Watches of Switzerland Group PLC

LSE:WOSG

Earnings Call Transcript 2021-Q4

[Operator]

Ladies and gentlemen, welcome to the Watches of Switzerland Group's Q4 FY '21 Trading Update. My name is Simona, and I will be coordinating your call today. [Operator Instructions]I will now hand you over to your host, Brian Duffy, CEO of Watches of Switzerland, to begin. Brian, please go ahead.

[Hugh Brian Duffy, CEO & Director]

Thank you, Simona, and good morning, everybody. Thanks for joining us. I was going to overview the report that we put out today and to give a bit more flavor, from my standpoint, on the performance that we've been reporting. Q4 is difficult to get into perspective in comparison to last year because of, obviously, the full lockdown that we were in last year and partial lockdown within this year. But as far as we're concerned, it was a very strong quarter. Throughout the quarter, we had a very strong online business here in the U.K. We had a good click-and-collect business prior to the openings on the 12th of April and then a very strong response from our markets beyond our expectation actually when the stores reopened and, fundamentally, a very, very strong continued business in the U.S. where all of our stores were open trading and doing a great job. So we think it was a great quarter overall. And interesting, if you look at it against fiscal year '19, as you'll see in the report, up 24.7%, and luxury watch is up 30% if we compare to fiscal year '19. We have been focused on looking at the year overall, and the year is characterized by what we see as exceptional growth in the U.S. market, dollar to dollar, plus 38.5%, despite the business there facing some headwinds. We had lockdown at the beginning of our year, stores started to reopen in May and went fully reopened through to August and clearly dealing with subdued traffic, particularly in places like Vegas where we have a big presence, hugely reduced traffic there, also New York where fewer people were coming to work or socialize or shop.We overcame, I think, a lot of these challenges with great marketing, great use of our technology, great client reach-out with our CRM and clienteling methods. We had great reference from customers who are having good experience for our customers to come to us. So I think we're very proactive and very confident we outperformed the market overall in the U.S. The market, at the end of the day, was strong. I think we'd acknowledge that throughout the year and, I think, picking up pace as the year went on. Our teams in the U.S., again, they really are the best, and they did a fantastic job throughout the year. U.K., we're up 3.6%. I'd regard that equally as exceptional as the U.S. when you take into account the headwinds in the U.K. We were closed for 26 weeks of the year. I mean half of the year, our shops were unavailable to our consumers. International and airport business was a small fraction of what it typically had been historically. But we responded to that by being hugely active on digital. Online business more than doubled and, as you've seen in the last quarter, more than trebled. Click-and-collect that we were able to do in lockdowns 2 and 3 were very, very helpful to keeping our core business going. And then when our stores were opened between lockdowns, including the most recent reopening, business has been very, very strong. So compared to fiscal year '19 again, we're looking at plus 18% overall. The team, again, U.K., full of enthusiasm, professional, really well trained, couldn't wait to get back in store again and doing a tremendous job.Some other headlines to take away. Our domestic business -- our domestic sales, effectively 95% of our total. We really are a domestic business. If you look back at the last fiscal year, luxury watch is now 87% of our total and the top 8 brands that we refer to now representing 81%.In addition to sales performance, I think we've outperformed on profits. We clearly haven't finished our audit overall, but we're confident enough to give the indication that we have there of adjusted EBITDA of GBP 104 million to GBP 107 million that represents 33% to 37% improvement on AOY, which we're clearly very pleased to report. And based on that and the good performance, we're repaying the furlough money for the year. We've repaid the government financing that we took out as a precaution at the start of the year. And we're also really delighted to be announcing the creation of Watches of Switzerland Group Foundation to whom we'll be contributing GBP 3 million, GBP 1.5 million booked this year, GBP 1.5 million committed for next year, which we're very pleased and very appreciative of the Board's support to do that. Then one other number we're very pleased to see, too, is our level of debt that's down at GBP 43.9 million; this time last year, GBP 130 million. So we feel good about the year. We're really glad it's behind us. And it clearly was a very challenging year for the world. We know it's not over, but I think perspective is, obviously, a lot more positive, and we share that going into fiscal year '22.Based on that, we've done our plans. We've done our projections. We feel confident on the perspective we're looking at. We're clearly staying with our proven strategies that are working for us well. We have a really good pipeline of projects, 1 or 2 that were delayed, particularly in the U.S., that are carrying into fiscal year '22. But I guess an assumption we are making is that we're not going to be affected by any further lockdowns in the next year in the U.K., the U.S. or Switzerland. We have visibility, as we typically do at this point, in the supply situation from key brands. We're not including in our guidance any unconfirmed projects. Overall, again, we've been consistent in doing that historically. And it all leads us to say that next year, we think we can increase our sales between 16% and 21%. Overall, that's GBP 1.05 million to -- GBP 1.05 billion, rather, to GBP 1.1 billion. And adjusted EBITDA, we think we could leverage potentially a bit, so flat to a 0.5% improvement means point -- that means plus 16% to plus 26% on profitability -- on profits. So that's where we are. And with that, we'll happily take your questions.

[Operator]

[Operator Instructions] Our first question is from Anne-Laure Bismuth of HSBC.

[Anne-Laure Bismuth]

I have 3, actually. My first question is, is it possible to have an idea of the luxury watches sales growth this year between -- the split between price and volume? The second question is about the U.S. market. So any key learnings in the U.S. market so far in terms of brand preferences in the luxury watches? Is it the same in the U.S. as in the U.K. market? And finally, on the online performance, so online was obviously very strong and especially in the U.K. But have you observed a change in stores that have reopened in the U.K.? And talking about the performance in online in the U.S., how is it performing?

[Lars Anders Ragnar Romberg, CFO & Director]

So I'll give the answer. It's Anders. I'll give the answer on the volume mix question. So in terms of luxury watches, year-on-year, volumes for the group were essentially flat. So it's driven by average selling price improvement. And within that, the vast majority of that is mixed towards, obviously, Rolex, Patek and Audemars, the higher price point brands.

[Hugh Brian Duffy, CEO & Director]

Okay. And with regards to the U.S., I mean, obviously, as you know, our whole contention about the U.S. market is that it was significantly underdeveloped due to a lack of investment in retail. I think we've proven that to be true. And the really strong performance has now been, overall, in the market the last couple of years, was investing, with other retailers responding as well. And I think there's good support coming from the brands in terms of supply, recognizing the potential that there is in the U.S. So our view is that the U.S. will outperform the global market, and the potential is clearly there to do it, and it's obviously happening right now. Online in the U.K., I mean, clearly, we have got great momentum. We already were a market leader. We think we've improved that situation further. We invested further behind driving our online business with the digital marketing and some traditional marketing, advertising, what was available online during lockdown. So we really got behind the business, and it's performed very well. I mean in the last quarter, Q4, we were 3x last year. And to your question, post the reopening, we've actually continued to show year-on-year growth, which we weren't expecting. It's obviously reasonably recent. But our expectation was, in store opening, that we would peg down a bit on the level of online that we were doing. But so far, it's not the case. So certainly, there's been a permanent improvement in the online business overall for us and an acceleration of a trend that was already there. The U.S., we only just really got going online last September, October. It's gone well. We have a great lineup of brands. We're putting marketing behind it. We have a credit provider, good technology. So we're making really good week-on-week progress, and we are looking to increase our marketing behind that business because we see it as having big potential.

[Operator]

Our next question is from Guido Lucarelli of BNP Paribas.

[Guido Lucarelli, Analyst of Luxury Goods]

The first one is on the U.K. sales. I was wondering if you could give us any color on the performance of the U.K. market compared to 2019, in the second part of the quarter when the stores were open. The second one, on the U.S., on the American Dream store. I see in the release that it's planned for FY '22. I was wondering if you had the more visibility on which quarter should we expect the store to open. And the last one, on capital allocation. Because with net debt decreasing, you seem to be generating more than enough cash for your capital expenditure requirements. So I was wondering what's the plan there, if we can expect the use for more acquisitions for the expansion in the U.S. or maybe some policy to give cash back to the shareholder.

[Hugh Brian Duffy, CEO & Director]

Yes. Thanks, Guido. We're not sort of tracking by week against '19, so specifically how we compare to '19 for the second half of April, I don't have to hand as a statistic. But overall, for the quarter, we are performing very well against '19 and undoubtedly accelerated when the stores reopened in the U.K. But if you don't mind, we'll get back to you with that specific later. The American Dream, we love the project. The American Dream, we think it's going to be a big success. It's largely open in terms of fun park and some retail. There's quite a lot of investment and preparation that's already been done on the luxury side of things. And our current plan is that we would be open at the earliest for the holiday season this year. So there's been a lot of -- there's been no changes in the timing of all this. But that's our latest plan that we would hopefully be open for a holiday season in the U.S., so open by kind of October, November. If it's not, then it would be just after the year-end, but it's part of our fiscal year, and that's a project that we feel very good about.Capital allocation?

[Lars Anders Ragnar Romberg, CFO & Director]

In terms of capital allocation, obviously we closed off, as you've seen, with low debts, so a great headroom. And obviously, we are growth interested. And we are and we are in pursuit for acquisition targets as we haven't made any secret of that. So we think that at this point in time, the best way to use the capital is to grow the business at the moment. So we are obviously spending capital, as you've seen, we guided up. We didn't achieve our capital objective for this year because there was a slippage of some of the projects, as Brian pointed out. So capital next year is a bit up on this year, obviously, as a result. But for now, we're going to keep the cash, and we're going to see how we can use this for accelerated growth.

[Operator]

Our next question is from Louise Singlehurst of Goldman Sachs.

[Louise Susan Singlehurst, Managing Director]

Just a couple of questions from me, if I may. Just going back to the cash position, the cash conversion and the better-than-expected net debt, obviously, lower CapEx this year. Can you talk about the working capital and the inventory dynamics, Anders, and where we are in terms of -- I presume everything has gotten fairly lively with the focus on Rolex but across the rest of the brand portfolio as well and by price points in terms of inventory. And so the real question is how that outlook looks into full year '22. And then just a follow-up on the U.S., if I may, on the space rollout. Is there any indication you're able to give us in terms of the space component of growth for full year '22 with the projects that you have talked about?

[Lars Anders Ragnar Romberg, CFO & Director]

Sure. So on the working capital then, so we've always said that the best way to look at this business is to take 11% of sales and use that as your working capital assumption. Actually, that holds true pretty well as we sit here. Inventory closed down a little bit on last year because, obviously, we had bought for, last year, the Easter and so forth, and then the lockdown came. So inventory was actually, as we pointed out, last year quite high at year-end. Inventory in this category, we don't have a problem with it. We look at it as an asset rather than a liability, which is quite unusual for retail. But it tends to appreciate in value. The composition of our stock is really good. I wish I had a bit more of some of the brands, actually, like Rolex and Patek and Audemars specifically. But obviously, that is somewhat supply constrained. But inventory is in really good shape, actually. So I don't think that we need to worry about that area.

[Hugh Brian Duffy, CEO & Director]

I'd just add to that, that we bought confidently as well in anticipation of maintaining a good level of business during lockdown and then clearly having a significant step-up when our stores opened, which I think has proven to have been a wise move overall. The U.S., we listed the projects that we are looking at. So we have the American Dream, we have Aventura, which has been delayed. We have other projects of investment in the Mayors network, investment in the big Rolex store. And when -- none of them are actual space increases, but they are significant elevations from which, as we know, always had a very positive impact on sales overall. So we have -- actually, we don't have a number to say in space. We will be adding some mono-brands as we did successfully last year, 8 mono-brands. We'll have a similar program this year. So that's additional. But as we know, physically, they're a lot smaller than our big flagship stores. So our existing network, investing in it as progressively as we can, plus the other projects that we talked about like the American Dream that's on the RNS.

[Operator]

Our next question is from Kate Calvert from Investec.

[Kate Calvert, Retail Analyst]

I'll join everyone else with a couple. Just on the net debt position, can you confirm whether you've actually repaid the furlough at that point? Or is that to come out? And were there any outstanding rents? In terms of the Mayors conversion plan, could you sort of confirm roughly how many Mayors stores you're planning to convert in FY '22? And my third question is just on price increases. I don't think Rolex has put one through in the last year. I may be wrong on that. But could you confirm when they last put one through? Or have they put one through in the States and not in the U.K.?

[Lars Anders Ragnar Romberg, CFO & Director]

Thanks, Kate. So we -- no, the furlough money has not yet been repaid. So we've gone through the detail, and we'll pay it in the first quarter of this year, for sure. So that obviously is a benefit. In addition to that, as I mentioned, we didn't spend all the capital that we had originally planned. So we came in more like GBP 24 million of CapEx for the year. So there is a push into the first quarter of some of the capital that has been delayed as a result of supply disruptions due to the pandemic. So that's where we are on that. In terms of pricing, we haven't had any notification of pricing so far this year. So obviously, that is not within our control. We haven't included any assumptions of pricing in our guidance. So we'll see where that all ends up. But for now, we haven't heard anything in that respect. There -- you could think there should be pressure on it given the price of gold and sort of where the dollar is going and the strengthening of the Swiss franc. But so far, we haven't seen anything.

[Hugh Brian Duffy, CEO & Director]

On the refurb program, so we are already in construction for the big Rolex store in Wynn in Vegas. Aventura, we mentioned, should have been finished by now, but due to problems of -- to do with the pandemic, things are being delayed. So that hasn't reopened, but hopefully will do in the summertime. We -- the balance of the Mayors network we have scheduled to do over fiscal '22 and '23, it will all be done during that time. And we've got an agreed schedule with Rolex in particular. We've had, inevitably, some movement in dates for these projects. We are literally doing them as quickly as we can. We have the capital. We know the results we get from them. So we're doing them all as fast as we practically can. And as Anders said earlier, that results in us having an increase in CapEx for next year, sort of carry into the year, plus hopefully doing everything that we've got scheduled.

[Operator]

[Operator Instructions] Our next question comes from Frank Manduca of UBS Asset Management.

[Francis John Manduca]

Just a quick couple of questions about the U.S., really. Just looking at this sort of split in sales, I'm just wondering whether you're looking at a very similar profile to the U.K., so there's quite a big dominance there towards the luxury watch brands. And if -- would Rolex be stronger or weaker out in the U.S. compared to the U.K.? And just following on from that, in terms of how you approach the sort of store opening program, would you approach something like Vegas different from a New York store? Clearly, you've got a bigger resident population in New York and a more transient population in Vegas. And I'm just wondering how that fits in with ordering luxury watch brands, which can take 6 months, a year to turn up. Just -- so I'd like to hear what your approach is there and how you're thinking about this going forward, really.

[Hugh Brian Duffy, CEO & Director]

Okay. Thanks. So Rolex has historically and remains a bigger proportion of the business in the U.S. than it is in the U.K. Having said that, what's really encouraging about the performance this year in the U.S. is that it's very broad-based across all of the major watch brands. We also had a positive experience, actually, in jewelry we relaunched. The team over there did a great campaign to relaunch Mayors jewelry in the -- at the start of the calendar year and have had very positive results from that. So that's encouraging. So across the board, obviously, Rolex, Patek and Audemars are supply constrained. But other brands who are less supply constrained, we've had very positive growth. And our view is that the market overall is significantly underdeveloped and I think applies to all the major plans that we represent overall. With regards to is Vegas different from New York or Florida. Yes, it is. And we merchandise -- a major store like that, we merchandise very specifically towards the clientele that we know we have. I mean, physically, it's inside a resort as opposed to SoHo, being on a street side. But it's a very significant flagship store for us and Rolex that we're opening. So it's a full -- it's a beautiful design that we're doing. It's a 3,000-foot store, slightly bigger, and will reopen in October. And between -- it's adjacent to our multi-brand store that contains Patek and Blancpain, Jaeger, IWC, Panerai, Hublot, a really wonderful selection of products. We also have clients who really look for differentiated high-end products. So brands like Jacob & Co. or Bovet, we've sold well in Vegas where we have clearly some wealthy regular visitors that come through. Listen, all I'm going to say in Vegas, it's not that we're constantly dealing with a changing traffic. There's a lot of people who go to Vegas very, very regularly, in many cases, several times a year. So they feel as local as a local would do in New York. But we do merchandise all of our kind of major segments or major stores independently in anticipation of the clientele.

[Operator]

We have a question from Richard Taylor from Barclays.

[Richard Michael Taylor, Analyst]

A quick follow-up on furlough. I know you've just said you'll repay the cash in Q1. But is that expensed in the numbers for the year just gone? Or is that for the next financial year? And secondly, are there any other government support schemes that you've repaid that we need to be aware of?

[Lars Anders Ragnar Romberg, CFO & Director]

So obviously, we've accrued 100% of the furlough back into the P&L. So we haven't taken any benefit of that into the numbers of this year. So it's just a cash transaction. So that's the first one. The second one, we haven't been charged the tax for real estate here in the U.K. throughout the year. And obviously, we haven't volunteered to pay it. So we've taken that benefit through because, obviously, we weren't charged states. So that is part of the benefit that we've had this year in the U.K. And that, obviously, we expect to normalize in next year -- well, this year, I should say. And obviously, therefore, we have guided towards a flat to a marginal improved EBITDA ratio next year because we don't expect that to continue.

[Richard Michael Taylor, Analyst]

And the total furlough that was disclosed at the interims, that GBP 3.3 million, is that the final number?

[Lars Anders Ragnar Romberg, CFO & Director]

The total furlough that we were eligible for was GBP 6.8 million.

[Richard Michael Taylor, Analyst]

So that's the amount that you've expensed to the account?

[Lars Anders Ragnar Romberg, CFO & Director]

Yes. Well, it's not gone through as a benefit, let's call it that. It's not -- I mean it's just -- it's cash that we have received, but we haven't put it in the P&L, again, because we're paying it, GBP 6.8 million.

[Richard Michael Taylor, Analyst]

Yes, yes. So you've not taken any of that benefit. So versus your previous guidance when you talked about margins being up by 1.5% to 2%, whatever it was, that would have assumed some benefit from furlough, is that correct? And now you're saying you are no longer taking that benefit.

[Lars Anders Ragnar Romberg, CFO & Director]

No. What we're saying is that we -- what we said in the guidance was that we were going to repay the GBP 3.3 million that we received in the first half that was disclosed in the half year. And then we said, subject to no major disruption, we will evaluate what we'll do with furlough for the balance of the year. And given our underlying performance, we've decided that we shouldn't take it.

[Hugh Brian Duffy, CEO & Director]

So since the half year, there has been no furlough benefit in our P&L.

[Lars Anders Ragnar Romberg, CFO & Director]

No.

[Hugh Brian Duffy, CEO & Director]

Including any guidance that we gave then.

[Lars Anders Ragnar Romberg, CFO & Director]

Yes.

[Hugh Brian Duffy, CEO & Director]

Yes. Sorry, just, Richard, just one additional. Look, we've put in, obviously, the contribution to the foundation, which wasn't there previously. GBP 1.5 million is booked in fiscal year '21, and GBP 1.5 million is committed for fiscal year '22.

[Operator]

We have a further question from Kate Calvert of Investec.

[Kate Calvert, Retail Analyst]

I just got a couple. Just coming back to Richard's question on furlough. So in terms of the cash you've got to repay for furlough, is it the GBP 3.3 million or the GBP 6.8 million?

[Lars Anders Ragnar Romberg, CFO & Director]

The GBP 6.8 million.

[Kate Calvert, Retail Analyst]

GBP 6.8 million. Just a couple of others. CapEx guidance for FY '22, because obviously, some of the CapEx has shifted into next year, and you're going to start the Goldsmiths elevation as well. What sort of level...

[Lars Anders Ragnar Romberg, CFO & Director]

Yes. So obviously, as I mentioned, we came out at about GBP 24 million of CapEx. So we got GBP 6 million of carrying capital, which is part of our guidance for next year. So if you take that out, it's not that different from what we had guided for, for this year, a little bit of a step-up. But obviously, we're now saying GBP 40 million to GBP 45 million, of which GBP 6 million is a roll forward from this year.

[Kate Calvert, Retail Analyst]

Okay. And in terms of the Goldsmiths new format you're going to start rolling out, how many do you think you might be able to do in the current year?

[Lars Anders Ragnar Romberg, CFO & Director]

Four.

[Kate Calvert, Retail Analyst]

Four, perfect.

[Operator]

We currently have no further questions. [Operator Instructions] We currently have no further questions registered, so I will hand back to Brian.

[Hugh Brian Duffy, CEO & Director]

Thanks, Simona. And again, just thanks, everybody, for joining us. So we are glad to have the year of such change and uncertainty behind us. I really believe that we've optimized the challenging situation to deliver the results that we announced this morning. I think our model is clearly proven and proven to be successful and competitively advantaged. And we're carrying a positive momentum into fiscal year '22 on many fronts.I think we've enhanced our relationship with our brand partners. We have great support from our teams who have just been fantastic and more and more awareness with the public out there, more and more business getting developed through referral, which is wonderful to see. So we're going into this year feeling confident. We think market conditions overall are going to be positive as they currently are now, U.K. and U.S., and we're very well positioned to take advantage of it.And I appreciate you all joining us and appreciate your support, for the investment in our business. So we look forward to seeing you at July 8. We'll have a further update on our final results, and we'll also then give our view of what the next few years could look like in terms of strategic goals. So I look forward to talking to you then. Thank you.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you for joining. Have a great rest of your day. You may now disconnect your lines.