Watches of Switzerland set for further expansion

No surprises for shareholders in Watches of Switzerland (WOSG) as full-year figures mirrored May’s trading update and consensus estimates. Demand for its high-end timepieces gathered momentum through the lockdowns, with ecommerce sales increasing by 121 per cent over the course of the year, while free cashflow more than doubled to £110m.

The surge in statutory profits was remarkable given that its outlets were closed for half the year and tourism numbers collapsed. Indeed, the UK business witnessed an 80.7 per cent fall in tourist spend coupled with a 74.7 per cent reduction in airport business. But the success of the online channels more than made up for the fall in standard footfall, presumably giving management food for thought in relation to future capital allocations, even though it insists that “stores continue to be a focus of investment”.

That focus was certainly borne out through the year, despite the unprecedented disruption to normal trading. The group allocated £23.1m in expansionary capital expenditure, as it brought the number of core outlets in the UK and US to 148 – a net increase of 13 through the year. The expansion doesn’t end there; capex is expected to be in the range of £40m-£45m in the current year, and a cumulative indicative range of £300m-£340m over the next five years.

Targeted social media campaigns and an increased budget for digital marketing helped support online traffic numbers, so it will be illuminating to discover what impact the reopening of the store estate will have on these numbers going forward.

Sales in the UK domestic market, which constitute two-thirds of the group total, were 3.6 per cent to the good at £607m, while revenues from the US marketplace were 38.5 per cent ahead of the prior year. Within its separately published five-year growth strategy, the group points out that the UK market has “the highest per capita retail-spend by domestic customers on luxury watches”, also noting that the UK’s “differential to other markets reflects retail investment, not customer behaviour”. The investment angle, aligned to aspirational consumption, should further underpin sales in the domestic market.

Chief executive Brian Duffy noted that supply continues to lag demand in the market, a dynamic in evidence across the luxury goods market, and one which could become more pronounced as international leisure travel slowly resumes in the wake of the pandemic.

The group reiterated revenue guidance of £1.05bn to £1.10bn, but cash profits will be held in check by increased capex commitments. A strong showing, but a forward rating of 26 times HSBC’s EPS estimate of 32.82p suggests the market is up to speed. Hold.

Last IC view: Hold, 540p, 22 Dec 2020