Watches of Switzerland Group PLC

LSE:WOSG

Earnings Call Transcript 2022-Q3

[Operator]

Welcome to the Watches of Switzerland Third Quarter Trading Update. My name is Juan, and I will be coordinating your call today. [Operator Instructions].I will now hand over to our CEO, Brian Duffy, to begin. Please, Brian, go ahead.

[Hugh Brian Duffy, CEO & Director]

Thank you, Juan, and good morning, everybody. Thanks for joining us. I'm joined by Bill Floydd, who's our CFO, appointed at the start of January. Bill joined us from the Rank organization. Lars Anders Romberg, our former CFO will be retiring at the end of February and Bill and Anders are working at transition over the next couple of months and also Caroline Browne, who's our Finance Director. So he got a bit of financial firepower, so Bill if we can answer your questions that in serious trouble. I'm just -- I'm assuming everybody has been through RNS and reviewed the numbers. So I'll just add a bit of color to what you've seen already. Overall, demand for luxury watches is the market strong, continues to be strong. And is characterized by demand exceeding supply. We can never fill a value demand overall, but our feeling is if anything, demand is getting further ahead of supply overall. We got up 28% growth on last year, 20% in the U.K., 25% in the U.S. Really important to point out the change in mix that's happening, we have a Super High Demand brands as we're calling them, Rolex, Patek and Audemars and clearly, what we sell in those brands is reflects what we get and that we have intake from those brands. So it has been completely in line with what was indicated for the calendar year. And obviously, the sales on those brands is just like the phasing of that intake overall. The other brands and by others, I'm saying the brands that include Cartier, OMEGA, Breitling, TAG Heuer that we see really great brands. We had a really fantastically strong performance, but then U.K., up 79% -- 78%, excuse me and the U.S., up 214%. So a tripling of the business that we did to those brands in the quarter. Overall, the growth more than doubled to 112% on last year. We also had a great quarter on luxury jewelry. In the U.K., we were up almost 36%. This work getting done by merchandising team and product development and selection. And in the U.S., we were up a staggering 172%. So again, almost 3x last year. And the U.S. numbers, good underlying numbers from Mayors following the relaunch that we did of the Mayors brands, but also a really important contribution from our new business in Betteridge. We did a fantastic business on jewelry, and clearly, particularly strong over the holiday season. We also opened our first Bvlgari mono-brand store in Miami, which has got off to a fantastic start again. So overall, our jewelry business up 88.4%. We clearly follow -- got to know our new businesses, our new products with the 5 stores that we announced that we've acquired during the year and that are pleased with how that integration and development of those businesses are going and a lot to look forward to, I think, from them in the future. Very pleased to announce our first steps into the EU market. Currently, our plan is that the EU would become an important part of our business in the years ahead. And our strategy is to enter Europe with a combination of acquisitions and mono-brands and the deals that we're able to announce at this point are our mono-brands that we've contracted to open in Stockholm, Copenhagen and Dublin. We then looking at our outlook and guidance for the balance of the year. We know we have around 12 weeks to go. We have visibility on supply for the balance of the year. We have the benefit of pricing, particularly Rolex pricing that was implemented in January. Good strong performance in Q3, and it's all led to us been able to now improve our guidance to say that we'll be at the top end of the previous guidance that we gave on both sales and profitability. Our teams have done an amazing job everywhere as an inspiration. Again, I've had the pleasure of seeing quite a few of them in the U.S. last week, doing a fantastic job and they were delighted to give them a resupply and same by getting everybody 50 shares in the company. Regardless of level, everybody got 50 shares U.K. and U.S. And we're also pleased to implement and commence a new Sharesave scheme that went out in January and a great uptake in participation on that from all of our colleagues. So really great that all of our colleagues are getting the opportunity of being actively interested in our shares. We're also delighted that we had a foundation fully registered in December. We've had 2 board meetings. The board, we have GBP 3 million of funds that have been given from the company, about GBP 1.5 million from last year, GBP 1.5 million this year. And we made a first round of donations in December and January to charter through U.K. and U.S. food banks, Crisis who worked with homeless for support and the Hospice in Glasgow and also the Prince's Trust that they've been working with for many years. So I'm delighted to be able to give them that. So I've been delighted to a lot so far. And the next point we'd be delighted to take your questions.

[Operator]

[Operator Instructions] And the first question comes from Melania Grippo from BNP Paribas.

[Melania Grippo, Analyst of Luxury Goods]

This is Melania Grippo from BNP Paribas Exane. I have 2 questions. First, I would like to ask you if you have seen any changes in the environment in both U.S. and U.K. Is there anything that you can tell us? Have you seen any changes in customer behavior or willingness to spend? And my second question is on the amount spend from the European market. Can you tell us if these stores -- these 6 stores are multi-brand or they also include mono-brand? And more or less how much we should account in terms of sales for these stores?

[Hugh Brian Duffy, CEO & Director]

So the first one is easy, Melania, that we haven't really seen any change. We have a good customer season, a bit strong. I think it has been reported to you a quarter ago. It started early in November. I think people were happy to be spending and maybe just motivated by concerns of availability. But it started early November, carried on good momentum, both U.K. and in U.S. And January is carried on with good momentum, but also we honestly haven't seen any change in sentiment or behavior influencing our business overall. The EU stores are mono-brand only. They're not multi-brand. We have obviously next year's numbers, and we're not giving out any specific numbers at this point. But we'll give you an update on our plans and our views of fiscal '23 at our year-end.

[Operator]

Our next question comes from Kate Calvert from Investec.

[Kate Calvert, Retail Analyst]

A couple from me. The first one is how did the sales mix in the third quarter compared to history in terms of mix between the Super High Demand brands and the other brands? My second question is, have you got any views on shortages creeping into other brands? There's been quite a few press articles out there? And my final question is on the 5 stores you bought at the end of last year in the U.S., how much could you actually do to the stores in the third quarter in terms of reformatting them putting different stock in? Or did you sort of basically just sell through the stock that came with it?

[Hugh Brian Duffy, CEO & Director]

Okay. We'll answer that in a slightly different order. So your last question is what we'll be able to do with the 5 stores in Minneapolis and the store in Texas? We rebadged and we reformatted both Watches of Switzerland stores now, upgraded furniture that did changed the brand mix somewhat. There's only so much you can do short term. But we were able to change the brand mix it, for example, in Minneapolis, we took jewelry out of Watches of Switzerland store now jewelry that was there before was relatively an expensive and really not making the contribution and in any event, it's only a Watches of Switzerland. So prior to this both of them. Betteridge, we -- practically, we couldn't and wouldn't do anything. It was a very strong season for our beautiful stores in Betteridge and in Connecticut and Vail and Aspen. But as we have plans to expand all 3, but this will take time to organize and negotiate and best landlords with brands and do all of our own planning and so on. So big plans for all of them, but Betteridge, at this point, we haven't changed. Anders, do you want to comment on the mix?

[Lars Anders Romberg]

Yes. Thanks, Kate. So the abnormally in our sales is predominantly related to last year where we disproportionately have good supply in of the supply-constrained brands, and we actively would pursue in click-and-collect. So the penetration of that segment of our business in last year's number was higher than what we normally see. So versus FY '20, the prior year, obviously, last year spiked up by about say 10 points or so. This year, we've gone down further than what we were in FY '20. So the growth that we see coming through is entirely driven by the nonsupply-constrained brands as well as the jewelry.

[Hugh Brian Duffy, CEO & Director]

And your second question, Kate, shortages. We've -- I mean, first of all, to deliver the level of growth that we did on those other brands. We clearly anticipated a strong period and importantly, bought in early to good stock levels that enabled us to do that a little. I think the industry in total is enjoying a good period and inevitably puts some pressure on production and componentry and so on. Nothing that unusual because we have done with more Cartier's and person as we have done with more brand watches? Yes. Could we have done with more in jewelry store from Breitling. Yes, but none of it's exceptional and our feeling is that even the shortages that we've had that the production is catching up. And we think by the end of our financial year, we'll be in a good situation. I think really importantly for us as big partners to these big brands, and we are looking to longer-term commitments, longer-term forecasting. And I think we've proven the value of that actually with what we've done over this year-to-date so far. So not -- I can say, if anything, getting better overall in terms of supply.

[Operator]

Our next question comes from Kathryn Parker from Jefferies.

[Kathryn Parker, Equity Analyst]

So my first question is on the European expansion. So you've obviously given the 3 countries for your mono-brand store rollout. And I wondered if the 3 same countries would be your prime choices for the multi-brand Watches of Switzerland store and whether there's any chance of that occurring in fiscal year '23 as well? And my second question is on jewelry. I believe that Betteridge has a higher penetration of jewelry than that store network and has been particularly strong in the quarter. So I wondered if there's any kind of takeaways from like a merchandising perspective or brand mix or price points that you could apply across the rest of the portfolio? And then my final question is on Rolex agencies. So of these stores that you acquired in the U.S. at the first half, could you confirm how many of those have the Rolex agencies already? And if any don't, if there's potential to integrate reelection to those stores?

[Hugh Brian Duffy, CEO & Director]

So expansion, Kathryn, new expansion, as I said earlier, the strategy is a combination of acquisition and mono-brand acquisitions as we've done continually. Our products always would be Rolex agencies and looking at acquisitions. So yes, possible that we would look to represent Rolex in those markets. But obviously, it's not completely up to us, but we've got to do a lot and see how we could effectively make that happen. But I would like to make it happen this year. You may find that the Scandinavia or the Nordics been a fast-move surprising. But what I'd say to that is Anders and I had a good experience of the Nordics markets with Ralph Lauren has been a great success there. They are markets that we think are underinvested from a retail standpoint. There's obviously a lot of wealth and affluence there and good market trends. So we've always felt positive about the combined Nordics market overall. And yes, we'll look to be fully representative over time in those markets. So a really good point and question on Betteridge. We actually spent all day, Friday, part of Thursday, last week and all the Friday with them going through the very subject of jewelry and seeing everything that we can learn from the great success that they have. They've been in the markets a long time keeping the Betteridge name. Has a great reputation in the markets that we're in. Very affluent markets. So I don't know if Betteridge can achieve it, but it's a very, very affluent New York suburb effectively. And they've been there for a generation. So we are learning from them. The average price point, by the way, of what we sold in jewelry was double last year in the U.S. and largely because of Betteridge. So yes, great things to learn the market overall -- the U.S. market for jewelry, by the way, is one of the best in the world. Some people characterize it as being half of the overall market when you look at the diamond. So a lot of good things to learn. I'm also delighted by the success that we've had with our first Bvlgari store as well. So the whole subject of jewelry is getting a lot more attention from us based on what we've experienced and the acquisition of Betteridge. In terms of Rolex agencies and acquisitions, 1 in Minneapolis was our Rolex agency, the one in Texas is not, but we have exclusivity for that mall, which we may have, and we had pre-agreed that Rolex would come and represent into that mall in Dallas, the Plano town. Betteridge has 2 Rolex and 2 Patek agencies across the 3 stores, and they're always looking to see where we can expand the representation of Rolex, Patek and Audemars. But also Cartier and again the other brands that we've talked about.

[Operator]

Our next question comes from Richard Taylor from Barclays.

[Richard Michael Taylor, Analyst]

On your acquisitions -- sorry, on the mono-brand, should we read anything into the markets that you've entered there in terms of where you'd like to make acquisitions or they potentially unrelated? And then secondly, on the price increases, Rolex, Patek and so on, has there been any change in the margins that you achieved on the sales following the price increases, i.e. do you get all the benefit yourselves or does the gross margin change that as the price goes up?

[Hugh Brian Duffy, CEO & Director]

So in terms of priority and acquisitions, I think we're open to any acquisition in the EU that comes at the right price. So we're not discriminating against any market. It would, of course, be a benefit to get scale in the markets where we're opening up the mono-brand. In terms of our view on margins, obviously, we had a margin compression 2 years ago in the U.K. where Rolex took some of the margins back as part of the price increase in the U.S. and the further consolidation of agencies, driving the productivity and allocation by existing price point. We took another 2 points out of our margin as part of that price increase in the U.S. from January.

[Richard Michael Taylor, Analyst]

Okay. So sort of net-net between the price increases and the margin contraction, what does that mean for you as a business looking much to grow?

[Hugh Brian Duffy, CEO & Director]

Well, we obviously held our guidance and actually put it up to the high end in terms of profitability for the year. So we don't see it having an adverse impact on this fiscal year. And obviously, our Rolex business is bigger than the U.K., so that they'll think is from the benefit on ongoing profitability per unit plus the stock that we've acquired with the previous and in the U.S. is a bit more of an offset. This links back to what we said in conjunction with the LRP that we haven't included any sort of pricing in our long-range plan as beneficial from a margin perspective because our belief was that at various stages throughout that journey and there might be changes as productivity reaches new levels from the brands, and this is just proves our theory, I guess.

[Operator]

[Operator Instructions] The next question comes from Karina Shooter from Goldman Sachs.

[Karina Shooter, Business Analyst]

I have 2. One is more of a follow-up on the previous question. We have seen Rolex price increases and also Patek Philippe also cited in the press in terms of price increases? Are you seeing some of the other less supply-constrained brands in the traditional sense following suit in terms of price increases? And just your thoughts on the pricing environment more broadly for this year would be fantastic. And then the second question is to Mr. Floydd, if I may? I know it's early days in you joining the company, but it would be great to hear what excites you most about Watches of Switzerland and the transition?

[Hugh Brian Duffy, CEO & Director]

Yes, that's good, but easy one for Bill, it's clearly working with Rolex, I think there will be follow-up price movements, by the way. We've had OMEGA price increase along with Rolex and Tudor price increase was announced. And in the underlying conditions, strong Swiss franc, increasing commodity prices, increasing gold, diamonds, whatever, so I think the conditions are such that it would make a lot of sense for all the brands to relook at the pricing. But we'll hear more, I think, in the months ahead better movement at this point from Louis Erard or from the LV Group or from Breitling but we'll see it. So all we know at that point will anticipate Tudor and OMEGA.

[Lars Anders Romberg]

Audemars are pricing up by 6% in the U.S., but it's obviously only 1 point of distribution, so not really material.

[William Floydd, CFO & Director]

Okay. So yes, I started beginning of January. It's been -- first of all, it's -- also it's been great having Anders here to help me through the first couple of months, been a very helpful start from my point of view. I've spent most of my time trying to meet as many of the people in the organization as I can get out to the stores within the U.S. and Florida last week, getting an early sense of that. And I have to say, it's a fabulous organization. Brian and the team have done a great job. And what I'm looking forward to most of all is that the scale of the opportunity that we have over the next few years in the U.K., in the U.S. and in Europe is brilliant and really looking forward to helping everybody execute on that.

[Operator]

We currently have no further questions. So I will hand over to Brian Duffy for any final remarks.

[Hugh Brian Duffy, CEO & Director]

Thanks, Juan. Very little jar, I'm delighted by the quarter. Overall my view is that uncertainty and disruption is on the way out, but we're not expecting any further disruption. As a matter of fact, normality, we think, is at some point in the horizon and getting closer. What that might mean we've been through all of our budgets now and looking to finalize them and present them to our Board in the weeks ahead, and that will form the guidance that we speak to you about at the end of this year. But market is good, momentum is good, but we're really committed to the long-range plan that we presented to you all. And just great job done by our teams everywhere. Great to have Bill onboard and the transition, I think, it's working very well with him and Anders. So all good. Thanks for your support. Thanks for joining us. And that's all we have to say. Thank you.

[Operator]

This concludes today's call. Thank you so much for joining. You may now disconnect your lines.