Watches of Switzerland Group PLC (WOSG) Earnings Call Transcript & Summary

Hello, and welcome to The Watches of Switzerland's Q1 FY '23 Trading Update. My name is Lauren, and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Brian Duffy, CEO to begin. Brian, please go ahead.

Thank you, Lauren, and good morning, everyone. Thanks for joining our call. I'll add some background to trading performance that we've posted this morning and then Bill Floydd, our CFO, will comment on update which we'll then be happy to take your questions. Q1 FY '23 saw a strong trading for our group throughout geographies, brand and product mix and sales channels, resulting in a 25% growth at constant foreign exchange and 31% in reported sales. Our U.S. business delivered 76% growth in constant FX and 58% if we exclude the acquisitions made in FY '22 and FY '23. Including the benefits of a strong dollar to pound foreign exchange rate, the U.S. was also bounded to a very significant 100%. Managing this level of growth is obviously challenging, and David Hurley, President of our North American division and the U.S. team are doing an excellent job of managing our day-to-day business, integrating new businesses and researching and negotiating new opportunities. Market conditions remained strong in the U.S., and we see continued expansion of this underdeveloped and fragmented luxury watch market. Additionally, through the application of our proven investment based modern business model, we are growing market share. In the U.K., our sales grew 8% despite very tough prior year comps of strong growth last year resulting from the reopening of retail and the favorable impact in Q1 last year of selling down stock, which we collected in Q2. Business was strong across all brands and product portfolios. We're pleased also with our first business in the EU in Stockholm, with our new colleagues who hit the ground running and initial business is in line with expectations. The e-commerce division had a very strong quarter at plus 14%. We've effectively fully consolidated the exceptional e-commerce growth that we had in FY '22 and first quarter this year compared to FY '20 with a growth in e-commerce of 140%. Luxury jewellery was again strong at plus 36% as we expand our presence in this growing market. I would like to announce a new London Rolex flagship boutique, which will be opening in 2023. This will be a spectacular showroom commensurate with the global status of Bond Street as a luxury destination and the importance of London Rolex was founded in the early 1900s. Xenia programme of elevated client experience based on the high standard of the hospitality industry is in full flow and is undoubtedly benefiting our sales and market status. Our showroom colleagues have embraced the programme and apply their usual enthusiasm and positivity. In the quarter, we increased our total colleagues count by 120 overall, and the HR teams are doing an amazing job of the teaching, inducting and training new colleagues despite the challenges of the labor market dynamics. We published an Annual Report for FY '22 on 27th of July and well done, and thanks to all involved in what was a monumental task. The Watches of Switzerland Foundation is now fully registered and active in the U.S. In total, we have now pledged GBP 2 million of the GBP 4.5 million paid to the foundation by the group in fiscal year '22. Looking ahead, we're assuming tougher market conditions impacting the second half of fiscal year of '23. We remain very confident in the underlying strength of the watch and jewellery markets and our ability to gain market share. We're therefore very confident to confirm and reiterate our guidance previously issued. The luxury watch and jewellery markets are strong and we believe underdeveloped. And watches demand continues to outpace supply, and we are expanding our list of registrations of interest. There is now a momentum of investment in products, marketing, retail and infrastructure, both from the brands and the retail sector that will maintain positive momentum. We will, as always, remain diligent and focused on short-term performance and market trends while strategically filing our longer-term goals. At this stage, we've got ahead of our long-range plan presented in July 2021, and we are scheduled to update our LRP in the spring/summer of 2022. I now hand over to Bill.

Thanks, Brian, and good morning, everyone. Needless to say, we're very pleased with the strong start we've had for the financial year. Our guidance for the full year, as a reminder, reflects our visibility of supplied key brands and confirmed showroom refurbishments, openings and closures and excludes any uncommitted capital projects and acquisitions. We're reiterating our guidance today that we go previously, and this is on an organic pre-IFRS 16 basis, and we are anticipating potentially more challenging trading in the second half of the financial year. So the revenue range remains at GBP 1.45 billion to GBP 1.5 billion and adjusted EBIT of GBP 157 million to GBP 169 million. We've also given you today some more color on foreign exchange and how that impacts the numbers. So hopefully, that will help you with your modeling. Lauren, back to you for Q&A.

[Operator Instructions] First question comes from Eleonora Dani from Shore Capital.

First of all, could you please break down the volume price component within the U.K. growth? Secondly, I appreciate that industry reports do not include the brand on stores, but they are showing that U.K. retail sales are declining. Does it mean that you are gaining market share? And lastly, with the company expected to be in a net cash position this year. Is there a possibility of a change in dividend policy ahead?

I'll take the middle question, Eleonora, and Bill can take the question on the volume, price and cash. We are getting market share. We're doing that. But we do enough totally reliable statistics in either the U.K. and even less so in the U.S. But what we do takes much as we can as overall brand feels from the individual brands and then growth levels, and we can see that we're exceeding overall growth levels generally for most brands in U.K., U.S. We're undoubtedly gaining share in the market, honestly, as we have done since we went through our transformation several years ago. Bill, on volume and...

Yes. So Eleonora, on volume and price. So U.K. growth is 8% as reported. We have obviously got the tough comps compared to the destocking. And my view is that you could probably add mid-single digits if you made that really like-for-like. We've previously said pricing benefit this year is 4% to 5%, and that's kind of where we are through first quarter. And then the balance is a mix of volume and mix, so increasing spec, an increasing price point and higher-value products. I'm not going to give exact numbers, but we've got good growth in volume and good growth in average sales price. On cash, yes, so we're in a good cash position at the moment. We remain focused on executing the long-range plan, which is both refurbishment and expansion of the store network and M&A. We remain active on M&A. And as we've said previously, we'll let you know on those as they land. We obviously maintain a view of our long-term cash position. We review the structure of the balance sheet regularly as and when the Board decides that they want to make a change on how we might do things and we'll let you know.

Our next question comes from Richard Taylor from Barclays.

It's obviously a strong quarter overall, but can you give us a bit more color on area -- any areas of relative strength or weakness? And in particular, have you seen any softness at this stage in areas such as the nonsupply-constrained brands? Or is it very similar across the board?

Thanks, Richard. I think the great thing, as I've said and remark shows that the strength is very broad based overall in terms of brands, product categories, watch, jewellery, geographies. Obviously, we have very strong growth in the U.S., but very equally pleased with what we delivered in the U.K. So honestly, as across the board, and as we regularly answer, we have not detected at this point at all any change in demand. As we've said, our waiting list continue to expand. We're actually adding more than we're able to take off the waiting list minus supplying happy customers. So no change. As we said, when we come out of a strong fiscal year '22, we carried strong momentum until first quarter, we feel exactly the same way about the momentum that we're carrying into Q2.

Our next question comes from Flavio Cereda from Jefferies.

Brian, I was wondering, with the luxury watches still accounting for 87% of sales, right? We know, of course, a supply-constrained brand, that's not a volume, volume is not a driver there rather. Can you -- are there any particular brands that you would call out as -- I know that some of them are waitlist, again, but if there's any particular names that you would like to call out that you're thinking in particularly well at this time? And the other question I had was on this rather remarkable increase in size of your -- the Rolex presence on the Bond Street area, which basically implies more availability, more and more product at a time when we know there's the issue of Duty Free in the U.K., which probably will be reversed. And do you have a sense that there will be a net additions, additional deliveries of Rolex in the London market? Or will -- is that likely to come at the expense of perhaps some of your weaker competitors at the moment?

Thanks, Flavio. I think, as you know, we clearly have great partnerships and relationships with Rolex and with TAG and Audemars and pretty much those brands. We are selling from waiting list overall. And -- but we've equally had great partnerships with fabulous global brands like Omega, Cartier, Breitling, Tudor, all of which have grown very, very well for both in the U.K. market and the U.S. We've undoubtedly gain share on them both. But equally, they have significantly grown in the markets and particularly the very, very evident in the U.S. So there's dynamism behind each of those brands individually and collectively even more and in addition, obviously, investment coming from us and other retailers. So I think great momentum. We have waiting list on and we have -- we'd love to get more [ Smyth ]. We'd love to get more of the new products. We even love to get more of the Bond Watches that are still selling a Bond movie was a year ago. We'd love to get more of Cartier, Santos. We'd love to get more Tudor, of course, Tudor is very strong. And of course, the Board would love more Tudor and Breitling, similarly new products, good success. Now with diamond and particular we'd love to get more [indiscernible] a great start as well with the new product. So just I think great examples of dynamism in the category that we're benefiting from and very much partnering on. And then the smaller niche brands are making a real contribution, seems wrong even to called [ Perregaux ] a niche brand, that's a wonderful brand. But the Laureato collection, we can't get enough of. We can't enough Zenith [indiscernible]. We just opened [indiscernible] in London for the first time month and pretty much all the product we have is sold. So the real strength over all across the market. The second question was on the Bond Street. Yes. I mean as we've said before, we make significant investments with our, I guess an oldest partner Rolex alongside discussion on the volume and supply to make those investments make sense. Totally confident on what will be a very, very successful store in Bond Street. It will be the only store in Bond Street, where you can buy a Rolex and as things work their way through, it will be a spectacular store. It will be a destination, and I think very much recognizing the importance of London and the history of Rolex and the importance of Mayfair and Bond Street to luxury retail. So our view is that at some point, the Duty Free situation will change. But for Rolex business, we honestly supply driven, as we know, and there really wouldn't be any impact overall from that. But we do think that at some point in the future across the luxury retailing, situation that the Duty Free situation will change. But very confident about the store and very, very pleased that we've got this deal done and can't wait to open. It will be spectacular.

[Operator Instructions] Our next question comes from Jon Cox from Kepler Cheuvreux.

Jon Cox with Kepler Cheuvreux here. Just a couple of questions really on the commentary about H2 and maybe preparing for a bit more softness. But given your statements, at least looking into Q2 being quite positive. Just wondering why maybe you could talk through that. Is it comparables or anything like that at? Just on the way the quarter went, I'm particularly interested in July, U.K. like-for-likes. I wonder if there's any sort of slowdown there. And I know a lot of your business is to do with the list and stuff. And then just the last question, it looks like the secondary market for many of the brands has rolled over, you're seeing declining prices in many cases. I'm surprised this is not having an impact on your waiting list as such as maybe people would go back to the secondary market rather than wait for so long if those prices look a bit more attractive and just what your thoughts may be on that.

Yes. We have incorporated an assumption that there'll be tougher trading conditions for Christmas in Q4. Overall, I think, along with the rest of the world, really, it's cautionary on our part. We are reiterating our guidance incorporating the fact that there could be some more challenging retail conditions impacting consumer confidence overall. It will only impact the minority of our business if it happens somewhere around 25% of our business is kind of traffic dependent. So it's cautionary on our part. And but earlier in the year, there was instability obviously in the country at the moment in terms of leadership and management of the economy. So we're just being, I think, pragmatic and as I said, cautionary on it and we'll see. It's not a worry overall. But certainly, where we are today, we think it's the right thing to do. We don't give the monthly numbers out at all, but just reiterate what I said in answer to Flavio, we really are not seeing any impact. Overall business continues to be predictable and strong. It's across the board. Overall, any slight variations we get and -- but on top of our numbers 4 times of this is very micro but any variations we get up or down we investigate the inevitable at about brand deliveries or something specific in that nature. We haven't escalate anything at this point to any kind of changing consumer sentiment. So business stays very strong and we're carrying good momentum into Q2. And as I've said earlier, just been a bit more cautionary about the second half. The secondary market is based off -- we are actually pleased to see some of the excessive pricing that was there that seems really rational, being adjusted, just all looking at huge premium at the end of the day. It's not really a market that we're in, it tends to be a market that's from these trading sites, they're calling 24 and whatever. We are in the pre-owned market, we're going very well in pre-owned market, analogue shift in the U.S., doing a great job. We've branded and done U.S. sites and new brand material with supporting them with the precuring product. And they're growing very nicely, not seeing any impact or challenges on pricing or margin overall. We're also growing our business here in the U.K. on pre-owned and adding to our resource again, on the procurement side. And that's going very well and the challenge in that business in terms of growth is just getting access to more products and then building our resource in terms of what makes to handle the refurbishment and so on. So In terms of what I'd say the more genuine pre-owned market, if we call it that, the one that we are very active in it stays very strong, and there will be no impact of challenge on pricing.

Congratulations with the figures.

Our next question comes from Erwan Rambourg from HSBC.

Congratulations from my side as well. Three questions, if I can. Two, on price points. So if you look at your waiting list and the fact that you have more people on the list, I'm wondering if there's a disproportionate amount that's on more elevated price points versus more accessible price points. And then linked to that question, when you talk about a potentially more challenging H2, should we also consider that the risk is more at the entry level than at the higher end? So that's the 2 questions on price points. And the third question I have is on the U.S. I think you said an 18% contribution from acquisition, 58% constant currency growth on the rest. If I look at that 58%, presumably, you had a few openings that contributed as well. I'm wondering -- I think you don't give same-store sales growth, but could you give us an idea of what the growth would have been with a stable perimeter, i.e., in your existing stores that have been opened for more than a year, what type of growth did you see in the U.S.?

On that last point, first of all, Erwan, not significantly different. I think is the answer on the 58% is the openings that we had our model brands were partway through the year. So honestly, not significant. We are viewing the 58% is pretty much organic. We obviously had the benefit of some refurbishments that were done in malls in particular. But if you want to knock a point or 2 off of that and call it like-for-like, even if I'm wrong overall. I'm not aware of any change. What we're experiencing on pricing has increased average selling price at each brand level and overall and mix. I'm not aware of any pricing dynamics specifically on waiting list. But I am -- we are probably looking ahead to your question with a bit of lower price points are impacted. Logically, yes, but the direct contradictory to what we're experiencing at the moment because we're experiencing an increase in the average selling price of consumers happy and willing to pay. I think it reflects the attraction and dynamism of the industry. There's a lot more going into products. It does, therefore, manifests itself in terms of pricing, but consumers are appreciating and wanting and desiring the product and prices are going up. But yes, logically, if there's an impact on consumer confidence, you could argue that it would impact lower level product more overall. But again, repeating myself, it's not what we're experiencing.

[Operator Instructions] Okay. We currently have no further questions registered, so I'll now hand you back over to Brian Duffy for closing remarks.

Thanks, Lauren. Thanks everyone for your questions and a particular thanks to our teams delivering what I think a very, very commendable results for the quarter. I think we've discussed with your questions and the remarks that we've given, the overall headlines, which are that business remains very good about not seeing an impact on consumer demand. We are being cautionary in seeing with the uncertainty that's ahead, let's build some of that into our thinking. But even having done so, we are very confident about the guidance that we gave and we're happy to be at the [ rate now ]. So all good. Thanks for joining us, and we look forward to speaking to you again when we do at our half year results. Thank you.

This concludes today's call. Thank you for joining. You may now disconnect your lines.