On Thursday, Watches of Switzerland Group (LSE:WOSG) shares tanked after the stock missed earnings estimates. However, the Braunstone-based company retained its guidance for the year, noting solid demand and a 17% rise in revenues.
So, let’s take a closer look at Watches of Switzerland and its meteoric rise in recent years.
Index-beating growth
Watches of Switzerland hasn’t just provided shareholders with index-beating growth over the past three years, it has soared. Demand for luxury watches has gone through the roof, with waiting times for certain timepieces extending to decades, and Watches of Switzerland has been a net beneficiary.
So, if I had bought £100 of Watches of Switzerland shares three years ago, today I’d have an impressive £257. That’s a whopping increase of 157%.
And it’s interesting to note that over the past year I’d have actually seen my investment fall in value. The stock has lost 18% of its value over 12 months, including around 10% on Thursday after the Q3 results were published.
Valuation
Watches of Switzerland trades with an earnings multiple of 23. That’s not cheap, but clearly it reflects investors’ belief in the company’s ability to continue growing the business.
Luxury watches have continued to benefit from a strong demand environment, while growth has been driven by increases in average selling price and volume.
Despite the share price falling over the past year, business has kept on growing. Watches of Switzerland said on Thursday that Q3 revenues rose 17% on the same period a year earlier, to £407m, while revenues for the nine months to 29 January were 25% higher at £1.17bn.
As such we’re looking at a forward price-to-earnings around 18, which is actually in line with consumer discretionary average.
My concerns
I like my watches, although I wouldn’t go as far to call myself a collector. I’ve been to luxury watch meets in London and I’ve been to store openings — only the brands I follow. So, I feel like a know the industry fairly well.
My main concern is how much further Watches of Switzerland can grow the business. Supply is clearly struggling to keep up with demand — it’s taken five years for a family member to reach no. 2 in the queue for a certain Rolex. And that’s the most mass produced brand in Switzerland — in 2021, it represented around a quarter of Swiss output.
But, these Swiss watchmakers don’t necessarily want to increase supply in line with demand, because scarcity is part of the brand value. That’s especially the case for the higher margin watches sold by Watches of Switzerland. I don’t see exponential growth in sale volume of Pateks, Vacheron Constantins, or Panerais. And it makes sense. If Panerai was more common, I probably wouldn’t be so keen on the brand.
Equally, we have to consider that the economic environment isn’t likely to support continued price inflation. There’s a host of economic terms we can use to analyse watch sales, but my broad belief is that demand will fall at a time when real wages are falling.
So, would I buy this stock? No, it’s not for me. I just don’t think the current rate of growth is sustainable and this will eventually investors will be disappointed. Moreover, there’s no dividend yield to soften the blow.
