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'll 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 well 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 1.88 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 and 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. PON 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 [indiscernible] boutiques, more than doubled following the upgraded shop-in-shop installations. If 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. E-commerce 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 action through to Watchdille, 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 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 and 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 Robert Coin and Hodinkee, which we will discuss for this afternoon. A bit more detail on our acquisition of Deutsch and 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 Todd and Alder Deutsche 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 and 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 Goldsmith and 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.

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 1.8 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 45.2, 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 major network, Roberto Coin sales more than doubled following upgraded shop-in-shop presentations. U.K. 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 grow the growth. Across both markets, our e-com business continued to do well and grew by 21% in constant currency. Our preowned 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 costs. The U.S., including Roberto Coin wholesale is the major growth area. And of 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 e-commerce 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 better 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 and 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 and 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 cards 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 8 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 16 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 to 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 have return to more normalized gross 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.

Good afternoon, everyone, and thank you for joining. We've got Anders Romberg, our Group CFO here; alongside David Hurley, our Deputy CEO. So please do feel free to add further questions into the text box on screen, but we'll begin working through the presubmitted questions now. So first one we have here, what are the key drivers of revenue growth you expect over the next 12 to 24 months? And how confident are you in achieving them? How is the company managing demand for luxury watches amid changing consumer spending and economic uncertainty.

Well, we have our -- and I don't know how many of you -- I should say good afternoon, first to both to everybody. First of all, we have our 6 strategic pillars. So they haven't changed in the last few years. So showroom investment, certified preowned e-commerce luxury branded jewelry acquisitions and client experience. And I'll take each one of those just very, very quickly. We continue to have a strong pipeline of offshore room investments. We've given the detail that we're going be spending circa GBP 60 million to GBP 70 million on capital this year. We've detailed out some of those projects, but it includes projects like a new boutique in Glasgow. We've announced that we're going to be opening up an expanded Rolex location in Terminal 5 that will open in 2027 in the U.S. We've got our Better Greenish store that's going to be opening this year. We're also opening up an expanded location just outside of Atlanta a location called Avalon or Alpharetta, it's about 30 minutes outside of Atlanta. And another sort at we acquired just outside of Philadelphia, Bernie Robins, we'll end up expanding this year as well. with Bode Watches Switzerland store and Ameris. So we continue to have a strong pipeline of projects and of course, with our brand partners, given the length of time that these projects take. We're talking 2 years and 3 years out on the different projects that we have. In terms of certified pre-owned, we're really delighted with our progress on certified preowned. It's gone from what was at 1.5% several years ago now to north of 8% of our total watch sales, we're targeting -- though we haven't put a time line on it for it to get close to 10%. We haven't in the majority of our showrooms today. We've still got 4 or 5 more showrooms in the U.K. where we're going to put Rolex-certified preowned in. And now with the acquisition of Deutsch and Deutsch in the U.S., we'll be adding it in there. But there are some more showrooms where we'll be able to add in the other brands that we do pre-owned with. And we're delighted with the fact that as we add in these new categories, that we're also attracting new clientele, and we spoke on our Capital Markets Day about the fact that 77% of the clients that have purchased a preowned time piece from us over the last year are new to watches to Switzerland. So there's a lot more that we can do in that area. It is a different clientele, but it also requires different training and knowledge on the part of our teams. And so we're continuing to our training and tweak our training for our showroom teams. And we continue to do more and more events around pre-owned as well. Then of course, we as we get more and more well-known for this, then we're also having clients coming in specifically asking us to source product. And that's something that we're able to do, both in the U.K. and in the U.S. having required analog shift, we have that expertise. E-commerce continues to be very strong. It grew strongly last year. In the U.K., obviously, we've been at it for many years now, and it's close to circa 10% of our overall U.K. business. If you look at just the brands that were able to retail online, it's closer to 20%. The U.S. is growing at a faster rate, but off a very low base today. It's around -- it's slightly less than 2%. So we wanted to get closer to the U.K. number in terms of percentage of sales over a period of time, but we haven't put a time line on that. But we have put in the investments in FY '26 to support growing e-commerce in the U.S. both in terms of structure and systems, and of course, the acquisition of Hodinkee also helps with that as well. Luxury branded jewelry. We've said that that's been a focus for some time. Number one, that's led with our acquisition of Roberto coin. We're 2 years in. We're even more delighted with the acquisition now and excited about the future for the potential of that brand than we were when we acquired it. We were working on that project for close to 18 months, [indiscernible] to announcing the acquisition and the reason why we spoke to Roberto coin and we're interested in acquiring them was a, they already had scale. They're already very, very well known in the United States and the other territories that we take into distribution rights. And b, we were seeing that they were becoming more and more productive in our own stores and point of fact in case line, they were sometimes doing more than shop-in-shops where we had some of our watch brands. So we've proven out in our own stores over the course of the last year that we -- that if we give it the appropriate space that it can be a very successful brand. I think we were up over 10% in the year in our own showroom network and over 180% for where we put in shop-in-shops. So now we're taking that out to the other 400 points of distribution that we have across the U.S. with 17 store partners expanding prior to the end of January and another 13 progress prior to the end of the calendar year, and that's something that we'll be working on over the next few years. And then we have all the other areas that we can expand with Roberto Coin both retail stores were 3 stores then, 3 more to go over the next 12 months, robertocoin.com, which is also part of our e-commerce strategy. the wholesale.com, so the Saks and names of the world and obviously, the international territories outside of the U.S., such as Canada, Carrebean and Mexico. So -- and then in the rest of our jewelry business is very strong and is growing well, both in the U.K. where we've also introduced a outgrown diamonds, and that's attracting again, as we add new categories that are attracting new clients. So that's been a great success in the U.K. and we've taken those learnings and we brought it to the U.S. as well. We only launched outgrowing diamonds in the U.S. a few weeks ago. But it is off to a strong start, and we see a lot of potential there. Acquisitions. Obviously, the last acquisition we've done is Deutsch and Deutsch. We had 1 of the 2 brother Todd present at our Capital Markets Day. We're delighted with the acquisition as our Deutsch and Deutsch. And again, we see a lot of potential in terms of -- and I think we've got a proven track record at this stage in terms of acquiring the business and over a period of time, investing in and expanding that business. And so they're close to their clients and their pillars of their community, they'll concentrate on the front of house activities -- will take a lot of the back of house activities of them. And of course, we can support them in terms of our strong brand relationships, brands that we carry that they don't carry today. And we like as well the format of this new acquisition, where the 2 brothers remain as owners in the business and incentivized along with us to grow it. And we think that opens up the opportunity for further acquisitions of [indiscernible] and again, a huge focus on client experience on events, et cetera. We really do believe that that's a differentiator for us versus a lot of other retailers out there. And we're also able to, as we add in these categories to offer more things to our clients and in particular, our VVIP clients. So we're doing more and more events. We did over 250 events in the U.S. last year. Recently spending more time in the U.K. and the quality of the events that the teams do here are fantastic as well. We're learning from each other and these events have strong ROI. So it's a focus on giving our clients one of a kind experiences. So there are 6 strategic pillars, and we're really confident that we can execute against all of them over the next few years. In terms of the changing dynamics on the watches and the demand out there, I would say that demand continues to be very strong for the super high demand brands. No surprise there that's continued throughout the time period that we've been owning this business -- or sorry, part of this business. But I think the U.K. is off to a positive start in the first 10 weeks of the year. And we see with the U.S. just the well creation that is there and the fact that the market is still not as well developed as in U.K. and Europe to still a use potential for growth in that market.

Great. Next question, how would you expect the business to perform if the AI bubble were to burst and present the [indiscernible] and AI stocks in the wealth created by AI-related businesses may have artificially boosted demand for watches.

Well, clearly, there is a correlation between wealth and demand in the U.S. market more so maybe than in the U.K. Here, I think the interest rates and people's feeling a wealth in their properties has a bigger impact actually. The U.S. market has had a good run in the shares. The wealth creation that we've seen over the last 4, 5 years is around $40 trillion, which is an extraordinary amount. Swiss export data has not kept track with the wealth creation in the U.S. and the market remains underpenetrated within this luxury category versus other luxury categories. And if you look at sort of where it sits, it's around 40% per capita consumption of this category versus what we have in the U.K. So we believe that the market will continue to grow long term. Is it growing faster given sort of where the stock market is, yes, potentially. I wouldn't hesitate to say that it's probably a factor. When you have the stock market crash in 2018 in the U.S., the market did take a big blow. It took a blow in the U.K. as well, but not of the same magnitude. So yes, there is more of a correlation between equity prices and luxury goods in the U.S. than what it is in the U.K.

Next question. Would you characterize your guidance for the year as conservative based on the underlying fundamentals and your comments, it's difficult to reconcile the expectation of around only 5% growth at the lower end of the range.

Well, first point to remind people is that this is a 52-week year versus a 53-week year. So the underlying growth is projected to be between 7% and 12%. Yes. I mean, listen, of course, we had pricing come through more than what we've seen at a normal level last year. And most of that pricing, we're going to annualize that in the second half of this year. So we've been a bit cautious on that factor. And we've had a long, long run of really good market positions in the U.S. So a bit of sort of the comps in the second half are a bit tougher than in the first. Last year, we had to rebuild inventory that we announced last year when we came out with our quarter 1 sort of comment which impacted the first half adversely last year. But obviously, this year, we don't have the same thing. So yes, and are we conscious about sort of the world situation, yes, we are. We have a change of guard here in the U.K. coming along, which could impact how people feel about things -- you don't know -- we have the situation in the Middle East, which is directly impacting us, but clearly, it could drive cost of living up through energy prices and so forth. So we're a bit cautious. So if things brighten up, and we have piece around in the world, and the government doesn't do anything crazy. Yes, maybe we're being a little bit conservative.

One for you, David. Are there any areas of America where you think people still don't know the Watchers of Switzerland brand well enough?

Yes. There are lots of in the U.S. And so look, the reality is that we have strong areas like Miami -- sorry, Florida, Georgia, where at least the group [indiscernible] is very, very well known, the New York Metro area. I think we've done a very, very good job. And obviously, Vegas where we've got significant presence -- the rest of the country, we've got pockets of stores in different locations. We've certainly proven we can open up stores in different locations around the U.S. and open up successfully. But yes, we believe there's a long runway for us to go in terms of growth. Again, it comes back to the fact that the -- we still believe that the market is underdeveloped, as Anders talked about the -- versus the U.K. There's a huge amount of growth still potentially there. So yes, a lot of work still to do to grow the brand name. We do believe that Hodinkee will help that as well. They have an incredible amount of passionate or logical experts and 25 million unique users and certainly deserve the vast majority of those -- of the people that visit their websites will not shop in waters in Switzerland today. Hopefully, a percentage will overtime with Oscar plans in that area. So there's a lot of work for us to do, and there's still white spaces out there in terms of of new locations where we believe we can open up boxes with multibrands.

We've only been in the U.S. for a little bit more than 8 years. So we're relatively new to the market still. We're building our geographical footprint. The brand name is obviously to our advantage, Watches of Switzerland, what do they do? I mean we used to be called Aurum Group, which nobody knew what it meant. So the name sort of is easy to get out there, and there is no confusion about what we do.

Next question. Have you ever considered pursuing a U.S. listing for the business?

It's not something that we've actively looked at. And the market cap of the company is fundamentally too small. As the presence of our business is expected to outpace the U.K. growth in the U.S. U.S. is going to become a bigger proportion of the business. So at some stage, that might be a consideration, but not anything that we have on the radar at the moment.

Are customers still wasting months for the most popular Rolex models or are waiting lists finally coming down.

Going to just specifically talk about one brand, but I would say that the registries of interest that we take for super high demand products that those lists continue to grow. And we work with all of our brands and with our clients, obviously, to try and satisfy them as picky as possible. But yes, for the for those watches that are most in demand, people definitely have to be patient, and obviously, we want to try to get to that as soon as possible, but it does take some significant period of time.

I just want to make a correction in the question. It's not months, it's years.

So for brand, but what I would also say to anybody that's interested in coming into our stores. We are still trying to balance that with bringing new clients in. So we're trying to make sure that again, across a broad range of brands that we have because it isn't just one brand. We have many brands that have either very strong demand for all of their product or for a particular product. We want to make sure that at least over 30% of that goes to new clients. So we continue to add to our client base.

Next question, would you say that the company is better positioned than it was in 2021? I'm just wondering why the market doesn't appear to properly reflect the progress you've made. The company is larger, more profitable and has now returned to growth

Well, it's a good question. So obviously, we had the Booker transaction come through. and which spooked some investors and had an impact on our multiple and how people viewed the risk profile. In spite of which Rolex confirmed the RNS that we issued back then, and it was repeated by Jean-Fred, the CEO at the Dubai watch week back in the fall. So their behavior hasn't changed at all, but it's all perception by the market, I would say. So that had an impact on our multiple, and we also had a profit warning in early '24, after which we've delivered 4 reporting cycles where we've always met or beat our number. So I think the sort of turning point is behind us now and confidence is starting to rebuild. So we'll see where it all goes.

Preowned feels like a really exciting market. Could that eventually become just as important as selling brand new watches?

I don't -- I honestly don't know. I don't think so. I think that the reality is it's -- it will be -- we've said that we think we'll get up to 10% of our business and that's what we stick with at the moment, and we made that prediction pretty early on. To be honest, we've gone into the certified preowned business. But we do believe over the next few years is going to continue to grow faster than the rest of our watch business. And again, as we said, it's attracting new clients, it's generally at a higher price. Based on the product that we carry and it also allows us to offer products to our clients that has been discontinued. So it's a big focus for us, but no, I don't see it becoming bigger in the newer business.

Is there another watch brand relative to Rolex that you think could become as important to the business over the next 5 years?

I would say that Rolex is an incredible brand, incredible partner. And I don't think so. But what I would say is that what we are able to offer our customers is that multi-brand experience. We've probably got the largest selection of watch brands out there in the world. And that's something we're very, very proud of, and we're proud of the fact that we're able to offer time pieces from up to north of GBP 1 million. So -- and what we're doing is I think we're continuing to develop a very, very healthy business in terms of the breadth of the sales across all of those price points and categories. So whether it's -- they are -- whether it's Rolex, or [indiscernible] strategic partner brands like -- take Omega, writing Tank & Tutor true to independent brands that again, attract collectors like NVNF or [indiscernible] down to the more accessible price points like Ares and launches that's performing very strongly. So we're focused on making every brand that we have in our business work. But in terms of share of our business, no, I don't see any other brand in the next few years coming close to that.

One for you, Anders. Could you explain your logic for splitting maintenance and expansionary CapEx in the free cash flow calculation? Specifically, a maintenance CapEx of GBP 3 million or roughly $15,000 per store seems low. Can you elaborate on how you arrived at that figure and how you think about it?