Interactive Investor

ii view: Watches of Switzerland share price smashed

Last year was one to forget for this FTSE 250 company and it's made a terrible start to 2024. We assess prospects for this luxury retailer.

18th January 2024 11:30

by Keith Bowman from interactive investor

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Third-quarter trading update

  • Now expects full-year revenue of between £1.53 billion and £1.55 billion, down from previous expectations for £1.65-£1.70 billion
  • Now expects currency adjusted revenue growth of 2% to 3%, down from a previous 8% to 11% 
  • Now expects a full-year adjusted profit margin of between 8.7% and 8.9%, down from 2023 adjusted margin of 10.7%

Chief executive Brian Duffy said:

"The festive period was particularly volatile this year for the luxury sector, with consumers allocating spend to other categories such as fashion, beauty, hospitality and travel. Whilst we are disappointed with this trend, we are encouraged by our market share gains in both the US and UK.

"We remain confident in the markets in which we operate, our model and the delivery of our Long-Range Plan announced to the market in November 2023."

ii round-up:

Retailer Watches of Switzerland Group (LSE:WOSG) today cut its full-year sales expectation and warned of challenging trading for the rest of the year as consumers, particularly in the UK, reined in their spending on luxury items. 

Full-year revenue is now expected to come in as low as £1.53 billion versus a prior forecast for up to £1.70 billion, with adjusted profit margin falling to around 8.8% from 10.7% in its last full financial year. 

Shares in the FTSE 250 company plunged by more than a quarter in UK trading having retreated by more than a tenth during 2023. Luxury clothing retailer Burberry Group (LSE:BRBY) fell by close to a third in 2023 and issued a profits warning recently. Iconic boot maker Dr. Martens Ordinary Shares (LSE:DOCS) also halved last year after issuing its fourth profit warning at the end of November. 

Watches of Switzerland sells both watches and jewellery across the UK, US, and parts of Europe. Management flagged ‘volatile’ trading in the run-up to Christmas, with the challenging economic backdrop hindering consumer spending. 

Despite net increases to customer registration of interest lists both in the UK and US, customer demand for luxury watches in the UK reduced, with an unusually high level of promotional activity for non-branded jewellery required.

A full trading update for the 13 and 39 weeks to 28 January is scheduled for 8 February.

ii view:

Tracing its history back to 1924, Watches of Switzerland is today the UK's largest retailer of Rolex, OMEGA, Cartier, TAG Heuer and Breitling watches. Operating across more than 200 stores, its store front brand names are Watches of Switzerland in both the UK and US, Mappin & Webb and Goldsmiths in the UK, and Mayors and Betteridge in the US. 

Luxury watch sales account for almost 87% of overall sales, jewellery a further 8%, and servicing, repairs and insurance the balance of 5%. Geographically, the UK and Europe generated almost three fifths of sales over its last financial year, with the US accounting for the balance. 

For investors, the tough economic backdrop including elevated borrowing costs is expected to continue impacting trading for the rest of the year. A move by Rolex to buy a rival watch retailer had already spooked investors regarding its relationship with this key supplier. Costs for businesses generally remain elevated, while the retailer, unlike rival luxury apparel seller Burberry, does not currently pay a dividend.

On the upside, management reiterated its confidence in achieving its long-term targets to more than double sales and profits by the full year 2028. Chief executive Brian Duffy previously expressed his confidence that its relationship with Rolex would not change despite its purchase of a rival retailer. Hoped-for cuts in interest rates during 2024 could aid consumer spending, while luxury watches are arguably seen as an investment as well as a status symbol and instrument to tell the time. 

While the group’s long-term ambitious targets cannot be ignored, and such a sharp drop in share price might tempt risk takers, more cautious investors will likely await confirmation that the worst is over and that conditions are improving before committing fresh money.

Positives: 

  • Growing geographical diversity
  • Exposure to hard assets in an inflationary world

Negatives:

  • Uncertain economic outlook
  • No dividend payment

The average rating of stock market analysts:

Buy

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