and Goldsmiths in the UK and Mayors and Betteridge in the US.  

The retailer flagged a stabilisation of demand for luxury watches and jewellery in its UK market following a period of tough economic conditions this time last year. 

Expected growth in the US continues to be second-half weighted, with the retailer currently increasing showroom stock levels to enhance displays and client experience.

The integration of its recent Roberto Coin jewellery maker acquisition in the US for $130 million is progressing to plan, with scheduled new store openings including a flagship Rolex boutique in Old Bond Street, London and a Manchester outlet in April 2025. 

Confidence of supply in the UK and US, along with increased certainty on the timing of key showroom projects and visibility of new product launches all underpin current full-year forecasts. 

First-half results are scheduled for 5 December. 

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 around 99 dedicated mono-brand stores working in partnership with Rolex, TAG Heuer, OMEGA, Breitling, Grand Seiko, Bvlgari and FOPE. 

Luxury watches accounted for 87% of overall sales during its last financial year, with jewellery a further 7%, and servicing, repairs, and insurance the balance of 6%. Geographically, the UK and a few European outlets generated 55% of sales and the US 45%. 

For investors, the tough economic backdrop for consumers, including high borrowing costs, cannot be overlooked, and supply chain issues for many industries persist. A previous move by Rolex to buy a rival watch retailer spooked investors who worry about the watch retailer’s relationship with this key supplier. Also, 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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To the upside, a stabilisation of UK demand has been seen, with expected US interest rate cuts potentially aiding demand there later in the year. Chief executive Brian Duffy previously expressed his confidence that its relationship with Rolex would not change despite its purchase of a rival retailer. A reiteration of management’s November 2023 Long Range Plan to more than double sales and profits by the 2028 full year, was made at recent full year results. Luxury watches are also arguably now seen as an investment as well as a status symbol and instrument to tell the time.

In all, and while a good dose of caution still looks sensible, a consensus analyst fair value estimate above 490p per share is likely to keep the interest of more speculative investors. 

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