Watches of Switzerland reports record revenues

Watches of Switzerland (WOSG) highlighted some potentially significant specialist retail trends in full-year figures that detailed record revenues and a 24 per cent increase in adjusted cash profits (Ebitda) to £201mn.

The upmarket retailer posits that its luxury brand partnerships have underpinned sales growth, with rising volumes and an increase in average selling prices driving a strong uplift in the top line. It also pointed to a double-digit increase in sales of preowned luxury watches, a possible reflection of the investment dynamic linked to high-end timepieces. This dynamic could conceivably play out further with the imminent launch of Rolex Certified Pre-Owned in the US and in the UK in September. The Old Bond Street Rolex flagship boutique is due to open during Summer 2024. Overall, sales of luxury watches were up 28 per cent, and accounted for 87 per cent of total revenue.

And the outlook remains positive. Chief executive, Brian Duffy, confirmed that “demand remains strong and continues to outpace supply” with “client registration lists extending and average selling prices growing”. Duffy went on to say that the company entered its new financial year significantly ahead of the expectations outlined in its long-range plan in 2021.

Beyond positive market momentum, there were also operational improvements. Free cash flow increased by 30 per cent to £146mn, with the conversion rate up by 330 basis points to 72 per cent, achieved despite investment in inventory.

US trading remains strong, accounting for more than a third of sales, while volumes also improved in airports as traffic recovers post-pandemic. Given its upmarket outlets, it is not surprising that lease liabilities account for the lion’s share of Watched of Switzerlans's debt, yet the consensus forward enterprise value (EV)/Ebitda ratio is contracting appreciably, suggesting that the shares may still be undervalued. Buy.

Last IC view: Buy, 894p, 14 Dec 2022