Watches of Switzerland Group PLC (5WS.F) Q3 FY2026 Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining our Q3 FY '26 trading update. This is Brian Duffy, CEO; joined by Anders, the CFO; and Colaianni, Group Finance and Investor Relations Director. I'll do some introductory remarks, and then we'll, of course, open for Q&A at the end of that. We're really pleased with our trading performance in Q3 FY '26, which obviously covers the key Christmas Holiday trading period. Sales were strong across the group and pretty much a continuation of the strong trends that we reported in H1. Demand for our key brands remain strong and continues to outstrip supply in both markets. In the U.S., we delivered sustained broad-based growth across categories, brands and price points. This reflects the strength of our model and the continued buoyancy of the luxury watch market in the U.S. Our growth projects of Pre-Owned e-commerce, Roberto Coin, are all performing particularly well. We were also delighted to announce the recent acquisition of Deutsch & Deutsch. This acquisition adds to our presence in Texas with a further 4 Rolex-anchored showrooms. We're looking forward to realizing the strategic benefits of this acquisition. In the U.K., trading has also been consistent with H1. We continue to be delighted with the performance of Rolex Old Bond Street boutique. This flagship showroom has consistently delivered strong client engagement and is attracting a high level of new customers. The group is sharing key insights from the showroom across the wider estate to support the continued elevation of best-in-class luxury retail experience. We've continued to make targeted investments in the business to support future growth. This has included showroom development projects, of course, our completely new U.S.-based e-com team, marketing investment and investments behind Hodinkee. These investments are supporting improved profitability in the second half and further improved profitability in future years. The strong trading performance in the quarter, combined with the early benefits from our e-commerce and marketing investments, good visibility for the balance of the year and the contribution of Deutsch & Deutsch acquisition, all gives us confidence to raise our revenue guidance for the year. We now expect to grow revenue by 9% to 11% constant currency, an increase from the previous 6% to 10% range that we guided to. EBIT margin percentage will improve in the second half of the year. For the full year is now expected to range between minus 70 to minus 90 bps versus prior year. This reflects brand margin adjustments, particularly -- partially offset by price increases, investment costs and some one-off costs. Specifically, we have projected a provision in the second half of the year relating to Roberto Coin department store debtor balance following a recent Chapter 11 filing in the U.S. and staff incentives reflecting our sales performance. As noted earlier, the platform infrastructure investments into U.S. e-commerce and marketing we have made, and Hodinkee, in the year are now largely complete and will support e-commerce sales and profitability growth in next year and beyond. We're really pleased with our trading performance in Q3 year-to-date and its forecast for the full FY '26. This is particularly pleasing given the challenges that our team have faced in navigating what has been a very volatile year. And with this, we'll hand back to the operator and move on with the Q&A.

[Operator Instructions] Our first question is coming from Adrien Duverger of Goldman Sachs.

My first question would be on the product allocation. Could you please comment on the outlook for inventory allocation across the different brands? Is that in line with your expectations? And secondly, if you could comment on where you see inventory currently sitting both in the U.K. and in the U.S.? Then I had another question, which would be on the 2 main markets. How would you describe the consumer environment across the U.S. and the U.K.? And could you please also comment on the exit rates for both of these regions?

Thanks, Adrien. We're obviously -- we're in the period in which we get our allocations from key brands. We've had -- those discussions are not complete at this point, but we have a pretty good indication that we've clearly reflected in our 4-month projection for the balance of -- what now is a 3-month projection for the balance of the year. So we have an allocation, it's a normal process. Nothing has really changed, and we now have certainty. We obviously have pricing as well known for what's happened at the start of the calendar year. Your second question was on inventory?

Yes. Inventory is in good shape, both in the U.K. as well as in the U.S. In the U.S., actually, we would say that we might be a bit light on certain brands, because some of them were holding back on shipments, waiting for the tariffs to normalize. So there's been sort of a little bit of a supply issue in the U.S. in that sense. But overall, we're in a good place when it comes to our stock.

Consumer mood, here in the U.K., I think my own personal view is it's a little bit better than it was when we last reported to you. We had the budget happening in November and people chat about the Christmas season, what would it have been like. As it turned out for us, it was a good season here in the U.K. I think we're really well prepared for it. And we made some kind of nuance change, made a way bit more emphasis on value, recognizing that, that would have been important to the consumer, and I think we made some really good moves there. So it was a good Christmas season for us overall. And we continue to describe the U.K. as being stable, which is what we've been seeing more or less for the last 18 months. And maybe as we enter this new calendar year, my sense is there may be a bit of an upturn -- a small upturn in, but we'll see. It's early days yet. U.S. consumer is clearly a very buoyant and positive and confident and spending accordingly. We saw the Bank of America credit card information for January and again, very strong in our category of luxury jewelry and watches. The consumer, they are very respondent to value of financial assets, which remain very strong, obviously. Their tax situation is net-net positive as well when we talk about the more affluent consumer. And there's no question in the U.S. that the K-shaped consumer behavior is definitely there and evident in the market. So the consumer has been positive throughout calendar '25, and that positivity carries into '26 to date.

In terms of the exit rates that we've seen, there's no change in sort of the momentum going through January. So it's been a good January as well.

Yes.

[Operator Instructions] Our next question is coming from Chris Huang, colleague from UBS.

It's Chris Huang from UBS. I have 2 questions, please. The first one on the consumer profile. You've been reporting very strong top line growth and especially in the U.S., that seems to be -- just continue to surprise to the upside. Could you provide perhaps a bit more color on the consumer profile in terms of their age? How much of a split coming from new versus existing consumers? And anything you can share on that front would be great. Secondly, on the margin guidance and the moving parts. If I look at the midpoint of your new guidance, which is around 10% sales growth, and this was at the high end of the previous guidance. But at the same time, if we look at margin expansion, the midpoint now sits 80% below the previous high end of -- flattish year-over-year. I know in the press release, you commented several factors that is driving this incremental 80 bps headwind, but would you be able to quantify each of them [ impossible ] (sic) [ if possible ]? And also connected to this, if we should expect any further headwind into fiscal '27, please?

Yes. Thanks, Chris. Consumer profile, I think we have reported to the market consistently that we're really encouraged by a younger demographic in the U.S. I think people get affluent, younger is one thing, but I think there's huge interest in the world of luxury watches with the young consumers in the U.S. And as our experience, even at the high end of the price ranges of what we sell is a very active younger consumer, very knowledgeable about the category. We obviously have now our Hodinkee media business, which again has a younger appeal overall, and we can get further consumer insight there and to those that really love and appreciate the wonderful world of watches. So yes, it's a really encouraging thing that younger consumers really appreciate this category, appreciate mechanical watches, appreciate that the products maintain value, that they last [ whatever ], they're not disposable products. And it's a real positive for the category. The last thing on that is, I think the influence of digital media as well, clearly has a younger profile appeal to. And our category lends itself very well to digital communications through advertising, through social media, through great videos in which you can talk about heritage and craftsmanship and modern techniques and celebrity ambassadors. I mean everything about this category communicates very well through your laptop or your phone. So definitely a younger consumer trend towards more women buying into the category, which is great, much more self-purchase. The other thing about the U.S. to mention a big difference there is a bigger concentration of collectors in the U.S. than we have experienced here in the U.K. So about 25% of our business in the U.K. It's near half of our business in the U.S. So really positive things in the U.S. that give us great confidence about the future of that market. It remains an underdeveloped market measured on a per capita basis, and the rate of growth for the market overall and for our business is very strong. Do you want to comment on...?

Yes. In terms of the margin profile for the second half, it's improving from what we saw in the first half. A couple of headwinds that came our way was obviously the Chapter 11 that Brian alluded to earlier with one of the department stores in the U.S. We've taken a prudent view on that and provided for it in our guidance. In addition to which we've had a great year. The team has done a fabulous piece of work throughout the whole year, and that's led us to taking up our variable compensation slightly -- versus what we expected. In addition to which we had a product mix with Pre-Owned continuing to [indiscernible] on really well across sort of both markets. And obviously, it comes at a slightly lower product margin, even though it's cash accretive from an EBIT margin perspective, obviously, you don't get the same flow-through.

Yes. And there's some one-off costs there too. There has been an impact from margin. Obviously, the brands have had to respond to pretty unprecedented levels of cost inflation with the price of gold, with the strength of the franc, the weakness of the dollar and you throw tariffs on top of that. So it's a lot to navigate for the brands. I think they've been very responsible and how they've done it overall, but that has included an element of margin adjustment for us retailers. That is offset by pricing over time. But within the fiscal year, it has a negative impact. And this year, we think it washes through next year. And we have other one-off costs like NIC, of course, that we've reported before in the U.K.

And sorry, just to follow up on that Chapter 11 of one of your partners. Are you able to tell us how much of a headwind you currently baked in? So we kind of know the sensitivity to that.

No, we're not going to specifically comment on that, but it's obviously not helpful.

We'll now go to Kate Calvert of Investec.

Just a quick question on your project pipeline because there wasn't any comments in the statement that I remember. Have you got any delays to your project pipelines for the current financial year? Or is all on track? And what are your sort of early thoughts on next year's project pipeline?

Thanks, Kate. No. No delays. We have our usual full program of activities, both here in the U.K. and the U.S. We obviously have our new business now with Deutsch & Deutsche, separate store projects. We have a lot going on with Hodinkee. We've opened now 3 stores with Roberto Coin, which look fabulous. I was in the States last week with the Roberto Coin team and our store in Miami, which is really great. And we have other projects there, too. We have e-com that we are moving on to a Shopify platform. Currently, we have watch -- Watches of Switzerland on the platform. We'll have Mayors on that platform too within the coming weeks. So yes, hands are full. We got a lot on. And yes, no change, no delays, some really nice projects both here in the U.K. and the U.S. coming up in the year ahead.

Can you give any more details on those projects in the year ahead?

Yes. So in our Q3, you know that we've kind of changed the kind of cadence of our reporting. We have a lot more information on our half year numbers. So we haven't gone through what we have done historically and listed. There's no change to what we presented and listed in the half year at this point. Big projects here in the U.K., the Glasgow boutique is a big deal. That's on schedule for the opening in early summer. The activity at Heathrow we're working on. We haven't landed on an exact date for that, but we're advanced with Rolex on the design of all of that. So that's great. We're working through and we'll have completed pretty much by the end of this next fiscal year, the whole upgrade that we did to Goldsmiths and Mappin & Webb here in the U.K. So yes, looking back to half 1 is probably your best reference at this point. And obviously, we'll update as we complete Q4 here.

[Operator Instructions] We now go to Melania Grippo of BNP Paribas.

This is Melania Grippo from BNP Paribas. I've got one question on your recent acquisition of 4 store in Texas. I was wondering if you could please give us an idea of what could be the store revenue uplift after the refurbishment and integration in your group?

We can't really, Melania. We don't -- honestly, we don't know at this point. It's a very recent acquisition. Clearly, our focus in these first few weeks is securing and answering all the questions from the team that are there. They are great people. We've had really good interactions and all that's going fine. We really believe that the format that we've done here of the owners staying in their roles and running the business and staying with an equity interest in the business is a really good format for the nature of the acquisition in this category of the family businesses. So we're working through all that. We would say they've done a great job of refurbishing 2 of the 4 stores. They look fabulous. But there's a lot of things that we can bring to their network, whether it's online, pre-owned and some other brand developments of that nature. So we're working through it. We haven't clearly done budgets with them at this point yet, but we have them scheduled. And yes, we'll hopefully be able to answer that more in the future.

We do not have any further questions coming in at this time. I'll turn the call back over to management for any additional or closing remarks. Thank you.

Thank you, everybody, for joining the call. Huge thanks to our team for navigating through what's been an interesting and I think a volatile year. We are looking forward to more stable conditions as we plan our fiscal year '27, but feel very good about where we've got to in this year. So thank you for joining us.