Inflation continues to run rampant and hit consumers’ wallets hard. As such, I’ve been looking for stocks that have the potential to outperform the inflation rate, and Watches of Switzerland (LSE: WOSG) has caught my eye.
Luxury stocks clock in
There are several reasons to invest in luxury stocks during times of high inflation. The first is that customers purchasing luxury goods are usually least affected by inflation, given their financial position. The second is that retailers are able to pass on higher costs without impacting demand.
I imagine this to be the case for Watches of Switzerland. The company sells luxury watches and jewellery, while also providing servicing, repairs, and insurance services. It operates over 100 showrooms in the UK and 40 showrooms in the US. The FTSE 250 firm also operates through several transactional websites that include Goldsmiths, Mappin & Webb, Watches of Switzerland, Mayors Jewelers, and Betteridge brands.
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Dazzling numbers
Keeping that in mind, the luxury retailer posted a rather robust set of numbers for its first quarter. Despite sales growth showing a slowdown, growth was still rather impressive for what I’d classify as a value stock. Shore Capital analyst Eleonora Dani echoed this sentiment as she described it as a “solid trading update“.
| Metrics | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total Revenue | £391m | £297m | 31% |
| UK Revenue | £239m | £222m | 8% |
| US Revenue | £152m | £76m | 100% |
| Watches | £342m | £259m | 32% |
| Jewellery | £27m | £20m | 36% |
As a prospective investor, it’s nice to see broad-based growth across the company’s line of products. This was helped by continued improvement in its range of watches, but more notably, its jewellery. CEO Brian Diffy expects the strong momentum from Q1 to carry into Q2, and the rest of the year. Management even guided for the FTSE 250 company to finish the year strongly as it reiterated its outlook for its financial year.
| Metrics | FY23 Outlook | Change |
|---|---|---|
| Revenue | £1.45bn to £1.50bn | 17% to 21% |
| Adjusted EBITDA | Flat to +0.5%. | 0% to 0.5% |
| Capital Expenditure | £70m to £80m | 71% to 95% |
| Net Cash | £35m to £45m | -67% to -76% |
Additionally, Diffy stated that the company’s products continue to show strength in demand, with client interest continuing to expand. Consequently, the trader will be focusing on attracting even more new clients and growing its market share in the UK and US. As travel across the Atlantic returns to pre-pandemic levels, this should serve as a tailwind, as all of its airport showrooms have now reopened.
Watch list
Although I’m no watch expert, the overall consensus seems to show that demand continues to strongly outstrip supply for luxury watches. And based on the latest results, the Watches of Switzerland management team has been showing its prowess by executing excellent strategic decisions while adapting to the tougher macroeconomic conditions.
With a rather steady balance sheet, boasting a debt-to-equity ratio of 33%, I think Watches of Switzerland is well equipped to continue its growth while remaining robust in the event of a recession. Therefore, I’m relatively confident that the firm’s share price can continue to perform. After all, it’s up 15% from its year-to-date low. Nonetheless, I’m slightly wary of the latest UK retail sales data, which showed non-food store sales declining 0.3% on a month-on-month basis, albeit still above 2019 levels.
Even so, this may not be truly indicative of the FTSE 250 company’s fortunes, given that it operates in a very niche market. So, with an average price target of £13.37, I’ll definitely be adding Watches of Switzerland to my watchlist for now and will be looking to purchase shares in the near future.
