Online sales are on a growth tear and the UK’s largest luxury watch retailer enjoyed a stronger than expected start to the third quarter in spite of lockdowns across the UK and reduced international clientele.
However, Shore Capital cautioned the latest positive revision is again set against ‘an unknown UK market during the first few months of 2021, with the prospect of further lockdowns on the horizon, in our view’.
ANOTHER 2021 UPGRADE
In light of a better than anticipated first half performance and a stronger than expected start to the third quarter, Watches of Switzerland has upgraded full year revenue guidance to £900 million to £925 million from the previous range of £880 million to £910 million.
Management also revised up its EBITDA margin growth guidance from a previous 1% to 1.5% range to 1.5% to 2%.
There was further positive news on the outlook for year-end net debt, now expected to be in the £60 million to £80 million range, down from £80 million to £100 million previously.
Domestic demand for luxury watches has never been stronger, especially for the Rolex brand, helping Watches of Switzerland to thrive despite the impact of the pandemic on consumer confidence, tourism and levels of airport sales.
During the half ending 25 October, constant currency revenue softened 2.6% to £414.3 million, though e-commerce sales surged an impressive 65.4%.
This was very much a tale of two halves. First quarter sales fell 27.7% due to the impact of store lockdowns in the UK and US, though second quarter sales shot up by a better than expected 21.5% as stores reopened.
Encouragingly, group sales over the more recent seven weeks to 13 December grew by 11.9% at constant currency, despite the retailer’s UK stores only trading 44% of their potential trading hours during the period.
Drawing confidence from its strong performance, Watches of Switzerland plans to repay furlough support received from the UK Government and management doesn’t foresee ‘any material impact’ on its supply chain from Brexit.
‘Our guidance assumes some further negative trading impact from potential lockdown measures in January and February 2021,’ explained chief executive Brian Duffy, who has also factored in the removal of tax-free shopping in the UK from January 2021.
Duffy remains confident Watches of Switzerland is ‘well positioned for future growth, with plans to continue to invest in further cementing our market leadership in the UK and to build upon our early success generated to date in the US.’
HIGH CLASS HYBRID
Complimenting Watches of Switzerland as a ‘high class act’, Shore Capital sees the company as ‘a hybrid mix of hard luxury goods and best in class retail execution with their proprietary CRM system and selective refits to stores’ and continues to highlight the opportunity in the fragmented US market as ‘significant’.
The broker also believes ‘management has enough self-help levers to pull to continue to outperform with good free cash flow generation. As a custodian of luxury brands, Watches remains strategically well placed. One to watch as we turn the clock to 2021.’