Good morning, and welcome to the Watches of Switzerland Q2 trading update. My name is Charlie, and I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation, you can do so by pressing star followed by one on your cellphone keypad. I'll now hand over to your host, Brian Duffy, Chief Executive Officer, to begin. Brian, please go ahead.
Thank you, Charlie. Morning, everyone. Welcome to our call. Thanks for joining us. Yeah, you'll be hearing from me, Brian Duffy, CEO of the group. I'll be giving some more background to our trading performance that we reported this morning. Our CFO, Bill Floydd, will comment on our guidance, and then we'll both be happy to take whatever questions you have.
Quarter two fiscal year 2023 was another strong quarter for our group, bringing to a close a strong first half. Q2 sales grew 30% at reported rates, 21% in constant currency. Half one sales grew 31% as reported and 23% in constant currency. There was some disruption during the quarter, but our model and our teams in particular prevailed and once again delivered good results.
We've had a busy program of new openings and reopenings of refurbished stores, with Battersea in London a real standout project. Sales were consistently good throughout Q2, and we finished the quarter on a strong trend. We experienced good sales growth across our portfolio of leading brands. The category is very dynamic in terms of new products and marketing, and we are working more and more closely with our partners to bring this excitement to our clients. In the US, sales for the quarter were +74% in reported currency, +46% in constant.
The US represented 42.5% of group sales. The US is now the number one market globally for luxury Swiss watches, and we believe that our analysis of the underdevelopment of this market due to under-investment in retail is now clearly proven and supported by the industry.
The US market is now a top priority for Swiss luxury watch brands. We are building our team and our resources in the US. We're gaining market share, and we're very confident of the long-term growth potential in this market. In the UK, sales were +9%. The UK is the number one market globally in terms of sales per capita for a domestic market for luxury watches. Group sales in the quarter were almost all to domestic clients with very low levels of tourism.
The absence of duty-free sales in the UK, which is unique to this country, will continue to depress total tourist sales for the foreseeable future. We have a leading share of the UK market. We've had that for some time, and we further enhanced our leading position during the quarter.
We're excited to have launched our entry into the EU market with the opening of four monobrand showrooms in Stockholm and Copenhagen in H1. The boutiques look great. We have fantastic teams, and we are building our presence and resources in these markets. We believe that Nordics are underdeveloped for luxury watch retail, and we have very good prospects for growth. Turning to first half profitability, we expect H1 Adjusted EBIT to come in between GBP 86 million and GBP 88 million, with the prior period margins benefiting from GBP 5 million of the UK business rates relief.
On the question of whether there are signs of a market slowdown, our situation is that we are not experiencing any measurable negative impact on demand at this time. Our client registration of interest lists continue to grow. Sales are strong, and we exited the quarter with good momentum.
As we reported at the end of Q1, we are clearly aware of the macroeconomic forecasts, and we have included some caution in our outlook for the potential of a more challenging condition in half two. We would remind everyone, however, that the supply-demand dynamics of the luxury watch markets are atypical and also that the Watches of Switzerland Group is well positioned to gain market share. In all luxury markets, as I'm sure many of you have experienced, whether travel, hospitality or retail, it has been difficult to maintain levels of luxury client service during this this period.
The success of our business has allowed our group to invest in luxury client service with the Xenia program, with which we're experiencing very, very positive response to this program from our clients and directly in our sales.
Finally, I'm very proud to report that our foundation trustees have now approved donations of GBP 2.7 million cumulative of the accumulated GBP 4.5 million contributed by the group to the foundation. These donations have gone to local charities in the UK of food banks, fuel banks, The Prince's Trust, and Crisis, and in the US, to Habitat for Humanity and food banks. We were also the headline sponsor for The Prince's Trust Palace to Palace bike ride. 100 of our colleagues and friends participated, and through that participation we raised a further GBP 100,000.
In summary, we remain very much on track. Our markets are good, our model's working. We're confident about the guidance that we're issuing today, confident about, and focused on our long range plan objectives.
We're also very conscious of our responsibility to our colleagues in the broader community. My thanks to our teams who have done a fantastic job as ever and continue to inspire and deliver in equal measure. I'll now pass over to Bill.
Thank you, Brian, and good morning, everyone.
Turning to the guidance, as a reminder, we present guidance reflecting our current visibility of supply from key partner brands, announced pricing, confirmed showroom refurbishments, openings, and closures. Uncommitted capital projects and acquisitions are excluded, and the guidance is presented on a pre-IFRS 16 basis. Our previous guidance used a sterling dollar rate of $1.30 to the pound.
Guidance is now upgraded to reflect movement in foreign exchange, with H1 actualizing at $1.19 to the pound and H2 projected using a rate of $1.20. On a constant currency basis, revenue and Adjusted EBIT guidance are unchanged. As we stated in the Q1 announcement, we continue to anticipate the potential for more challenging market conditions in the second half.
On revenue, we've increased guidance by GBP 50 million, with the range now at GBP 1.5 billion-GBP 1.55 billion. Guidance for Adjusted EBITDA margin remains at 0-50 basis point improvement. Adjusted EBIT guidance increases by GBP 6 million to a range of GBP 163 million-GBP 175 million. We have provided further detail in the announcement, including the key headlines when using IFRS 16. From an FX sensitivity perspective, a 5-cent movement in the H2 average rate would have a revenue impact of around GBP 15 million and GBP 2 million Adjusted EBIT impact.
Going forward, we believe that the strength of the luxury watch and jewelry categories with the unique supply demand dynamics of luxury watches underpinned by client registration lists together with our brand partnerships and the success of our model will continue to support long-term sustainable sales growth. We remain confident in the long-range plan objectives. I'm gonna hand you back to Charlie for questions.
Thank you. Of course, if you'd like to ask your question via the telephone lines, you can do so by pressing star followed by one on your telephone keypad. If you choose to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted locally. As a reminder, that's star followed by one on your telephone keypad now. Our first question comes from Melania Grippo of BNP Paribas Exane. Melania, your line is open. Please proceed.
Morning, everyone. This is Melania Grippo from BNP Paribas Exane. I have two questions. I would like to know, I mean, you said you commented on the fact that your environment is still good. You know, could you please tell us do you see any differences across the UK and the US in terms of price points? I mean, how is the high end behaving compared to the more entry price points? Also, what should we assume are your profitability drivers for the rest of the year, but also going forward? Thank you.
Thanks, Melania. I mean, we obviously, you know, as we presented to you all many times and when we entered the UK, US market rather, and when we did the IPO, we're convinced of a structural under-investment in the market, which I think is now proven. We have that, you know, structural weakness that's been addressed by investment in the market coming from the brands, coming from retailers and the results are there to see, and you see the Swiss export data.
The US is clearly getting a great support in terms of supply, but also as I say in terms of investment overall. The US market from a growth standpoint is definitely more dynamic overall.
In the UK, this market has been so strong for so long, continues to go well. We continue with applying our model. As I said, we've been really active on investment and new projects, gaining market share. We've, you know, the proportions that we talked about in the long range plan, UK, US growth, you know, kind of remains a focus overall, although we're clearly ahead of the numbers in particular with what we've done in the US through existing store and through acquisition. In terms of, you know, consumer behavior, overall from a pricing standpoint. Well, you know, first of all, the UK has had much more price increases.
We had two waves of price increases, which were entirely currency related, but the dollar being so strong, some price increases were put through at the start of the year, and there haven't been any since. The average price of luxury watches have always been higher in the US and with the dollar where it is now, that's that differential is even greater. In terms of consumer behavior within price, we've experienced, you know, consistently over the last couple of years, a real preference for the consumer to move up in average price, and to move towards, you know, more gold.
We can't get enough gold products, and whether, you know, completely 18 karat gold or gold and steel.
It really is a consumer preference to move into precious materials overall, whether that's seen as a hedge against inflation or whatever the motivation, that's definitely what we're experiencing, and we're chasing more gold products right now than we are steel. Other than that, no real discernible difference. Overall, we are seeing a younger consumer demographic. Overall, we're seeing a really good spread of interest in watches and niche brands doing particularly well overall. I think overall, it's a very dynamic market and a very good time for the luxury Swiss watches.
On the profitability drivers question, Melania. Excuse me. You would expect the net margin to kind of stay where it is, product mix broadly unchanged. Continue to get operating leverage from overhead. And then I think the other thing to just bear in mind is inflation. We're well-insulated from inflation compared to most, so things like utilities is a very small part of our cost base. Overall, you know, confident with the guidance of 0-50 basis points margin for the year. Thank you.
Thank you. Our next question comes from Carina Nugent of Goldman Sachs. Carina, your line is open. Please go ahead.
Hi there. Thank you very much for taking my questions. The first one just revolves around the conversion of the wait list. A common pushback we get from investors is that, you know, wait lists may be growing, but you don't need to put a deposit down, or anything to secure that place. Are you seeing anything changes in the uptake when people are made available in terms of that product that they're after, particularly on the brands that are not typically on wait list?
Secondly, I wanted to ask about your allocations from Rolex. Has anything changed since the start of the fiscal year in terms of, you know, your expected allocation from them? Are you benefiting from continued disruption in China, for example?
Finally, as we think about the broader macroeconomic environment potentially getting more challenging, do you see any potential to accelerate your expansion plan in that regard? You know, whether there's cheaper opportunities for M&A or store rents. Thank you.
Thanks, Carina. Conversion of wait lists has always been very high, and there's really no change. We don't especially track it, you know, other than anecdotally. We are, as we've said, we're adding more people. You know, when the calls are made, people are, you know, in the store within 24 hours generally and looking to get the product. No reading of any change in those circumstances and very high levels of conversion. Anybody we find who chooses not to buy, it's because they got the product somewhere else or, you know, they have personal circumstances or whatever that may change their mind.
Honestly, we just move on to the next person then and convert very high. No change. Allocation, we haven't seen a significant change in allocation during the year in terms of units from key brands. Pricing's got better. Obviously, the price of all products has gone up, so that benefits the ASP. Mix has been a bit better too, sort of impacting ASP as well. But as Bill says, we always reflect the most recent information.
From a, just repeating myself, from a volume viewpoint, it hasn't changed in a measurable way, and the commitments should be honored. We obviously have only got a couple of months to go now. M&A-wise, you know, we've always been active.
We remain active in UK, in US and now in Europe. I think as everybody knows, it tends to be smaller family-owned businesses that we are having discussions with. It all takes time. It takes a lot of due diligence in terms of availability of information and so on. No real change in behavior, I don't think, overall either from us or from, you know, the potential sellers. Remains a focus for us, and we remain as committed to, you know, adding to our business through M&A as we were when we presented the long-range plan.
Carina, you had one there on store rent. Typically what we do is take a 10-year lease with a five-year break, and we'd always look at the end of that five years to see if we want to continue. Typically, if we continue after the five years, then we'd refurbish it, and that would then involve a conversation with the landlord at the same time.
That's pretty helpful.
Okey-dokey.
Our next question comes from Jon Cox of Kepler Cheuvreux. Jon, your line is open. Please go ahead.
Yeah, thanks very much. Good morning, gents. Jon Cox with Kepler Cheuvreux here. Couple of questions for you. Just on the like for like, trying to strip out some of the shop openings if you had, is there much of a material impact on those sales figures that we see from the nine stores you opened in the quarter and obviously you've been opening stores on a rolling basis? Ahead of that, maybe it's just a couple of points, maybe it's more, maybe it's not.
Just what you think the trend has been, it really comes back down to this, is there a slowdown happening? Do you think that, you know, stripping out all of that, you are seeing maybe some deceleration in the top line? That's the first question.
Second question, just back onto the waiting lists, and I know it's a bit of an old chestnut, but just wondering in terms of, you know, if you had to fill, you know, that waiting list today, what would that be in terms of your annual revenue? Is it like a quarter of your revenue? Is it a third? Is it a bit more? You mentioned about that growing a little bit. Just wondering how much did it grow?
Is it just really fractional, you know, 0.1%, or is it a bit more meaningful, you know, in terms of maybe a couple of %? Just the last question on China and all of these discussions about opening up, and clearly, you know, you guys could benefit if we got more Chinese tourists in.
You do allude to the fact that, you know, clearly with the duty-free not really helping so much at the moment, and I know there's lots of discussions going on about that, and whether you may be actually not doing so well, you know, if the Chinese come back, maybe they won't go to the UK, they'll go to, you know, Paris or elsewhere to buy their luxury watches. I'm wondering if you have any, you know, thoughts on that.
Sorry, I just want to tack one on. In terms of, you know, your allocation, I've heard that some watch brands are now starting to cut back, particularly for those watches that are maybe typically abundant, just in anticipation potentially of a slowdown.
You don't seem to be seeing any sign of that at all, and I'm just wondering what your thoughts are into 2023, on that. Thank you very much.
Okay. Jon, got a few things to get through there. The best, or the most significant adjustment you would look at in terms of a trend to come up with an LFL is taking out US acquisitions, and we give that number. Once you've done that, you're not far away from what really is kind of organic growth. We did have, you know, quite a few openings like Battersea and so on, but obviously very late in the quarter, overall and late in the half didn't really have an impact.
Could be actually probably had more disruption with, you know, construction and significant stores that were closed for periods, including, you know, our Meadowhall configuration in Sheffield and a store in Southampton and some others. If you take out the acquisitions in the US, you're really not far off from dealing with what has been an LFL-type trend for us overall, which obviously is still very positive.
You know, trend deceleration, honestly, we're on it in terms of analyzing our sales when daily sales by brand, by store, and they look at it frequently, you know, throughout the day we're getting reports, so we're constantly looking at trends. The ups and downs always happen in retail.
We've put on explanations with regards to specific brand situations on deliveries or comping this year or last year on new products or whatever it might be. We have had some disruptions that I mentioned during the Queen's funeral or the hurricane in the US. We had the Betteridge stores that we acquired. We closed down for a couple of days as we completely redid the stock again because we had some challenges there and relabeled all of the stock. These are the explanations that we have for the ups and downs. We haven't really ascribed anything at all to a change in consumer sentiment.
As you know, both Bill and I have said we are anticipating along with everybody else that there's potential for a change in sentiment and behavior, but we haven't seen anything yet. Wait lists, you know, we don't give out specific numbers, but it's not a percentage of annual revenue. It's more like a multiple. They're pretty significant, the depth of the waiting list. We are adding to them. Again, we don't give percentages or numbers overall, but net-net, we are adding more names to the waiting list than we're able to take off.
We are a lot more, you know, edited and analytical on the wait list today than we've been historically given its importance. We're in more control of it.
We're not letting people put their name down for large multiples of product. We're making sure that people are not putting their names down in different formats, you know, Brian Duffy, B. Duffy, Mr. Duffy, you know, whatever. But having done all of those edits and so on, we're still looking at net-net growth of the wait list.
We're not anticipating and we haven't projected in our long range plan or guidance any benefit to come from Chinese tourism whenever it returns. There's a lot of views out there as to, you know, will the Chinese consumer be as willing generally to spend on travel versus domestic? I think it's an open question that's out there. Then, of course, we have the duty-free situation.
Our view, I'm very confident that the duty-free situation will be changed at some point. There's obviously a change for a few days during September. I'm pretty confident that it will change. There's evidence out there to say that the US UK exchequer is losing from the potential loss of tourist business. We have not projected any tourist business recovering at all in our numbers. I don't think it will do significantly until duty-free does come back. Allocation cutback, production cutback, I'm totally unaware of. I'll be spending a lot of time in Switzerland recently.
I was there on Monday on the jury of the GPHG, doing the choice of award-winning watches, and I wasn't hearing anything at all then about any negativity. There's still overall we are, you know, short of a lot of products. I think a lot of the brands are still a bit constrained by component manufacturing, you know, case and dial components and others. Yeah, no, I'm not at all hearing of any kind of a cutback on allocation of production.
Great. Thank you. Thank you. As a reminder, if you wish to submit a question, please press star followed by one on the telephone keypad now. Our next question comes from Natasha Brilliant of Credit Suisse. Natasha, your line is open. Please go ahead.
Thank you, and good morning, everyone. I've got three questions, please. First of all, just coming back on tourism, and I hear what you're saying on Chinese tourism. Has there been any change in terms of the mix of tourists say, versus local demand in the UK, particularly from the US and the Middle East after the summer? Have you seen any changes there? Second question on credit sales, can you just remind us what percentage of customers purchase on credit both in the UK and the US, and if there's been any notable changes to those numbers in recent months?
Then the third question is on mono brand stores, obviously proving to be a successful strategy. Are there any brands for which you don't currently have mono brand stores, but where there might be potential to open some? Those are my three questions.
Thank you.
Maybe Credit first.
Yeah. I'll cover off credit, Natasha. Credit sales represent 10%-12% of sales. That hasn't changed in this half. In terms of the proportion of sales that are going through credit, the cost has obviously, with increased interest rates, and the teams are doing a fabulous job of managing that as best they can. The other thing just to remember on credit sales is that we act as an intermediary, so we don't bear the credit risk if there is a higher rate of default going forward.
On tourism, Natasha, Americans and Middle Easterns clearly are shopping, but predominantly in Europe. Again, I've been there recently and there was in the Mandarin Oriental in Paris, it was all Americans, and they were all there shopping for sure. I think it's very evident that people and organizing their itineraries are definitely planning, particularly Americans planning to shop in Europe. We're not seeing much of that here in the UK. We have obviously a bit of difficulty kind of recording it now because we used to use VAT-free sales as the record of tourism overall.
Now we've got credit card data, but even that's not 100% reliable because there's a lot of people who live here, either full-time or part-time, who use credit cards. You know, overall US and Middle East has it nudged up maybe 1% from 2% to 3% or whatever, it's of that sort of dimension, really not significant at all. Mono brands, we clearly have strong partnerships, strategic partnerships on mono brands with Breitling, with Omega, with TAG Heuer.
With Tudor, we now have three mono brands in the UK with Tudor, two in the US. I think it's next week, we open our first Longines mono brand in the epicenter of luxury retail known as Glasgow.
We have our Bulgari mono brand in the US and that's going very well as we've reported and, you know, we'd like to do more of that. We have other discussions that are going. The format works very, very well. The ability to do adjacent brands together that gives the economies of shared back-of-house and management and so on works very well too. It's a successful format overall and, you know, we're clearly ahead of the market on it.
Super. Thank you.
Yep.
Thank you. Our next question comes from Rogério Fujimori of Stifel. Rogério, your line is open. Please go ahead.
Hi, Brian and Bill. I have two questions. Could you remind us of the magnitude of the second price increase in the UK for Rolex and the other leading watch partners in September? It's just to help us understand the contribution to your Q2 exit rate in the UK and the pricing tailwind for H2. A follow-up question on customer behavior in the US and the UK.
Could you talk about what you are seeing in terms of contribution to growth from your top spending VIP existing customer base versus perhaps more aspirational new consumers? I think any insights into the behavior of your top spending customers, especially as macros get a bit more challenging in H2, would be great. Thank you.
Yeah. On pricing, Rogério. Rolex did a price increase in September of averaging 5%. That's UK only, and is a re-reflection of sterling Swiss franc exchange rates, we think. The other brands, not all, but largely have done similar kinds of price increases. Again, in Europe only. We've not seen anything in the US of any magnitude since the beginning of the year.
On customer behavior, we are tracking repeat customer behavior and overall, you know, spend patterns and new customers. We are particularly good at recruiting new customers. We're obviously very, very visible where we are, UK and US, very active digitally.
You know, the internet is, I think, having a huge beneficial impact on this market as people tend to do their research and so on online. So it really helps us recruit new clients as well. We've got a healthy increase from them both. Actually more of an increase in repeat clients overall. I mean, the exact stats, we're still just refining and questioning and future updates so that might be able to give more specific information on our consumer split. I'm very confident that directionally we're increasing in both and you know, a higher proportion of repeat customers expanding their spending with us.
Thank you.
Sure.
Thank you. As another reminder, if you wish to submit a question, please press star followed by one on your telephone keypad now. Our next question comes from Flavio Cereda of Jefferies. Flavio, your line is open. Please go ahead.
Thank you very much. Morning, Brian. Just two quick questions from me. First one, on the whole issue of duty-free and tourist sales. If I talk to some of your far smaller competitors in Europe, say, for example, in Milan, what I'm finding out is that the presence of Americans and tourists, which of course is being much stronger, playing a much larger part compared to London in the summer, it works for jewelry.
For watches, not so much for the very simple reason they don't have the watches to sell. Like you, they don't have the Rolex, they don't have the Patek, they don't have the Audemars. Only for a handful of brands who seem to benefit.
I just wonder, is it significant at all for you, this reversal which you're saying and hopefully, eventually will come? Number two on the mono brands that you're opening in Europe and the Breitling as well. Performance so far is as expected, is reassuring, you're comfortable that these brands will continue to perform well? Thank you.
Yeah, Flavio, I agree. I mean, I think the removal of duty-free kind of coincided with this, you know, significant change towards a lot of products being available and, you know, waitlist only, and therefore being less available to tourists. I take your point, and there still is a reasonable amount of products, a good value. You know, we do invest in stock. Our stores are full. There's a lot of product for sale. I think if we had a duty-free, we'd be enjoying more tourist business now, and we would enjoy more when the Chinese start traveling again.
Yeah, I take your point that and it is correct that a lot of product is nobody is able to move around the country and get access to Rolex, Patek Philippe, Audemars Piguet, as you rightfully say. Just on that finally, I mean, I'm on this group of retailers that are representing the luxury retail industry with the government, and we have pretty solid evidence of the fact that this is a net loss to the exchequer.
We're desperately keen that an independent study is done so that we can all look at independent analysis together and hopefully make the right decision sooner rather than later. As I said earlier, we aren't assuming any change in any of the numbers that we've been presenting.
The mono brands in Stockholm and Copenhagen are collectively on plan overall, doing a bit better in Stockholm than we are in Copenhagen. It's very much early days. Of course it's lumpy. Some spectacular days, some disappointing days. Overall enough for us to feel very positive of the potential in the markets overall. Confident that there are a really good basis for expansion.
Thank you.
Sure. Thanks, Flavio.
As a final reminder, if you wish to submit a question, please press star followed by one on your telephone keypad now. We currently have no further questions. I'll hand back over to Brian Duffy for any closing remarks.
Thanks, Charlie. Thanks again everybody for joining us. You know, our summary is that we carry on as we were in Q1. We're not seeing a huge change in the marketplace. We're obviously coming into, you know, now the Christmas season. We're very well prepared for it, UK and US. We'll get the chance to update you all sooner rather than later because we're gonna have a half year final audited numbers that we'll be presenting to you in early December. We'll get a chance to update you then on what's happening in the on Christmas and whether or not our perspective has changed. Very pleased with our performance.
Really grateful to all of our teams who are working extraordinarily hard with the amount of activity that we've got going on across all of our geographies. So far so good. Thank you all for joining us. Thanks for the support and very much thank you to our great teams.
Ladies and gentlemen, this concludes today's call. You may now disconnect your lines.