ii view: Watches of Switzerland returns to sales growth

Full-year trading update to 27 April

• Currency adjusted revenues up 8% to £1.65 billion
• Expects full-year adjusted profits to match existing City forecasts

Chief executive Brian Duffy said:

"As we look ahead, we remain confident in the strength of our business model, our strong pipeline of showroom openings and the resilience of the luxury watch category where demand for key brands continues to outstrip supply. We are of course mindful of the broader macroeconomic and consumer environment, including potential US tariff changes."

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ii round-up:

Specialist retailer Watches of Switzerland Group (LSE:WOSG) today detailed a return to sales growth in the UK and Europe, with trading patterns in the US recently normalising following initial consumer uncertainty post the announcement of Trump trade tariffs. 

UK and European sales rose 6% in the second half to late April, improving from a fall of 1% in the first half to late October. Second-half US sales accelerated to growth of 19% on a currency adjusted basis, up from growth of 11% in H1. The retailer expects adjusted annual profit to broadly match current City estimates. 

Shares in the FTSE 250 company rose 4% in UK trading having come into this latest news down by close to a third year-to-date. That’s way below a gain of almost 1% for the FTSE 250 so far this year. Fellow luxury goods retailer Dr. Martens Ordinary Shares (LSE:DOCS) is down by almost a fifth. 

Watches of Switzerland operates 208 stores across the UK, US and Europe via brands including Mappin & Webb and Goldsmiths in the UK and Mayors and Betteridge in the US.  

Overall currency adjusted group sales for the year to late April rose 8% to £1.65 billion. Management flagged ongoing strong customer demand, particularly for products on registration interest lists, where demand continues to outstrip supply. 

Group developments during the second half included the opening of a new flagship Rolex boutique on Old Bond Street, London, with trading subsequently exceeding management expectations. 

The integration of previous business acquisitions Hodinkee and Roberto Coin in the US are progressing well, with the US luxury jewellery market the biggest in the world. 

Full-year results to 27 April are scheduled for 3 July. 

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 94 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 the first half, 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 uncertain economic backdrop for consumers, including increased costs due to applied trade tariffs, cannot be overlooked. A previous move by Rolex to buy a rival watch retailer had investors worried about the watch retailer’s relationship with this key supplier. Supply chain issues persist for many industries, while Watches of Switzerland, unlike rival high-end retailers, Hugo Boss AG (XETRA:BOSS) and Dr Martens, does not currently pay a dividend.

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More favourably, sales for both of the retailer’s key markets have improved during the second half. Chief executive Brian Duffy previously expressed his confidence that its relationship with Rolex would not change despite its purchase of a rival retailer. New showrooms such as the London Bond Street branch continue to be opened, while luxury watches are arguably now seen as an investment as well as a status symbol and timepiece.

On balance, and while some caution remains sensible, potential for further overseas expansion and a consensus analyst fair value estimate above 450p per share, are likely to keep investors interested in this recovery story. 

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:

Strong hold