Watches of Switzerland Group PLC

LSE:WOSG

Earnings Call Transcript 2022-Q2

[Operator]

Good day, and welcome to the Watches of Switzerland conference call. At this time, I would like to turn the conference over to Mr. Brian Duffy, CEO. Please go ahead, sir.

[Hugh Brian Duffy, CEO & Director]

Thanks, Simon. Good morning, everybody. Apologies for the slight delay in getting the call going. I just have to make sure we put everybody off the queue online. But thanks, everybody, for joining us. You've obviously all seen our RNS, and I'm sure you've observed it and been through it. So I just want to add a couple of comments, some added color. Overall, I'll call it, very pleased with the half year numbers that we're reporting, very strong performance, both U.K. and U.S. Half 1 sales up by almost 45% versus last year and 41% versus 2 years ago. Our team continued to do a great job overall. The environment that we're in is a very strong one, we think, for our categories, both luxury watches and jewelry. And feeling as the demand continues to increase, further outpacing supply overall. Just a couple of added comments. We changed how we're handling Rolex stocks during the period. And effectively, we changed our in-store stock over to being effectively demonstration stock has been presented -- has been for exhibition only. And we're doing that simply to keep a reasonable representation of the brand in store. Overall, not selling that stock, but customers are able to see the product, try it on and register their interest in buying when availability is there. The level of stock that went out obviously worked through with Rolex specifically U.K. and the U.S., and that's a level of stock that we'll effectively maintain for the foreseeable future. And the system of having in-store stock for demonstration purposes only is likely to remain, we think, for the indefinite future. So what it meant is that we restocked our Rolex position during the quarter, during the half. And consequently, Rolex sales during the period were actually a bit less than our overall sales growth that we're reporting. And our strong sales growth for the half and for the quarter, therefore, was due to very strong performances from other luxury watches and jewelry. Category strong, but we're pretty sure that we are gaining share through our continued store investment, multichannel approach, great systems, technology, increased marketing. And I think very importantly, a confident buying decisions that we made, we decided to buy good quantities and sufficiently far in advance because we got confident about this period, and we're very confident about the upcoming holiday season overall. We think the best way to look at our numbers, as you do, would be looking at the 2-year stack. There's clearly a lot of moving parts when you compare to last year, the influence of the lockdown and significant impact on traffic and so on. Looking against 2 years ago, we think is the most relevant comparison, which when you do, you see that we were up around 41% in constant currency against that period. But you've got to bear in mind that 2 years ago, we had a good amount of international business here in the U.K. Of our total group that represented around 33%, 34%, a combination of tourism and airports. And effectively now our businesses, almost all, that's like 98% domestic. So when you make that comparison, you effectively have to take 30% off the base. And when you do that, you see a very, very strong performance with the domestic clients in U.K. and in the U.S. So our business continues to put on, reporting strong sales. We're also reporting improved profitability due to the favorable margin mix coming from the favorable product mix overall, which Anders will comment more on. In addition to our underlying base business, we're also pleased to report progress on our long-range planned objectives of incremental growth through our agreements to acquire stores in Greenwich, Connecticut; Vail and Aspen, Colorado; and complete deals in the Minneapolis and Plano, Texas. David Hurley, he leads our business in the U.S. The U.S. team are doing an amazing job of finding and connecting with potential acquisitions. We're all keeping the current business moving forward very well. So all of that has led us to upgrade our outlook due to the improved performance of our base business plus the incremental acquisitions. To talk through the outlook and the performance of the product, I'll pass over to Anders.

[Lars Anders Ragnar Romberg, CFO & Director]

So thank you, Brian. Yes, obviously, a really pleasing first half. And to Brian's point, the product mix this year is very different from what we experienced last year. That normally was last year when we were selling to waiting list of hard-to-get products. So the representation of the sort of supply constrained balance peaked at about 70% in the first half last year versus a normalized base of around 60% we experienced in '20 and we've experienced this year as well. So the business is back to what it used to be in terms of mix as such. And that's driving the margin performance. And obviously, sales as such. And particularly positive surprise has been our online performance. We had planned online down internally here given the fact that we were up against the period when stores were closed. We felt that was the right way to look at it. To our surprise, actually, we've done better. So we're obviously trading up like 24% on last year. So we are increasing results overall, and that has led us then to look at our business and where we see demand sitting at the moment. We're done with a restocking exercise. So we will sell what we get going forward here throughout the year. And on that basis, obviously, we're calling out the year by 100 million. Part of that call up is due to the acquisitions that Brian alluded to. On a trailing 12 months basis, that is worth around $100 million sales. And obviously, we'll have 4 months of complete sort of transaction volume going through as part of our balance of the year. And our profit is looking better because we hadn't planned for the margin upside that we've experienced through the first half. And we expect that mix of product to remain in place throughout the balance of the year. In addition to that, we get some better leverage on our cost base, we sweat out another 0.5 point of that. And that is against the year where we actually benefited from some government support in the first half, as you can see in the disclosures. So very positive all around, I would say. In terms of our capital program, we are on track to deliver on our plans. We actually have called it up by another GBP 0.5 million or so. And that is obviously linked to the acquisition to some degree, but we're also investing more in technology throughout the year. So overall, really good. Cash is coming in better than what we had expected. The display stock that Brian was alluding to is obviously paid for. And as we get products in, they vanish before we actually have to pay for them. So we get cash generation from our stock, which is a new one. So obviously, overall, very pleased with the results.

[Hugh Brian Duffy, CEO & Director]

Okay. And so with that, very happily move on to your questions.

[Operator]

Thank you very much, sir. [Operator Instructions] I will now move to our first question over the phone, which comes from Anne-Laure Bismuth from HSBC.

[Anne-Laure Bismuth]

Yes. I have two questions. The first one is on the U.S. Is it possible to have an idea of the split between like-for-like and store expansion? The reason why I'm asking is that last year around Christmas you did a lot of multi-brand stores. So I'm just wondering if you can give us some indication on that. And the second question is around the e-commerce, if you can give us some comments about orders, if incremental development is going in U.S. as you launched the U.S. e-commerce in the last [indiscernible]

[Hugh Brian Duffy, CEO & Director]

Anne-Laure, I hope we heard a lot okay, the line wasn't great. I think you were asking, first of all, about like-for-like, which we don't report anymore. We get so many activities going on in investment and projects. But I mean, overall, we haven't hugely increased our space in any significant way. We've invested in it. We've added more to brands, as you know. But proportionate to our big multi-brand stores, the contribution there is less. So we get a bit of added year-on-year, but it's really not that significant. The underlying driver of businesses, demand that's there, market share we're gaining because of our, say, confident buying or investment in technology or increase in marketing. And the supply situation, as you know, half of our business is supply-driven, and that is regardless of the network situation overall. So like-for-like really isn't honestly that relevant for us. And I think it's just a bit impossible to calculate. So we haven't really been reporting on that for some time. e-Com in the U.S. is off to a good start. We're pleased about the progress, but it takes a combination of time and money. We are spending behind the business in the U.S. and driving traffic to our site. We've increased centralized stock to provide a better service to clients. And pleased that the progress, our biggest business, of course, in e-com is the U.K. The number year-on-year, it was reporting an e-com of 28.7 is predominantly the U.K. success story, but a small contribution from an increase in the U.S. as well. So I'm confident that in the years ahead, e-com in the U.S. is going to be a big, but it takes time to really build up that positioning and the awareness and even the support structure and so on to take advantage of the potential market as well.

[Operator]

We'll now move on to our next question over the phone, which comes from Flavio Cereda from Jefferies.

[Flavio Cereda-Parini]

Wonderful. Thank you. Two quick questions here, both on, I guess, fundamentally on Rolex. But generally speaking, as travel as we know sort of normalizes, were, right, travel restarts and gradual process. We saw yesterday, travel to the U.S. restarted from the U.K. and stuff. And these stores that you have store for was not a point. Are you able to supply these stores as business restarts? Do you have the product to supply these stores given that the dynamics have shifted so much in the last 2 years? And my other question was on pricing, which I guess is, number one on Rolex, so no news of a price increase, I guess. So maybe if you could tell us anything about that. But generally speaking on pricing for the supply-constrained brands, are you seeing anything in particular that we should be aware of?

[Hugh Brian Duffy, CEO & Director]

Thanks, Flavio. So what we are seeing in the airports is increased traffic and a good level of spend per passenger. There was an uptake on kind of leisure travel with the recent kind of reopening of holiday destinations in the half year here in the U.K. So we saw a nice trend of improving business there. And as you see, the U.S. has opened and business travel will step up as well. We're anticipating an improvement from that, too, of course. There's a real willingness to spend. I mean, obviously, the environment overall is strong. Heathrow is a great place to shop. It's convenient. It's also, I think, very enticing from the great luxury lineup that's there, including us. So there's no -- an overall feeling and how we've sort of planned it is that we think the business will come back at the airport. But with the absence of Duty Free, it wouldn't come back in any foreseeable period until that changes to the level that we had kind of pre Brexit, pre COVID. So we're assuming, I don't know, 60%, 65% potential once traffic is back up again and assuming that the no tax-free situation remains. Flavio recent experiences, a little bit better than that actually. And I think it just talks to how attractive the category is overall, so people are spending. Your point is right that was incremental business there, a way of getting incremental stock for it. And of course, it's something that we are openly discussing with our friends at Rolex. But generally, whatever we do, the airports income is next to nothing on last year. The other 4 terminals are open, and we're assuming that remains the case for the foreseeable T2, T3 and T5. So we'll see. It's positive. You're right, we do have to get more stock to take advantage of it fully. But encouraging. On pricing, we don't have -- I think your question indicates that the conditions would support price increases. The inflationary economy that we're in globally, increase in Swiss franc, increase in commodity prices and so on would all underpin a pricing review. So I don't think it's crazy to assume that, that would come at some point, but we do not have anything specific from any of our brand partners. So you know as much as we do as to whether or not a price increase will come and when.

[Operator]

We'll now move on to our next question over the phone, which comes from Andrew Gowen from Lombard.

[Andrew Gowen]

Brian, it's Andrew here. Could I just ask, please, for a little bit of color both in the U.K. and in the U.S. on what other brands are particularly doing well and what brands you've got effectively better supply on because the situation is you're kind of selling everything you bought. So what are you getting more of? And then the second question related to that, obviously, can you give me just a kind of ballpark guide? Obviously, we know the margins are a little bit lower on the Rolex. But what the differential is, what the spread is, is it 500 basis points, 1,000 basis points on some of the brands you've got better supply on versus a Rolex which is a bit more constrained?

[Hugh Brian Duffy, CEO & Director]

Okay. I'll let Anders comment on the margin situation. In terms of brands that are doing well, we're having a great period with Omega. We got Commander Bond to thank for part of that. There's been a huge reaction to the movie. Those are special James Bond watches, been very popular. In our experience, the most popular ever. I don't know if it's the case globally, even nationally. But in our case, it was a more expensive than typical bond watch, was the best part at GBP 8,000, it continues to sell very, very well. So -- and then Omega in addition, of course, they play a major part in the official timekeeper and sponsors at the Olympics over the summer. We get the Winter Olympics coming next. It's a very kind of high-profile investment period for Omega and the brand is really enjoying the benefit of that. Cartier, also doing super well with us, both in-store and online. And I think all of the new product activity that they've launched over the last couple of years has generally always been successful. Notably Santos and the Tank range doing well. And we are chasing supply on these, but generally getting good support from these brand partners. Breitling, also doing well. Same again, great marketing, good new product introductions. TAG Heuer doing well. And Tudor doing particularly well and been very clever about frequency and excitement around new product launches, one of which just launched yesterday, a new Pelagos, which immediately will see with these suppliers within that. And actually, Tudor is another brand where we could be selling more if we had better supply. And of course, we'll continue to chase that. I also mentioned jewelry. Our jewelry business is up 50%. So it's a good market for jewelry. Our buying team, doing a fantastic job and selecting the right products. Our approach to the market, which is a branded approach. We steer clear of promotional activity and you'll protect the margin, but more than anything to protect, I think the status and the quality of the product that we're selling, and that's working very well, again, in store and online. So very broad-based success story from a product standpoint. And generally, we're getting good supply and buying early and buying bold, I think, is clearly puts us in a very, very strong position for what we've delivered this half and what we see coming in the holiday season. So within the watch category, the margin structure is very formulistic. The higher productivity, the lower your intake margin is essentially. So it ranges from the mid-30s to the mid- -- to sort of mid 40-ish. So that's sort of the range in the watch category. Jewelry comes in at north of 45%. So obviously, it's a bit better margin in jewelry traditionally. So that's sort of the margin structure within our business.

[Operator]

[Operator Instructions] We'll now move to our next question over the phone, which comes from Kathryn Parker from Jefferies.

[Kathryn Parker, Equity Analyst]

So my first question is on market share. And I wondered if you could give us an update on overall market share in the U.S. and the U.K. and maybe the share of Rolex agencies in the U.S. once your new stores have been integrated. And then my second question is just on the net margin. So obviously, you've had a nice uplift in H1, and I wondered if you could give any comments on what to expect for H2 and whether there would be a similar uplift and if that's contained within your guidance.

[Hugh Brian Duffy, CEO & Director]

Yes. It's not going to be particularly helpful, Kathryn, on your first question on market share. We don't -- we're not kind of quoting market share. And our reluctance is just reliability of data. The folks that we are tracking the market in the U.S. no longer do. So they don't even have market data to look at. We do, for our annual report and so on, we do try and calculate and just for information, but we don't do it on a regular ongoing basis. So can't really help on market share. And Anders, do you want to...

[Lars Anders Ragnar Romberg, CFO & Director]

So in terms of our margin guidance, yes, it includes sort of the balance of the year, obviously. And what we've seen in the first half, we do expect similar trends to prevail through the second half. And obviously, as you know, we were closed for about 5 months in the U.K. last year, which then automatically leads to higher penetration of hard-to-get products because we were clienteling and selling sort of on waiting lists and so forth. So we think the product mix in the second half is going to be similar to what we experienced in the first half. In addition to that, obviously, if you look at the government support schemes that we enjoyed last year, the skewness towards the first half is where we have the biggest benefit gone through because we took the furlough and we had the PPP, it's all in the disclosures. And then we reversed it out in the second half, right? So obviously, we had a charge in the second half. So net result of all of that is obviously that you would expect the leverage to come through on the store cost and overhead is a bit stronger in the second half.

[Hugh Brian Duffy, CEO & Director]

I think if you walk through the math, the year-on-year profit growth will be relatively similar first half to second half. I think if you work through the math. I think in the first half, we've quoted the adjusted EBITDA estimated number between 81 and 83. So a midpoint of 82 I think year-on-year would be like plus 57. And we'll be ahead of that for the year, if you work through the improved profitability and the sales guidance that we've given.

[Operator]

We'll now move on to our next question over the phone, which comes from Frank Manduca from UBS.

[Francis John Manduca]

Two quick questions. One is, could you give us an idea of what the proportion of Rolex sales are within your U.K. business? And what sort of you'd expect that to settle down at in terms of percentage of overall sales going forward? And secondly, I just wanted to see what your thoughts are on some of the online retailers. I think people like CHRONEXT made quite a lot of noise recently when they were looking to float about the discounts that they can get on things like TAG and Breitling. And I wondered whether that has had any impact that you've seen in the U.K. or whether that is just a European thing and indeed whether that could affect your business in the U.S.

[Lars Anders Ragnar Romberg, CFO & Director]

So typically, we don't disclose brand-specific sales by market or anything. But as I've quoted, for the group as such, as I said, the supply-constrained brand, which contains Rolex, Audemar and Patek represents about 60% of the group's revenue in FY '20. And going into last year, obviously, since we were working the waiting list and so forth, that penetration grew to around 69%. And this year, it's back down to 59% of our business. So that's sort of how we previously disclosed our sales mix, and we'll stick with that rather than giving specifics by market. Generally speaking, you could say that, historically, Rolex had a bigger portion of the U.S. business because they could actually impose investments into retailers, which other brands didn't have the leverage to do. We can see that, that is getting more balanced as we invest into our store network in the U.S. So the penetration of Rolex in the U.S. is actually somewhat descending.

[Hugh Brian Duffy, CEO & Director]

On your second point, Frank, honestly, I haven't -- I didn't see anything specific on CHRONEXT indicated that they were acquiring product at discount, which would really very much surprised me. Obviously, the IPO will get filed reasonably early on and didn't happen. And certainly, from our standpoint, Breitling and TAG along with the rest of our ranges, our discount is less than 1% and it's almost nothing overall. And these brands are doing very well for us at full price U.K. and the U.S. So I can't quite reconcile any comment about acquiring products through discounted places.

[Operator]

We'll now move on to our next question over the phone, which comes from Rogerio Fujimori from Stifel.

[Rogerio Fujimori, Director & Analyst]

I was just wondering if you could talk about the contribution to growth that you see from new versus existing customers for your non-supply constrained brands. I believe that consumers historically have been more repeat customers. But I was wondering if you see luxury watches attracting more new customers in the U.S. and U.K. and what you see in terms of purchase frequency profile based on your CRM data with the shift to online and as you come out of the pandemic.

[Hugh Brian Duffy, CEO & Director]

It's a great question. We actually don't have those stats exactly, but that's something that we should get. Our feeling is there's a lot more new clientele in the market. And I think your comment on the U.S., I mean, clearly, very, very good growth we're experiencing in the U.S. We obviously have 2 big beautiful stores that are very, I think, incremental to the whole profile of the watch retailing in Manhattan. We're definitely attracting new consumers. The money we're spending on marketing online so the number of impressions that we're reaching runs into billions. The number of PR impressions we're making in the U.S. runs into several billions. So I think we are certainly very, very visible to a very broad audience. And so our feeling is that we are attracting new and younger consumers. The big change, obviously, that I referred to earlier that's been made is our consumers today are all domestic, whereas historically we had a bigger proportion of international. Our feeling as well -- I'm giving a feeling rather than statistics. So feeling is that we have a higher proportion of the female consumers. We have a higher proportion of people buying self-purchasing rather than gifting. So I think a lot of very positive trends for the industry overall that we're delighted to be sharing in and I think gaining share on.

[Operator]

We'll now move on to our next question over the phone which comes from Karina Shooter from Goldman Sachs.

[Karina Shooter, Business Analyst]

Just a little bit of a broader one for me. Obviously, you've benefited quite strongly from very robust domestic demand in the U.K. and the U.S. and presumably have received a better supply allocation because of that as tourism has been more constrained. As we see the world opening up, do you have any color on how the brands are thinking about their geographical allocations and how that would potentially impact your business?

[Hugh Brian Duffy, CEO & Director]

Great question, Karina. But really I think everybody knows that information is a lot less available in this category than people would logically think it should be. And you would be reading the global trends as well as we are, a bit of a slowdown people are seeing in China, which was the fastest-growing market. I think probably still is for luxury watches. Hong Kong still subdued. U.S. really pulling ahead as a leading market, along with Dubai maybe, which I think has continued to be strong overall. I was actually at an industry event last week. I was a juror on the GPHG, which is a Grand Prix d’Horlogerie in Geneva. And the feeling overall was very upbeat from the industry. And I think people were generally enjoying a very good trend, surprisingly good towards the inflation from all of the Swiss brands and curated ones. But I think those are the big trends, that China has been quite very positive, but maybe slowing down a little. And maybe I'll just start the anniversary as well, there will be a natural sort of slowdown on it. Hong Kong still subdued. And I'm repeating myself now Dubai and U.S. very strong. U.K. has been very strong, I think, within Europe and better than the main European markets. European markets have more of a tourist dependency. I would include in that Switzerland. And so clearly those markets haven't seen the degree of recovery and don't have quite the same opportunity to focus on domestically that we do, I think, in the U.K. and U.S. But I think that's all fairly public information that's out there and typical of what's happening in the whole luxury category.

[Operator]

It appears there are no further questions queued at this time. So Mr. Duffy, I would like to turn the conference back over to yourselves, sir, for any additional or closing remarks.

[Hugh Brian Duffy, CEO & Director]

Okay. Well, thanks, everybody, for your questions. Big thanks to our team as well for continuing to exceed everybody's expectations, including mine. The enthusiasm and dedication of our team, I think, is fantastic and a huge part of our strength. So I'm sure as comes over from the RNS and the comments that we made today, we're confident in our model, we're very confident in this category. We're looking forward to a positive holiday season, which we think is underway at the moment. And we're generally very pleased with our results, and I appreciate all of your interest and support. So thank you for joining us.

[Operator]

Thank you very much to the speakers. Ladies and gentlemen, this does conclude today's call. Thank you very much for your participation. You may now disconnect.