Watches of Switzerland keeps ticking over

There were no big surprises in Watches of Switzerland’s (WOSG) half-year results, after the luxury watch retailer trailed the performance in an update last month. That was good news for the company, which is trying to rejuvenate sentiment after the shares fell by over a fifth when Rolex announced its purchase of Swiss retailer Bucherer in August.

That raised fears about Rolex setting up its own retail network, but our view (based on the current situation) is that the share price reaction was overdone and that nothing fundamental has changed about the investment thesis. As RBC Capital Markets analysts argue, this was a “one-off transaction with no change to Rolex’s strategic view on downstream distribution and WOSG remains a key partner with [around] 10 per cent global Rolex market share”.

The top-line highlight in the half was the 5 per cent growth posted in the US, where the company now has 25 multi-brand showrooms and 31 mono-brand boutiques. Sales in the bigger UK and Europe market were down by 4 per cent, though, which management pinned on “the unwinding of the benefit of product intake” and the impact of closing showrooms for refurbishments. 

Adjusted cash profits of £73mn, while down 15 per cent against last year, came in slightly above previous guidance. The adjusted margin was down by 170 basis points to 9.6 per cent, impacted by inflationary headwinds.  

The fall in statutory profits was driven by higher costs, not helped by £3.1mn of impairment charges over property, plant and equipment and showroom assets. 

Full-year guidance was left unchanged, with no comments on current trading. But the company’s note that its forecasts don’t “reflect any expectation of an improvement in consumer confidence” was interesting, given chief executive Brian Duffy's statement that client registration lists are still growing. 

The shares have been boosted by the release of new long-term targets to 2028 in November. The company is aiming for a doubling of revenue and adjusted cash profits over five years, with hopes of a compound annual growth rate of 20-25 per cent in the US. Part of the growth story will be expansion in the second-hand watches and luxury jewellery categories, which is certainly feasible, if not an easy task. 

Growth expectations keep us bullish on the company's long-term prospects, while the valuation is undemanding. The shares trade hands at 12 times forward consensus earnings, compared with a five-year average of 18 times. Buy. 

Last IC view: Buy, 689p, 13 Jul 2023