- Guidance for sales to climb 9 per cent in the 2023 financial year
- Company insists luxury market will hold up in recession
Spending indicators and received wisdom say the luxury market will withstand the cost of living crisis, as those with plenty of cash will keep spending. Watches of Switzerland (WOSG) said its sales for the last quarter of 2022 showed as much: its revenue for the 13 weeks to 29 January were up 12 per cent on a constant currency basis, to £407mn. This was a slight miss on the consensus forecast of £425mn.
This growth was largely driven by the US, which saw a 22 per cent hike compared to 7 per cent in the company’s bigger UK and European market. Jewellery sales slowed in the quarter by 2 per cent.
Investors weren’t sold by what the company called the “the unique supply/demand dynamics of luxury watches” holding firm in a recession, with its shares falling by up to 13 per cent in early trading before coming back to a 7 per cent drop on Wednesday’s closing price.
Guidance for the full year is £1.5bn-£1.55bn in sales and adjusted Ebitda flat on last year. This sales level would be a 9 per cent increase on the last financial year.
Analysts largely share this view, and forecast an increase again in the 2024 financial year to sales of over £1.7bn. Watches of Switzerland has guided capital expenditure of £70mn-£80mn in the current financial year, double last year’s figure. This spending is largely on new shops and refits of existing locations.
The market has seen real shortages of sought-after watches in recent years, with various models from Rolex and other Swiss watchmakers tough to find. Watches of Switzerland said demand continued to exceed supply in the space.
But there are questions over the health of the watch market more generally: last month, Morgan Stanley said the second-hand market was awash with previously unavailable models. “We have noticed a significant increase of watch inventory in the secondary watch market year to date as a result of second-hand watch dealers and individual watch investors off-loading their stocks,” the bank’s luxury analysts wrote.
It is clear some part of the watch and jewellery market will be impacted as buyers who would have splashed out delay purchases or decide not to buy at all. Watches of Switzerland's inventory levels will give a clue to its ability to manage any shift in demand – last year it grew stocks by £80mn, given the “obsolescence risk is low and therefore we expect to grow inventory levels”, as it said in the last full-year results. Any major increase (and the linked negative shift in working capital) will show stocks are not moving as intended.
Positives for the retailer include improving tourism to the UK and Europe and a net cash position to help weather operating cost increases. Buy.
Last IC View: Buy, 849p, 14 Dec 2022
