US Tariffs And Supply Risks Will Hinder Prospects Despite Upside

Key Takeaways

• Exposure to regulatory risks, brand partner dependence, and macroeconomic volatility threaten margins, revenue growth, and long-term earnings scalability.
  
• Heavy reliance on in-person showrooms, limited online presence, and supply concentration may constrain future market share and gross margin stability.
  
• Heavy reliance on key brands, geographic concentration, and industry shifts toward direct sales and alternative luxury pose significant risks to revenue stability and future growth.

Catalysts

Operates as a retailer of luxury watches and jewelry in the United Kingdom, Europe, and the United States.

• While Watches of Switzerland Group is well-positioned to benefit from the continued growth in global wealth and rising demand for luxury watches, the company remains highly exposed to regulatory risks such as U.S. tariffs and potential luxury taxes, which could dampen future revenue growth and compress margins through forced price increases or reduced brand partner margins.
  
• Although digital transformation and e-commerce adoption present opportunities for global customer acquisition and channel diversification, Watches of Switzerland's heavy reliance on in-person showroom experiences and key brand allocation agreements may limit its ability to fully capture online market share, especially if major brands expand their direct-to-consumer presence-threatening long-term earnings scalability.
  
• While the group's geographic expansion into the U.S. and luxury branded jewelry categories offers new growth avenues and increased addressable markets, a significant concentration of earnings continues to come from the U.K. and the cyclical U.S. market, meaning macroeconomic volatility or shifts in discretionary spending could place structural downward pressure on consolidated revenue and net margins.
  
• Despite exclusive supply agreements and certified pre-owned initiatives providing some protection against secondary market volatility, Watches of Switzerland is deeply dependent on a handful of Swiss watchmakers for product allocation; any tightening of supply, adverse brand distribution changes, or shifts toward brand-owned retail networks could threaten long-term top-line growth and gross margin stability.
  
• While consumer trends among younger generations remain supportive of luxury purchases as status symbols, rising expectations around sustainability and ethical sourcing in the luxury sector may require substantial investment and adaptation; failure to keep pace with evolving consumer values could negatively affect brand reputation and result in lower customer loyalty, undermining future revenue and long-term earnings power.

Watches of Switzerland Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Watches of Switzerland Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Watches of Switzerland Group's revenue will grow by 5.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.3% today to 5.1% in 3 years time.
• The bearish analysts expect earnings to reach £98.5 million (and earnings per share of £0.45) by about August 2028, up from £53.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.8x on those 2028 earnings, down from 14.2x today. This future PE is lower than the current PE for the GB Specialty Retail industry at 23.3x.
• Analysts expect the number of shares outstanding to grow by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.85%, as per the Simply Wall St company report.

Watches of Switzerland Group Future Earnings Per Share Growth

Risks

• Watches of Switzerland Group remains heavily reliant on a few key luxury watch brands, particularly Rolex and Patek Philippe, and any future supply constraints or unfavorable changes in brand partner agreements could directly undermine revenue growth and earnings stability.
  
• The company's concentration in the UK and US, despite US growth, exposes it significantly to macroeconomic cycles, consumer sentiment, and volatility in these markets; this geographic risk could pressure both revenues and net margins if local demand falters or regulation shifts.
  
• Luxury watch brands are increasingly adopting direct-to-consumer strategies, and any accelerated shift by brands to limit product allocations or bypass third-party retailers could erode Watches of Switzerland Group's market share, reducing future revenue streams.
  
• The rising luxury good tariffs in the US and associated margin reductions from key brand partners-where brand partners share tariff burdens with retailers-point to potential downward pressure on EBIT margins and overall profitability.
  
• Changing secular trends, including ethical sourcing expectations, sustainability concerns, and the growing shift among younger consumers toward alternative forms of luxury and experiential spending, create long-term risks to demand for traditional luxury watches, impacting top line revenue and long-term growth potential.

Valuation

• The assumed bearish price target for Watches of Switzerland Group is £3.6, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Watches of Switzerland Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £5.9, and the most bearish reporting a price target of just £3.6.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be £1.9 billion, earnings will come to £98.5 million, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 10.8%.
• Given the current share price of £3.22, the bearish analyst price target of £3.6 is 10.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.