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

Welcome, and thank you for joining The Watches of Switzerland Third Quarter Fiscal Year '23 Trading Update. My name is Harry, and I'll be coordinating your call today. [Operator Instructions] And I'd now like to hand you over to your host, Brian Duffy, CEO of Watches of Switzerland Group to begin. Brian, please go ahead.

Thank you, Harry, and good morning, everyone. Welcome to our call, and thanks for joining us. I'm Brian Duffy, the CEO of the Watches of Switzerland Group, and I'll be adding some further commentary to the Q3 fiscal '23 trading announcement that we made this morning. Bill, our CFO, will then add some comments, and then we'll both be happy to take your questions. I'm very pleased with our strong performance in Q3, delivering sales growth of 17% and reported 12% constant currency. It's in line with how we had guided to the quarter and a half year. Sales growth in the U.S. remained very strong at plus 36% reported, plus 22% in constant currency. U.K., Europe sales were also very good at plus 7%. Q3, which includes the holiday Christmas season has the most traffic dependent and competitive quarter for our group, and I'm really delighted with the outcome. Our model prevailed and our teams once again excelled. When we reported our Q1 and Q2 figures, we said that there was potential for more challenging trading conditions in the second half due to cost-saving pressures, interest rate increases and so on, all impacting consumer confidence and sentiment. Looking at Q3, the macro backdrop has been more challenging as we expected. However, despite these conditions, we have continued to trade very strongly, and we exited the third quarter with good momentum. Luxury watches grew 22%, and our market information shows that we once again gained share both in the U.K. and the U.S. Growth was driven by both increases in average selling price as well as volume. Demand for luxury watches continues to outpace supply. We have added to the net registration list at the same rate as we've done in the recent quarters in both the U.K. and the U.S. We receive weekly anecdotal feedback from our stores, and they continue to report definitely good conversion levels from the wait list clients. Stores report, but there has been some incidents in recent weeks of some customers deferring buying opportunities within a very small assortment of products, but only recently added to the that distribution list. However, as I say, conversion remains good, and the lists overall are growing. Luxury jewelry was down 2%. It reflects our focus on full price sales, which has been our strategy ongoing. And overall, our ASP increased high single digit as we merchandise to higher price points and reduced promotional activity in the U.K. and discounts in the U.S. E-com sales at plus 5% were very good and ahead of market trends. We also enjoyed strong sales growth in pre-owned products, both in the U.K. and U.S. with continued good margins, no pressure on the pricing. And we are preparing for and looking forward to the introduction of the Rolex CPO program sometime later in this calendar year. We continue our expansion into Europe and our new stores in Stockholm and Copenhagen are doing well and trading in line with our expectations. Consumers in these markets are responding well to elevated short term environments and client sales. We're really pleased with the flagship Watches of Switzerland showroom plus the 4 mono-brand boutiques that we opened in the Battersea Power Station. In October, we are delivering overall good performance. We have an exciting pipeline going forward of new showroom openings, including the American Dream in New Jersey and the flagship Rolex Boutique on Bond Street and a field program of showroom refurbishments. Since we last spoke to our half year results in December, when I have a greater visibility of supply for the calendar year and obviously, the price increases that have been announced for January and February, taking all that together, we are pleased to confirm our previously issued guidance for the year. We remain confident in our markets, and the competitive advantages of our business model and we remain committed to and confident in our long-range plan objectives. And with that, I'll hand over to Bill.

Thanks, Brian. Good morning, everyone. So just a couple of extra bits of color for me on the guidance. So this is now at an exchange rate of $1.24 to sterling which is the rate at the end of the quarter. So a little bit of a headwind compared to the $1.20 we previously had. So revenue still between GBP 1.5 billion and GBP 1.55 billion, EBIT, GBP 163 million to GBP 165 million. Add on free cash conversion, maintaining the 70% guidance that we gave at the half year with inventory levels coming down in the quarter, in line with the seasonal pattern. Harry, over to you for Q&A.

[Operator Instructions] And our first question of the day is from the line of Antoine Bregeaut of BNP Paribas.

Yes. That's Antoine from the BNP Paribas Exane. 3 questions, if I may. First of all, can you comment a bit on current trading, maybe for the key regions? And also, overall, would you say that you are more confident or less confident compared to last time we spoke in December. But number two, in terms of the mechanics of the waiting list and -- so what are you seeing there, different patterns or attitude of consumers? And then point number three, with regards to what you see in Q3 and the start to Q4 and any comment on some of the moving parts of the profitability of the company?

Okay. Thanks. We've only just entered our quarter. We had said that we exited the quarter strongly. We entered Q4 strongly. We are more or less confident we're confirming our guidance. So obviously, there's less time to go, but we're really not seeing a change. I guess it's worth just pointing the second half, Q3, Q4. Q3 is the quarter -- that's the one that you would say that you would have had more potential volatility in with the Christmas season, so more competitive. Jewelry is not a big part of our total business at 8%, but it's a bigger proportion during Christmas. So looking at the second half year, Q3 was likely to be the most volatile potentially. And I do think it was a time as well when market sentiment or economic sentiment was pretty negative. So very, very pleased that Q3 and very confident and comfortable at the guidance that we've given for the year. So not more or less confident, but obviously, with a bit less time to go. We have a very good feeling about the year overall. In terms of waiting lists, there isn't really any change in attitude, the fact that I commented on some customers deferring is just really full transparency, but regularly asked has there been any change at all and anecdotally, a few customers on a few products that were recently added to the list. And nobody is wanting to come off those, by the way, and are simply saying I still want the product, but can you give me a call in a month or 6 weeks' time, and we go to our next customer who then buy. So we're increasing our list U.K., U.S. and really, we're not seeing any significant change at all overall. The moving parts from profitability?

Yes. Antoine. So on the profitability, no material changes. The most meaningful headwind is the interest-free credit cost, not in terms of the volume of people taking up interest-free credit. That's in line with normal levels, but the interest rates going up increases the cost of that for us. So that's the most meaningful thing in there. Elsewhere, we've got a bit of inflation in things like IT costs. But overall, no meaningful changes in profitability.

Okay. And just maybe a follow up on the -- there been a few price increases for the main brands. I mean is it pretty neutral for you because your purchasing price has also been adjusted? Or is it having a slight impact?

It is beneficial for us. So we operate on fixed margins with the brand. So as the wholesale price goes up, the RRP goes up by the same amount. What we have got going against us is the FX headwind. So it's marginally positive for us but not meaningful.

Our next question is from the line of Kathryn Parker.

So my first question is on brand performance and whether you've seen any changes in relative brand performance outside of the super high demand brand. And my second question is on very lax supply. So I believe you have given your allocation for this year. And I wondered if this what aligns your expectations. And then thirdly, just on the U.S. growth numbers, so there's been a slight deceleration in the growth ex acquisitions. And I just wondered if you could comment on any reasons for that.

Thanks, Kathryn. Brand is something that's really characterized this last couple of years. There's been an overall strength of the luxury watch world, which we think is very, very positive. And our brands doing drastically well for us, Cartier and OMEGA, all those major global brands, Tudor is doing fantastically well. But in addition, what -- [indiscernible] is smaller brands have had a very good period as well . Some niche with MB and AFH more [indiscernible]. So there's been a really good spread of business and nothing has really changed over the years. I think it really talks to the strength of the category overall. And obviously, we represent pretty much everybody in the industry. Any brand changes that we have experienced so things like supply or anniversarying of new introductions of whatever this year versus last year, but nothing to do at all with the overall demand for the brands, which, as I say, has been very strong. The Rolex slide, everybody, the most people who follow us know, we do get a number at the start of the year in terms of units for Rolex, U.K. and U.S., we've had those meetings that take place in January. And those numbers are never missed in our experience, they only ever go upwards, and they were in line with expectation. So no issue for us there, obviously, helps underpin the balance of the year guidance that we're giving. We -- the U.S. as far as we can tell is very strong. We're doing very, very well. There's some things that impact our net sales that don't necessarily affect the consumer demand overall, the timing of supplies, the management of stock levels. For example, we did increase stock levels in store in conjunction with Rolex and some of the other better consumer experience. So those things like that, that impact our sales overall. When we look at the quarter, we compare it to 2 years ago, it was plus 76% in the U.S., excluding acquisitions, plus 50%. So -- and it was exactly in line with where we guided that it would have been our forecast that it would have been. So U.S. is still very, very strong, having great support from all of the brands, getting a really good level of investment in the market from the brands and from retailers. So we see it as a strong quarter as part of what's been a really strong year-to-date market performance.

Our next question is from the line of Daria Nasledysheva of Bank of America.

I have 3. The first one would be, could you please help us quantify the -- a bit of a weakness in the U.S. between weakness comps in jewelry versus performance of watches? And can you please remind us what percentage of your U.S. sales actually come from jewelry? And also, are you starting to see any discounting in the watch channel today versus what we have been seeing over the past couple of years? Obviously, the discounts probably in the wholesale channel have been narrowing and generally disappearing. Has it changed now? And a bit more sequentially within the quarter, how does January trading compared to November, December? If you could give us a bit of color on that.

Daria, So not in order that you asked. I'll answer. No discounting at all. We don't discount luxury watches, and we don't see any pressure on that at all either from us or others in the market. We haven't spread out jewelry by market overall. But with regards to the U.S., that were -- has been historically a tendency of discounting, we experienced it when we acquired Mayors and eliminated it pretty quickly. We may acquire Ben Bridge and working through the same process. So our hope is actually -- is to eliminate discounting, and we're doing that and getting a really good response overall. But we've never given the split of the jewelry and watches. And overall, both markets in the U.S. are good. With regards to jewelry, as I said, we've got different positioning from a strategic standpoint. We commented that we exited the quarter strongly. And so that gives you an indication of January. Obviously, the biggest part of the quarter and the most volatile part of it is the holiday season, and we're pleased overall with how we managed to perform during that.

[Operator Instructions] Our next question is from the line of Richard Taylor of Barclays.

I've got 3 questions, please. Can you give us some color on the jewelry split as a percentage of revenue in Q3? I realize it's higher given the Christmas gifting, but to know the Q3 -- the rough Q3 split versus a typical quarter will be useful. Secondly, given your comments on focusing on full price sales on jewelry, can you comment on how margins performed in the quarter, please, versus your expectations? And finally, any comments on the M&A pipeline will be welcome for U.S. and Europe.

Bill will give you the split. And Richard, on jewelry, it's -- in Q3, it's 10% of the business for jewelry. And in the year on average, it's 7% to 8%. So it ticks up for the holiday season for the obvious reasons. And we'd expect it to be the normal proportion going through the rest of the year. And we have improved margins on jewelry, particularly in the U.S., as I said in answer to the previous question, eliminating any element of discounting. We have improved margins exactly as planned. And I'm sorry, what was the third question Richard? Sorry.

M&A please.

M&A, yes. We remain as active as we've been in the U.S. and Europe, and we've always said these deals lump in October to November. We got various stages of discussion. And as soon as we -- and we never give a speculation in our guidance. So we remain as active. It remains a key part of our strategy. It's a key part of our long-range plan in both U.S. and Europe. Nothing has changed. And as soon as we have anything done and dusted, obviously the market will get updated.

And our next question is from the line of Natasha Brilliant of Credit Suisse.

Three questions from me as well, please. Just on -- back to the wait list. You said there's been some examples of deferral. Can you give us just a bit more color on these customers? What sort of products or price points they're looking at? I think you said there are recent additions to the wait list. So if they're getting the call already, does that suggest it's not the most supply-constrained watches? The first question. And second question, just if you can tell us what the overlap is between customers buying both watches and jewelry. And in the short term, if customers are price driven and are perhaps shopping elsewhere for jewelry, is there any risk to the nonsupply constrained watch sales? And then last question, you mentioned the Rolex certification program for pre-owned watches. Can you just tell us a bit more about what the opportunity might be for you in that context?

On the wait list, as I've said, it's just in the interest of full transparency that I've made the comment. We asked all the time, is there any change? There is this very small change of some customers deferring. They are the products that were most recently added to the list. I think as everybody knows, the Rolex, there's been this succession that steel professional touch of the tones and some -- have always been in waiting list and then all other professionals, then steel products and so on. And the last category that went on to waiting list was typically a ladies product. So as the products that went most recently on the waiting list are the ones that the guys are making 1 or 2 calls about. But just to emphasize, every product that goes in the store is out of the store in very short order. And I just simply for, again, full transparency, I wanted to say there's been that very small slight change that's been reported by some of our stores. On watch and jewelry overlap, that's not a big deal at all here in the U.K., particularly in the U.S. We have some great jewelry businesses, great jewelry clients and they -- with the clients from time to time, we've been buying watches as well, but isn't really a big deal of business of some great client relations that we sell the full assortment of product to. And there's no negative impact there at all of jewelry overlap and watches. CPO, we were very positive about the principle and the program and what Rolex has done to organize bringing, I think, discipline and control and confidence to recalculate by introducing this certified program only available to authorized retailers like us. And we think it could be very big, but there needs to be a scaling up of capacity for servicing and refurbishing and authenticating product between Rolex and ourselves. And that will determine, I think, the pace and the extent of the growth, and we're still working through that detail, but we expect to be fully operating as an authorized CPO CL for Rolex sometime later in this calendar year.

Our next question is from the line of Samson Evans of Redburn.

Just a quick question. You made a reference in the statement of not having seen much recovery in the tourist business in the U.K. which is -- I find it slightly surprising given where currency was and for the U.S. travelers. Just wondering if you could flesh that out a bit and also your thoughts as we go through the year in terms of the potential return of Chinese consumers and where that business stands relative to kind of pre-COVID levels and what you've assumed in the guidance -- revenue guidance in terms of recovery in that business.

Good questions, Samson. We obviously have this situation in the U.K. of no jewelry shopping. And we can see very clearly, and we know and we hear it from all the brands, the evidence that tourism has recovered, but it's particularly covered in the EU. The groups that have been traveling and buying are Americans and Middle East clients, but we know they're choosing to buy in Paris and Frankfurt and Munich rather than buying here in the U.K. because of the [indiscernible] offering VAT. So for that reason, we think more than any other one, we think that it hasn't been a big deal to date. And until the VAT situation is resolved, we are not really including any significant return of tourism in any of the numbers that we're guiding to. Chinese business, historically for us for the year, pre-pandemic, pre-Brexit, the Chinese business was 7% of our total group. It's been nothing since, and we have been totally domestic, and our sales -- around 97% of our sales, U.K. and U.S. have been to domestic clients. Once again, the Chinese tourists does plan the itinerary with the shopping in mind and without any doubt, they'll plan to spend more time in European cities in the U.K. because of the VAT situation. But some will come, of course, and some will shop, of course, but we haven't really included anything of that increment in our guidance at this point.

[Operator Instructions] And our next question is from the line of Kate Calvert of Investec.

Just 2 for me. The first one is can you give some thoughts on your -- on the number of mono-brands openings in FY '24 you expect to do in the U.K. and the U.S. And the second question is just coming back to the certification of Rolex pre-owned watches. Are you yourselves going to be certifying those Rolex?

So yes, we haven't given the number yet for fiscal year '24. We'll do it a quarter from now when we do our year-end update as usual. But mono-brands remain part of our strategy is U.K., U.S. and Europe, and we have good momentum and good pipeline and a good discussion of opportunities going with our brand partners. The CPO question was...

Are we doing the certification or...

So initially and for the foreseeable, Rolex will do the authentication and refurbishment in the U.K. We're looking like we might be able to do it slightly differently in the U.S. that we've been doing the refurb, we've been doing the authentication. Rolex, of course, are offering a guarantee on the product. So quite rightly, they're seeing every product. And so yes, that's it will be initially. And that's why I said to answer to an earlier question, we are just working through the logistics of the capacity, the volume throughput and so on. There will be no issue here at all with demand is our view, and the business will be whatever logistically, we can manage through all those processes and get into our stores. But that's how it's starting.

We have no further questions in the queue today, so I'd like to hand back Brian Duffy for any further remarks.

So thanks, Harry. Thanks, everybody, for your questions and for joining us. Summary, we really are pleased with the strong performance in Q3, remained confident in our fiscal year '23 guidance. We're also going forward to see the economic outlook is more positive. And I think the second half year of the calendar year will certainly be great overall. Our brand partners continue to invest product development and marketing. We continue to invest in retail as [indiscernible]. We think the category is in great shape. Our team are doing fantastically well. We're all looking forward to watching wonders in March. We think it will be a very positive watch fair all around. And as I say, happy with the quarter and happy with where we're headed for the year and a big thanks to all of our teams. Thank you.

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