- Higher demand than supply means that Watches of Switzerland should be able to pass cost pressures onto customers
- The company may be able to grow in the US and Europe
Katen Patel, co-manager of JPMorgan Mid Cap Investment Trust (JMF), explains why he invests in luxury watch retailer Watches of Switzerland (WOSG).
“Within today’s economic environment, UK investors should consider their portfolios through an inflationary lens. While rising inflation can impact UK equities, investors can still benefit from high-quality stock selection, focusing on companies with strong pricing power to protect themselves against rising costs.
"Watches of Switzerland is a good example of this. Luxury watches are durable assets with higher demand than supply. This gives manufacturers and retailers like Watches of Switzerland the ability to pass on any cost pressures to their largely price insensitive customers.
"Despite a decline in sales from overseas buyers during the pandemic, Watches of Switzerland ended 2021 as one of the biggest risers in the FTSE 250 index, having gained almost 140 per cent. And, most impressively, it was trading more than four times higher than its 2019 offer price. Market expectations are for this British’s retailer’s revenue in the coming 12 months to be more than double that of its pre-pandemic peak and earnings to be up almost four-fold.
"Watches of Switzerland’s long-term growth prospects also look attractive. The company is making excellent progress on executing its recently laid out expansion plans in the US to generate further revenue and profit growth. US sales of luxury watches are 40 per cent lower per capita than in the UK, providing Watches of Switzerland an opportunity to tap into the growth potential of this sector. Closer to home, the company has recently made its first foray into the $14bn (£10.45bn) European luxury watch market, and beyond that [there are opportunities] as a result of the strong relationships it has built with key suppliers.
"Despite inflationary concerns, we believe that Watches of Switzerland is well placed to benefit from the current environment and provide strong long-term returns to shareholders.”
Watches of Switzerland was one of JPMorgan Mid Cap Investment Trust’s three largest holdings at the end of January, accounting for 4.3 per cent of its assets. The trust’s largest sector exposure was consumer discretionary stocks which accounted for 47.9 per cent of its assets.
