What made the Watches of Switzerland Group to pay back furlough support obtained from the UK government?

Summary

• Watches of Switzerland Group Plc had reported a 3.4% contraction in revenue during H1 FY21.
• The UK e-commerce sales went up by 102.4% for the seven-weeks period ended on 13 December 2020.
• The Company had also expressed its intentions to pay back furlough support obtained from the UK Government subject to certain conditions.
• The Cash conversion ratio stood at 222.6% as of 25 October 2020.

Watches of Switzerland Group Plc (LON:WOSG) is the LSE listed consumer stock. Based on its 1-year performance, shares of WOSG have generated a return of 53.44%. Shares of WOSG were down by close to 2.71% from the last closing price (as on 21 December 2020, before the market close at 08:30 AM GMT)

Watches of Switzerland Group Plc is the FTSE 250 listed company, which is the UK based retailer of watches. The Company is operating across both the UK and the US.

Business Model

The Company is operating under four reputed brands –

• Watches of Switzerland (UK and US)
• Mappin & Webb (UK)
• Goldsmiths (UK)
• Mayors (US)

(Source: Company presentation)

The Company has 138 core stores present across UK & US and 27 mono-brand stores in two markets (22 in UK and 5 in US), in collaboration with brands like Rolex, TAG Heuer, OMEGA, Breitling, Audemars Piguet, Tudor and FOPE. The Company is known as UK’s largest retailer for Rolex, Cartier, OMEGA, TAG Heuer and Breitling watches.

Trading Update (for the seven-weeks period ended on 13 December 2020 as on 17 December 2020)

• The Company had reported modest growth of 11.9% at constant currency in revenue for the seven-weeks period ended on 13 December 2020.
• The UK stores traded just 44% of potential trading hours as stores remained closed during the four-weeks national lockdown in England, while it remains closed for a shorter period in Wales and Scotland.
• The UK sales went up by 7.7%, while UK e-commerce sales surged by 102.4% during the seven-week period. The New Watches of Switzerland was opened in Broadgate during the period. All stores in England were reopened on 02 December 2020.
• The US sales grew by 22.7% at constant currency during the period. The Company had opened five new mono-brand boutiques during the seven-week period ended on 13 December 2020.

Financial Highlights (for 26 weeks ended on 25 October 2020 as on 17 December 2020)

(Source: Company result)

• The revenue of the Company was declined by 3.4% at constant currency to £414.3 million for H1 FY21 ended on 25 October 2020, with strong trading, particularly during Q2 FY21 witnessing around 21.5% jump at constant currency terms despite significant headwinds.
• The Company had reported Ecommerce sales growth to be around 65.4% during H1 FY21.
• The Company had highlighted the significant impact of Covid-19 pandemic as its stores were traded at 59% of its full potential due to the stringent restrictions and the lockdowns.
• On the profitability front, the adjusted EBITDA and adjusted EBIT had demonstrated growth of 26.5% and 33.1%, respectively during H1 FY21. The adjusted profit before tax was increased by 44.5% to £38.3 million.
• The adjusted earning per share had increased by 35.5% to 12.6 pence per share during H1 FY21 ended on 25 October 2020.
• With regards to its financial position, the net debt of the Company was reduced to £22.7 million during H1 FY21 ended on 25 October 2020, while it was £92.0 million as of 27 October 2019.
• The free cash flow of the Company had increased to £116.1 million as of 25 October 2020, while it was £44.1 million as of 27 October 2019.
• Return on Capital Employed (ROCE) went up by 150 basis points and stood at 17.2% as of 25 October 2020.
• The Company had incurred expansionary capital expenditure of £9.1 million towards the opening of six new stores and expansion of two stores.
• The Cash conversion ratio stood at 222.6% as of 25 October 2020.

Operational Highlights (for 26 weeks ended on 25 October 2020 as on 17 December 2020)

• The Company had achieved resilient financial performance in the UK despite several headwinds faced by the Company like global travel restrictions, closure of stores and lower footfalls in stores.
• The Company had adopted itself towards changing consumer behaviour by making significant investments in building its retail landscape throughout the pandemic.
• The Company had conducted several market campaign to penetrate digital transformation.
• The Company had made significant investments in stores as it has started five mono-brand boutiques in the UK including one Rolex boutique, one Tudor boutique and three TAG Heuer boutiques.
• The Company had completed the acquisition of Analog Shift, which is the US-based retailer of vintage and pre-owned watches.

Recent News

On 17 December 2020, the Company had announced regarding the decision of Fabrice Nottin and Michele Rabà to leave the Company from their roles as Non-Executive Director and Board Observer of the Group, respectively, effective from the same day. 

Share Price Performance Analysis of Watches of Switzerland Group Plc

(Source: Refinitiv, chart created by Kalkine group)

Shares of Watches of Switzerland Group Plc were trading at GBX 538.00 (as on 21 December 2020, before the market close at 08:30 AM GMT). WOSG’s 52-week High and Low were GBX 573.00 and GBX 170.80, respectively. Watches of Switzerland Group Plc had a market capitalization of around £1.32 billion.

Business Outlook

The Company had shown resilient financial performance during the first half of FY21, and the trading seems to be positive during Q3 FY21 so far. The Company had revised its financial guidance. The Company is anticipating its revenue to be ranging from £900.0 million to £925 million and its adjusted EBITDA margin to be ranging from 1.5% to 2.0%. The net debt is expected to be ranging from £60.0 million to £90.0 million, while Capex to be ranging from £28.0 million to £30.0 million.

The Company had also expressed its intentions to pay back furlough support obtained from the UK Government during this financial year considering no further significant material disruption cause any adverse impact on its financial performance for the remaining part of the FY21. The new store design for Goldsmiths luxury locations will be kickstarted from Summer 2021 in the UK.