A 48% year-to-date share price plunge at Watches of Switzerland (WOSG) has created a compelling entry point for investors with time on their side.

Shares believes the luxury watch-to-high end jewellery retailer’s global growth journey is just getting started. Whereas the outlook for most consumer-facing businesses is bleak, Watches of Switzerland is well-placed to buck the wider retail doom and gloom.

Led by CEO Brian Duffy, the £1.9 billion company enjoys high margins and is blessed with pricing power conferred by the sale of luxury products that appeal to a well-heeled clientele whose lifestyle won’t be too affected by inflationary pressures.

Watches of Switzerland has plenty of growth to go for in the UK and US, where demand for luxury timepieces remains strong and consistently exceeds supply, while its entry into the European market brings further geographic diversification to the business.

WHY THE SHARES ARE DOWN

The shares peaked at £14.70 in December 2021, having ticked higher on a sustained run of earnings upgrades and with investors viewing the company as a prime beneficiary of a roaring 1920s-style luxury spending boom.

Investors have this year been less willing to pay a high rating for growth shares, causing a derating in stocks such as Watches of Switzerland. Also weighing on sentiment towards the stock has been the worsening outlook for consumer spending amid rampant inflation around the globe.

Sceptics argue Watches of Switzerland will struggle to sustain the sales growth it enjoyed during the pandemic, when demand was boosted by locked-down consumers spending on collectable watches online and where the group benefited from better product availability as brands such as Rolex diverted supply from Asia to the US and UK.

Yet we think the market is being unduly pessimistic about Watches of Switzerland, whose trading brands include Mappin & Webb, Goldsmiths and Mayors Jewelers.

The company has a leading position in the UK luxury watch market, where it is now the biggest retailer for Rolex, Cartier, Omega, TAG Heuer and Breitling watches, and has built a significant presence in the fragmented US market too.

Consumer desire for ‘super high demand’ brands such as Rolex, Patek Philippe and Audemars Piguet continues to exceed supply. Other luxury watch brands are enjoying bumper demand and spending on luxury jewellery is also positive. It is also important to note Watches of Switzerland’s customers are overwhelmingly domestic clientele rather than tourists and these upper class or wealthy individuals have the purchasing power to underpin demand in tougher times.

Having said that, the retailer expects to benefit from an ongoing recovery in footfall and airport traffic.

ON A ROLL WITH ROLEX

Gavin Launder, who manages the L&G Future World Sustainable UK Equity Fund (B8F72V6) tells Shares that Watches of Switzerland has rarity value. ‘It’s probably the only way you can get equity exposure to Rolex, which is the premium watch, but is a private company,’ he comments.

Launder points out that between 50% and 60% of Rolex’s sales are through Watches of Switzerland and the retailer has moved into the US market ‘at the behest of Rolex and other brands have supported the move’.

Rolex and the other watch brands are keen for Watches of Switzerland to become a much bigger player in the US, according to Launder. With the retailer now also entering the Continental European market through the opening of stores in Sweden and Denmark, Launder believes growth can continue for many years.

‘From an inflation point of view, everybody likes watch prices going up,’ adds Launder. ‘The manufacturers will put the prices up; that means retailers’ inventory immediately gets re-priced, so they are happy. The person who just bought one is happy because the watch has done what they always thought it would do, which is be a good store of value. The person who wants to buy one is even more convinced it is a store of value and will pay a bit more.’

In its latest update on 18 May, Watches of Switzerland reported a ‘stellar’ end to its financial year to 1 May, clocking up revenue growth of 48% in the fourth quarter.

The company said it entered 2023 with ‘strong momentum’, expecting that the disruption from the pandemic is now largely in the past with ongoing recovery in footfall and airport traffic. Management’s cautious guidance for 2023 suggests sales can grow to between £1.45 billion and £1.5 billion, before any potential acquisitions.

For the year to April 2023, Investec Securities forecasts normalised pre-tax profits will grow from £127.8 million to £168.5 million, ahead of £198.8 million in 2024.

Based on forward earnings estimates of 57p this year and 63.8p next year, Watches of Switzerland sells for 13.9 times forward earnings, falling to 12.4 times on the 2024 estimate.

Those ratings are too cheap for a high-quality operator in a resilient category with potential for further organic and acquisitive US and European market share gains.

Sometimes the best time to buy a share is when everyone else has lost interest, and Watches of Switzerland looks like a perfect example. You’ll need to be patient as weak market sentiment could weigh on the share price for a bit longer, but there is no doubt that the stock is attractive at current levels.

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