Watches of Switzerland posts strong US growth

Luxury watch purveyor Watches of Switzerland (WOSG) increased its revenues and statutory profits as the demand for high-end wristwear remains strong despite consumer spending pressures. But the shares were marked down by 6 per cent after the market took fright at a fall in margins and a 45 per cent contraction in free cash flow.

Unique sectoral supply and demand dynamics, which result in long customer waiting lists for luxury watch models, show little signs of abating even with severe macro headwinds pounding economies. Management also pointed to higher prices and volumes in the half. These factors helped UK and Europe revenues climb by 8 per cent to £454mn, while US revenues were up by 86 per cent to £311mn as the company continues to expand Stateside.

The downturn in margins – the adjusted cash profit margin fell by 50 basis points to 13.6 per cent and the operating margin was down by 20 basis points to 12.1 per cent – was less impressive. But this was impacted by the lack of £5mn of business rates relief, which was enjoyed in the prior year.

The free cash flow decline, from £102mn to £56mn, was driven by a £28mn working capital outflow. This was due to rising inventories, which were up by £143mm. As Barclays analysts noted: “Investor scrutiny on inventory has increased given macro concerns”. But a big chunk of the increase was due to acquisitions, new showrooms, and foreign exchange movements. And the company increased its ranges ahead of Christmas trading, surely a sensible move.  

The shares trade at a consensus 17 times forward earnings according to FactSet, below the five-year average of 19 times. This is an attractive rating for a growing company which enjoys resilient demand for its products. Buy.

Last IC View: Buy, 797p, 7 Jul 2022