ii view: Watches of Switzerland shares fast-forward to record high

This UK and US luxury watch retailer is setting full-year forecasts higher. Here’s why.

Second-quarter trading update to 25 October

• Revenue up 18% to £202.7 million

Full-year guidance:

• Expects revenues of £880 million to £910 million, up from £840 million to £860 million
• Expects profit margin between +1% to +1.5%, up from a previous flat forecast 

Chief executive Brian Duffy said:

"We are very pleased with the strong Q2 performance we are delivering in what continue to be unprecedented market conditions.  Our guidance for the balance of the fiscal year assumes that the positive trend experienced in Q2 will be moderated by the impact of pandemic related retail disruption in the UK and the US and uncertainty in the US economy, impacting mainly in Q3.  We do not assume any improvement in recent trends regarding the travel or tourist sectors.

"Looking ahead, we will continue to focus on our strategy by investing in high quality growth through selective capital projects and targeted marketing activity."

ii round-up:

Specialist retailer Watches of Switzerland (LSE:WOSG) today raised its full-year sales estimate given better-than-expected 18% revenue growth in the second quarter.

Strong sales in both the UK and US, more than offsetting lower tourist and airport takings, underpin an upgrading of full-year revenue estimates to £880-£910 million from a previous £840-£860 million.

Shares in the company rose by almost a fifth in UK trading and have more than doubled since pandemic -induced lows back in March. Shares of luxury goods retailer Burberry (LSE:BRBY)have risen by just over 40% since late March. 

The specialist watch retailer also edged higher its expectations for an adjusted full-year profit margin change from flat to up to 1.5% higher. 

Second-quarter sales rose by just over a third in the US to £58 million. All US regions contributed. Sales in the UK climbed by 13% to £145 million, with ecommerce sales up by 50%. Regional sales continued to outperform those in London where footfall remains reduced. 

The group has 135 stores across the UK and US including outlets at Heathrow airport, along with five online stores. 

Sales to the middle of March during its last financial year rose by 16% to just under £800 million, although its last six weeks of trading into April were hit by store closures under Covid-19. Operating profit increased by 6% to £48.3 million. 

The company doesn’t currently pay a dividend. First-half results are scheduled for 17 December.

ii view:

Watches of Switzerland operates under four brands - Watches of Switzerland itself in the UK and US, Mappin & Webb and Goldsmiths both in the UK, and Mayors in the US. It also offers a complementary jewellery offering. The company claims to be the UK's largest retailer for Rolex, Cartier, OMEGA, TAG Heuer and Breitling watches. 

Watches account for just over four-fifths of overall sales, with jewellery the balance. For the financial year to the end of April, the UK generated just over two-thirds of group sales, and the US just under a third. 

For investors, the course of the pandemic and its potential to again close stores cannot be forgotten. A significant rise in the share price over recent months and the lack of a dividend payment also offer some reason for caution. However, the sale of hard assets in an era of central bank money printing has some attraction, as do growing online sales. In all, while some near-term caution looks advisable, the long-term story puts this stock on the watchlist. 

Positives: 

• Growing online sales
• Exposure to hard assets

Negatives:

• Tourist sales remain impacted by Covid-19
• No dividend payment

The average rating of stock market analysts:

Strong hold