Those FTSE 250 stocks with a reliance on the luxury end of their markets have struggled recently. Aston Martin Lagonda and Burberry are two examples that spring to mind. In the wake of post-pandemic inflation and a resulting global slowdown, both have seen their earnings — and share prices — fall.
Watches of Switzerland Group (LSE:WOSG) is no different. Towards the end of 2021, its shares were changing hands for around £15. Today, an investor could buy one for approximately £4.50. The group’s share price is now 25% below its 52-week high.
A large and growing market
Luxury watches are big business. The global market is estimated to be worth close to $50bn. The most expensive timepiece on its website has a price tag of £565,900. In fact, it has 1,155 of them with a retail price in excess of £10,000.
During the year ended 28 April 2024 (FY24), its revenue was over £1.5bn. And its adjusted earnings before interest and tax (EBIT) was £134.7m.
For FY25, analysts are expecting an 8.6% increase in the group’s top line and a 11.3% improvement in EBIT. If their forecast for earnings per share of 41.4p proves to be correct, it means the stock’s currently (10 March) trading on a very reasonable forward price-to-earnings ratio of just under 11.
In December 2021, it was over 35.
Time to look further ahead
The company has ambitious growth plans. It wants to double its revenue and adjusted EBIT by the end of FY28.
It hopes that some of this expansion will come from its decision to move into the pre-owned market, which is forecast to grow by 10% a year up until 2028. Further investment in its network of shops should also help boost sales. In keeping with its status as a premium retailer, Watches of Switzerland prefers to use the term ‘showroom’ and has 217 of them in the UK, United States and Europe.
It’s also selling jewellery, which in FY24, accounted for only 7% of revenue. But I think there’s huge potential here.
However, the Bloomberg X Subdial Index, which tracks the price of the 50 most traded luxury watches, has been falling for some time now. It’s a similar story with the WatchCharts Overall Market Index. It follows the secondhand prices of 300 watches from the top 10 luxury brands. It’s currently a third below its peak, achieved in April 2022.
Although both of these indexes monitor pre-owned prices, they’re a good indicator of the overall health of the luxury watch market. That’s why, in my opinion, the Watches of Switzerland stock price tends to move in tandem.
However, there’s no immediate sign of a recovery, which I think explains why the group’s shares currently attract a relatively low valuation. And inflation in the UK, which has significantly impacted earnings in recent years, hasn’t been tamed yet.
But in my opinion, with a still healthy margin, exposure to a market that should recover if global economic conditions improve as expected — and because of a sensible decision to expand in other luxury products — Watches of Switzerland Group is a stock worth considering.
