WOSG: Sector Tailwinds And Measured Risk Will Shape US Expansion Strategy

Key Takeaways

• Expansion in the U.S. and new luxury jewelry offerings are likely to enhance revenue growth through increased market presence and share.
  
• Strategic acquisitions and planned projects, including enhancing online and retail capacities, aim to boost sales, earnings, and market visibility significantly.
  
• Increased financial pressures from acquisitions and higher tax rates could strain earnings, while domestic focus, expenses, and slow U.K. growth challenge revenue and cash flow.

Catalysts

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

• The integration and planned growth of the recently acquired Hodinkee business, which is expected to boost online sales and advertising revenues, represents a forward-looking catalyst likely to positively impact revenue and earnings.
  
• Strong growth in Pre-Owned watches, especially with the Rolex Certified Pre-Owned program, indicates a significant opportunity for accelerated growth, which will likely contribute to increased revenues and improved net margins.
  
• Expansion in the U.S. market, including opening new showrooms and enhancing existing ones, is expected to drive further revenue growth as the company increases its market presence and leverages its established brand partnerships.
  
• The strategic acquisition of Roberto Coin and focus on expanding branded jewelry sales provide additional revenue opportunities through increased market share in the luxury jewelry sector, contributing to potential revenue and net margin growth.
  
• Planned major projects, including high-profile showroom openings with key brands like Rolex in Bond Street, London, signal increased sales potential from expanded retail capacity and brand visibility, likely enhancing both revenue and net margins.

Watches of Switzerland Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Watches of Switzerland Group's revenue will grow by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.3% today to 5.3% in 3 years time.
• Analysts expect earnings to reach £102.4 million (and earnings per share of £0.44) by about September 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 analysts price target, the company would need to trade at a PE ratio of 13.7x on those 2028 earnings, down from 14.9x 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 10.79%, as per the Simply Wall St company report.

Watches of Switzerland Group Future Earnings Per Share Growth

Risks

• The removal of tax-free shopping in the U.K. has shifted sales predominantly to domestic clients, which could impact revenue growth if local demand softens or if international tourism does not rebound. [Revenue Impact]
  
• The net margin was down 60 basis points due to an adverse product mix linked to an increase in Pre-Owned sales, reflecting potential challenges in maintaining profitability as the revenue mix changes. [Net Margin Impact]
  
• Finance costs have increased significantly due to acquisitions, and the effective tax rate is higher than the standard U.K. rate, potentially putting pressure on net earnings if these factors are not mitigated. [Earnings Impact]
  
• Although the U.S. market is strong, U.K. revenue was only up 2% in Q2, indicating potential stagnation, which might not support revenue growth as anticipated if consumer confidence does not maintain its upward trend. [Revenue Impact]
  
• Expansion plans, including new store openings and refurbishments, require significant capital investment, which could strain financial resources and impact cash flow if expected returns are not realized promptly. [Cash Flow Impact]
  

Valuation

• The analysts have a consensus price target of £4.36 for Watches of Switzerland Group based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be £1.9 billion, earnings will come to £102.4 million, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 10.8%.
• Given the current share price of £3.38, the analyst price target of £4.36 is 22.4% 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.