The bull and bear case of newly-listed Watches of Switzerland
Despite an inhospitable retail backdrop and a poor post-float showing from another luxury goods group, Aston Martin Lagonda (AML), luxury watch-to-prestige jewellery retailer Watches of Switzerland (WOSG) has met with a positive investor reception following its stock market flotation.
Shares in the high-end timepieces specialist ticked up from their 270p issue price to 305p at the start of unconditional dealings (4 Jun).
Watches of Switzerland has raised a net £139.5m of new money which it will use to reduce debt and grow the business, although it is also worth noting that pre-IPO shareholders have sold £63m worth of shares at the stock market listing. The business is now valued at £730m.
THE BULL CASE
Trading as Watches of Switzerland, Goldsmiths, Mappin & Webb and Mayors, the group is a leader in the global luxury watch market and is delivering profitable like-for-like sales growth under chief executive Brian Duffy.
Competitive strengths include its scale and strong relationships with the owners of luxury watch brands including Rolex, Patek Philippe, Tag Heuer, Omega, Breitling, Cartier and Audemars Piguet, which command significant pricing power. Luxury watches are durable assets with outsized demand compared to supply, meaning there is limited margin-eroding discounting.
THE BEAR CASE
There are some significant risks to consider. Watches of Switzerland’s products are discretionary in nature and the business is geographically concentrated in the UK; any Brexit-induced downturn in the domestic luxury watch or jewellery markets could impact profitability.
A key tenet of the growth strategy is expansion in the fragmented-yet-competitive US market, historically a graveyard for UK retailers.
And many of the company’s US outlets are in Florida and Georgia, regions susceptible to hurricanes which can force store closures. Should the group lose access to the supply of luxury watches or the luxury watch brands fail to supply the group with watches in desired models or quantities, this would crimp earnings growth.
Earnings would also come under pressure if luxury watch brands decide to bypass the group and sell directly to consumers online.
Past acquisitions mean Watches of Switzerland has a substantial amount of goodwill on its balance sheet. Goodwill is essentially the premium for buying a business at a higher price than its identifiable assets. Should its acquisitions fail to perform, future results would may bear the scars of goodwill write-offs.
Watches of Switzerland will reinvest cash flows into growing the business and has no plans to pay out a dividend in the near-term. And one final point to note is that controlling shareholder Apollo Global Management retains significant sway over the voting rights with a 59.2% stake. That creates a share overhang with the market wondering when it may sell down the stake.