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

Good morning, everyone. Thank you for joining our presentation. We will be reasonably brief this morning, focusing on fiscal year '26 results ahead of hosting a more in-depth presentation on our growth strategies this afternoon. You'll be hearing firstly from me, Brian Duffy, Group CEO. I'll be taking you through some highlights for the year and performance against our growth pillars. I'll then hand over to Anders Romberg, our Group CFO. He will take you through the numbers in more detail before we open up, as usual, for your questions. Fiscal year '26 was a year of strong execution against what was a complex and changeable operating backdrop. The growth our teams managed to deliver while navigating headwinds from tariffs, gold pricing, margin changes and ongoing consumer pressure in the U.K. is a testament to their drive and capabilities. So our top line numbers, sales for the year of GBP 1.828 billion, up 13% on last year in constant currency. The U.S. was plus 24% in constant currency, which saw it become our largest revenue and profits market, and the U.K. was plus 5% on last year. Encouragingly, we saw an improving trend over the course of the year with H2 at plus 17% constant currency ahead of the plus 10% delivered in H1. Adjusted EBIT grew 6% in constant currency to GBP 155 million and statutory PBT of GBP 133 million was up an impressive 75% year-on-year. Turning to our growth drivers. We will talk about these focus areas in more detail this afternoon. But for now, I'd like to share some of the highlights from fiscal '26. We invested GBP 66 million into our showroom estate during the year, completing 13 major projects. We were also very pleased to complete the acquisition of Deutsch & Deutsch in January. This is a fantastic addition to our business, showrooms, which have a well-established presence and client relationships in 4 Texas locations as well as long-standing partnerships with leading watch and jewelry brands. Tad Deutsch of Deutsch & Deutsch will join us this afternoon to talk about the business and his experience of joining the Watches of Switzerland Group. Pre-owned continued to perform well, up 22% year-on-year with good growth in both the U.K. and the U.S. In luxury branded jewelry, Roberto Coin performed very well at plus 20%. We saw sales through our Mayors boutiques more than double following the upgraded shop-in-shop installations. We've had a good success with our launch of lab-grown diamonds. The product is trading really well in the U.K., and we have now launched in the U.S. Ecommerce also had a good year in both markets with growth outpacing the overall group at plus 21%. We launched a new upgraded Hodinkee app during the year with a shop option through to Watches of Switzerland. Ben Clymer, Founder of Hodinkee, will also be joining us this afternoon to present the Hodinkee story and growth strategy. As I mentioned earlier, looking at the geographic split of our sales, the U.S. surpassed the U.K. in fiscal year '26 as our largest market by revenue, reaching 51% of group share. Our group sales remain very much domestic driven, 95% in fiscal year '26 with very little international business since VAT-free shopping was removed in the U.K. following Brexit implementation in 2021. So altogether, FY '26 was a record year for our group. Our revenue CAGR between fiscal year '15 and '26 is 15.5%, and we saw adjusted EBIT increase despite the volatility in the year. Our balance sheet remains healthy. Net debt reduced to GBP 56 million during the year, and our ROCE was a robust 18%. Focusing on highlights from the U.S. market, fiscal year '26 constant currency growth increased to 24% with an acceleration during H2 to 27%. Growth was broad-based, led by strong underlying demand, outperformance of Roberto Coin, e-com and pre-owned, our showroom investments and contribution from the acquisition of Deutsch & Deutsch. We're pleased to have carried this good momentum into the new financial year. Key projects for the year included a new Watches of Switzerland in Minneapolis, 2 relocations in Georgia and Florida as well as 3 Roberto Coin mono-brand boutiques. We have also developed our growth strategies and plans for Roberto Coin and Hodinkee, which we will discuss further this afternoon. A bit more detail on our acquisition of Deutsch & Deutsch. We have adopted a new acquisition model here, which sees the former owners, the Deutsch family retain a 12% ownership, something we believe works well from all perspectives. We are pleased to have Tad and Aladar Deutsch remaining in the leadership of the business. They are great operators and bring fantastic local knowledge of the market and long-standing client relationships. The integration has been very positive, and we are delighted to have added 60 Deutsch & Deutsch colleagues to our team. Turning to the U.K. Growth in fiscal year '26 was solid at plus 5%, which was a good result against a somewhat subdued market backdrop. Trading improved over the course of the year, and we believe the market is now showing encouraging signs of improvement, which is great to see. We completed 7 key projects during the year. Highlights include the expansion and refurbishment of Mappin & Webb in Birmingham and refurbishment of the first-ever Rolex agency in the U.K., Northern Goldsmiths in Newcastle. We had our first full year of trading at Rolex Old Bond Street, having opened at the end of fiscal year '25. The showroom performed brilliantly ahead of plan with strong client feedback, including a very high NPS of 93. We have taken the learnings from this great client experience and included these learnings in all of our training programs. With that, I'll hand over to Anders to talk through the financials in more detail.

Thank you, Brian. FY '26 delivered a record year of sales and strong momentum in the U.S. market and a robust U.K. performance. Sales came in at GBP 1.828 billion or plus 13% at constant currency versus last year. The sales growth was driven by the U.S. market with growth of 25% in constant currency. Our adjusted EBIT came in at GBP 155 million versus GBP 150 million in FY '25 or plus 6% in constant currency, with adjusted EBIT margin of 8.5%, down 60 basis points versus prior year. Our free cash flow was GBP 162 million and return on capital employed was 18%. On to the income statement. This is presented on a pre-IFRS 16 basis and excludes exceptional items. The reconciliations to the statutory numbers are included in the RNS. Net sales was up 13% versus last year in constant currency or 11% at reported rates, driven by strong U.S. performance. Net product margin was 70 basis points down versus last year, reflecting adverse product mix and a reduction in brand margins due to U.S. tariffs and significant increases in gold prices. Our adjusted EBIT was GBP 155 million or plus 6% compared to last year at constant currency or 3% in reported. This gave an adjusted EBIT margin of 8.5%, down 60 basis points to last year due to the net margin decline, as just mentioned, and a one-off debt write-off in Roberto Coin. This was partially offset by leveraging showroom costs and overheads. The effective tax rate was 26.7%, a reduction on last year, driven by a one-off tax credit on Roberto Coin. Adjusted EPS came in at 45.2p, an increase of 9%. Looking at the breakdown of sales, the U.S. was the biggest growth driver. U.S. retail was up 25% in constant currency with robust demand across brands and categories, supported by the expansion of our showroom network. We're pleased with the performance of Roberto Coin wholesale with sales growth of 22% in constant currency. There's been a positive market response to the new products and the advertising campaign launched at the start of the year. Within our Mayors network, Roberto Coin sales more than doubled following upgraded shop-in-shop presentations. U.K. and Europe sales grew by 4% with 5% U.K. growth, excluding the closure of our European showrooms. Continued demand for luxury watches and improving momentum in luxury jewelry in the second half drove the growth. Across both markets, our e-com business continued to do well and grew by 21% in constant currency. Our pre-owned business grew by 22% in the year. Adjusted EBIT came in at GBP 155 million or plus 6% on last year at constant currency. Adjusted EBIT margin was 8.5%, which was 60 basis points down to prior year due to product margin rate decline, partially offset by leverage of fixed cost. The U.S., including Roberto Coin wholesale is the major growth area and 51% of group sales represents 62% of adjusted EBIT. U.S. retail had product margin contraction due to U.S. tariffs, but this was offset by leveraging on the cost base. The year was also impacted by investments behind our ecommerce business and Hodinkee. We expect these investments to start delivering benefits in FY '27 and beyond. In the U.K., product margin was impacted by adverse product mix with limited leverage on the cost base. We focused on cost control and store profitability and made good progress during the year. Roberto Coin wholesale EBIT margin was impacted by one-off department store debtor write-off and the investment behind our marketing campaign with Dakota Johnson. Our balance sheet is strong. In the year, we spent GBP 39 million on acquisitions made up of our purchase of Deutsch & Deutsch and the final payment for Roberto Coin. Continued capital investments in our estate to elevate the network and drive future growth remains a key component of our growth strategy. Inventory levels were up 2% with continued improvement in underlying stock terms. Average unit cost of stock increased in the year, reflecting increased gold prices and U.S. tariffs. Underlying inventory was flat year-on-year, and the increase came from the acquisitions of Deutsch & Deutsch. As a reminder, inventory is a very low-risk asset in our category. We closed the year with a net debt position of GBP 57 million. Our net debt-to-EBITDA leverage came out at 0.3x. We continue to be highly cash generative. Our free cash flow for the year was GBP 162 million with a cash flow conversion of 80%. Last year was adversely impacted due to an increase in working capital as a result of change in payment terms from some of our key suppliers. In Q1, we completed the announced GBP 25 million share buyback program with GBP 14 million spent during FY '26. The full year net cash inflow was GBP 38 million. Our guidance for FY '27 is based on a 52-week trading period versus 53 weeks in FY '26. It's also based on visibility of supply of key brands for the calendar year of '26. The guidance reflects confirmed showroom projects, but excludes uncommitted capital projects and acquisitions. So we're guiding towards revenue growth in constant currency of between 5% and 10%. We expect our adjusted EBIT margin percentage to expand by between 40 and 80 basis points, and our capital expenditure for the year will be between GBP 60 million and GBP 70 million. With that, I will now hand over to Brian for some final remarks.

Thanks, Anders. So I'll just summarize before we open up the Q&A. I'm extremely proud of the performance our teams delivered against what was a very complex and changeable operating backdrop. We made strong progress against each of our strategic pillars, and we look forward to sharing a bit more detail on those this afternoon. We've started the new year well. Trading is encouraging in the first 10 weeks with continued strong momentum in the U.S. and in the U.K. looking to return to more normalized growth market conditions. We confirm our previous guidance. Just before we open up to Q&A, if I could ask you to focus your questions on fiscal year '26 performance, and we will be more than happy to take questions on the broader strategy this afternoon. Operator, can we please open up to your questions.

[Operator Instructions] Now take our first question from Zuzanna Pusz of UBS.

I just have 2. Maybe the first question on current trading. I mean the press release sounds quite positive. You say that there are encouraging signs of improvement in the U.K., and it sounds like the U.S. sort of the momentum is also continuing. But I'll be just curious if you could give us maybe some extra color. I understand it's still early point in the year, but maybe just for us to understand sort of if we are trending more towards the upper end of your outlook or anything incremental, if you put that, that would be helpful. And then secondly, just a very quick question. Given that the U.S. is obviously becoming a much bigger part of your business and especially profit. Can you maybe remind us if there's any rule of thumb we should be aware of when it comes to the impact of the U.S. dollar? I mean, I know that the outlook has been confirmed at 1.34 rate, but just something to keep in mind in case you were to see any FX volatility.

Zuzanna, thanks for your questions. We don't have a lot to add in current trading. The way you summarize it is right. On the U.K., performance is good and improving as it has been steadily through H2 last year continued into the first quarter of fiscal '27 and the U.S. has remained strong. We're ahead of what we assumed in the guidance for the first quarter, but not substantially enough to change anything. We're conscious it's only 10 weeks, of course. We have some favorable intake of product, which we think is most likely timing, and we'll probably see that reverse in the balance of the year up against tougher comps, and there's a lot of uncertainty still out there from a macro standpoint. So clearly, a lot to go, but an encouraging start. We've described it as that certainly feels I think your second point is a good one on dollar. Year-on-year, last year reported was not as good as constant with the dollar weakness. Year-on-year, the situation is much more comparable. So there wouldn't be a loss running at a slight gain at the moment. But again, we'll see what the dollar does. But obviously, our dollar-denominated profits are more than half of our profitability overall, the exchange rate is important and a bit of favorability on that so far, but we'll wait and see how things develop for the year.

Sensitivity-wise, a GBP 0.05 movement on the dollar is worth around GBP 30 million in sales and GBP 4.5 million in EBIT.

We'll now take our next question from Adrien Duverger of Goldman Sachs.

My first question would be on the certified pre-owned business. So relative to your midterm target, how is the Rolex CPO progressing? And what are you learning in terms of customer reception? I think in the U.S., you already have CPO in all of the stores except and how is the progress in the U.K. And my second question would be on your full year '27 guidance, especially with regards to the adjusted EBIT margin to be up 40 to 80 bps. Could you please help us with the different building blocks in place there?

Thanks, Adrien. I'll take the first one on CPO and Anders can comment on EBIT trends. We -- going forward, we are going to be reporting CPO as a category. We've had a very good experience. Clearly, Rolex certified pre-owned was a major catalyst for us getting seriously into the pre-owned market, building our resources, building our capabilities, building our expertise. But the benefit alongside Rolex has been a meaningful uptake in other brands CPO. So we'll be looking at it as a total category. It's now over 8% of our business. It was less than 2% and we started out in fiscal '19. So it was never a big deal for us in the past, but it clearly has become that now. It's really great to see our team's expertise and confidence and everything grow. The training that we're doing with our salespeople. It's a different enough selling experience new versus pre-owned that really requires specialized training, which we're doing, also developing marketing, window presentations, [digital] activities. So a lot going on. It's now a really meaningful part of our portfolio now. It's an area where it's a segment where scale and resources such as we have really does give a competitive advantage. Rolex CPO in your question, we're in every Rolex agency in the U.S., not yet in the U.K., but it's a matter of just store design, store changes that are happening and as they happen, for example, the Rolex boutique that we're opening in Glasgow, my hometown relatively soon. Then we'll introduce CPO at that point given the doubling of space that we're going to have up there. So we will be rolling it out to other Rolex agencies. We will be expanding. We're allocating more space to preowned generally, U.K. and U.S. since it's really proven to be a valuable category for us.

Adrien, your question on margin, obviously, we had a one-off write-off going through in FY '26 as disclosed, GBP 3.5 million of bad debt provision that we had to take. The balance of it is going to come through operational leverage.

[Operator Instructions] We will now move on to our next question from Piral Dadhania of RBC.

I just had one technical question, if I may. So I think that your EBIT margin was impacted negatively by the write-off of a debtor balance, which we assume to be Saks. And if our understanding is correct, the amount is in the region of about 7 million. My question is as follows. Is that GBP 7 million included as an adjusting item against your EBIT -- your adjusted EBIT of GBP 155 million because we can't find that in the Note 4 of the release? Or have you included that within adjusted EBIT, which means that the underlying EBIT margin, excluding that write-off would actually be roughly 40 basis points higher?

So thanks for the question. It's not GBP 7 million. It's GBP 3.5 million. Your assumption on Saks is correct, and it is included in the reported adjusted EBIT. It's not regarded as an exceptional item.

Okay. So that means that -- so our number was wrong, but directionally, does that mean that if we took that out, then actually the starting point for the '26 margin would actually be slightly higher?

Correct.