Shares in FTSE 250 retailer Watches of Switzerland Group (LSE: WOSG) boomed during the pandemic, as watch collectors snapped up luxury time pieces.
As one of the largest sellers of brands such as Rolex, Audemars Piguet and Breitling, the company was able to sell all the luxury watches it could get hold of.
The shares hit an all-time high of over 1,500p in January 2022, before going sharply into reverse as the watch market slowed.
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As I write, Watches of Switzerland’s share price is 390p. That’s 73% lower than the record highs seen two-and-a-half years ago. Is this a buying opportunity? Here’s what I think.
A golden opportunity?
In my time as an investor, I’ve often seen share prices overshoot as investor sentiment swings out of control. First the shares go too high, and then they go too low. I think this could be one of those situations.
While market conditions have certainly got tougher for Watches of Switzerland since 2022, the company hasn’t been standing still. It has continued to open new shops and remodel existing stores to improve sales.
Management have also made a big ($130m) acquisition of jewellery retailer Roberto Coin’s American oos, which is expected to boost profits.
It’s too soon to say if this deal will be successful. But what we do know is that Watches of Switzerland’s trading so far this year (May-August) is in line with broker forecasts.
Luxury watch and jewellery sales in the UK are said to be stabilising after a difficult period last year, when the company’s earnings fell by 28%.
“Demand for our key luxury brands” in the UK and US is still said to be “outstripping supply”.
The company is also continuing its expansion into the luxury jewellery market, which could help to expand its customer base.
What I’d do
The acquisition of Roberto Coin has left Watches of Switzerland with some debt. It’s also made the business more complicated, at least for a while. This could add to the risk of financial problems, if the integration of Roberto Coin doesn’t go as smoothly as planned.
Demand for luxury goods in other sectors of the market has also slowed, notably fashion. I guess there’s a risk that watches could see further weakness too.
However, on balance I think these risks are already priced into Watches of Switzerland’s £960m market cap.
I’m also excited by the growth potential the business has in the US. This is a much larger market than the UK.
At current levels the shares trade on a 2024/25 forecast price-to-earnings (P/E) ratio of nine.
Profits are expected to continue rising next year too. Broker forecasts suggest the stock could be trading on just eight times 2025/26 forecast earnings.
That looks too cheap to me for a market-leading specialist retailer. If Watches of Switzerland can continue to deliver on forecasts, I reckon the shares could perform well from here and are worth considering.
