Good day, and welcome to the Watches of Switzerland conference call. At this time, I would like to turn the conference over to Mr. Brian Duffy, CEO. Please go ahead, sir.
Thanks, Simon. Morning, everybody. Apologies for the slight delay in getting the call going. Just had to make sure we'd got everybody off the queue and online. Thanks, everybody, for joining us. You've obviously all seen our RNS, and I'm sure have absorbed it and been through it, so just wanna add a couple of comments of added color. Overall, we're clearly very pleased with the half year numbers that we're reporting. Very strong performance, both U.K. and U.S. Half one sales up by almost 45% versus last year, and 41% versus two years ago. Our team continue to do a great job overall. The environment that we're in is a very strong one, we think, for our categories, both luxury watches and jewelry.
Our feeling is that demand continues to increase and further outpacing supply overall. Just a couple of added comments. We changed how we're handling Rolex stocks during the period, and effectively we've changed our in-store stock over to being effectively demonstration stock. We present it as being for exhibition only. We're doing that simply to keep a reasonable representation of the brand in store. Overall, not selling much stock, but customers are able to see the product, try it on and register their interest in buying when availability is there. The level of stock that we're at, we've obviously you know worked through with Rolex, specifically U.K. and U.S. That's a level of stock that we'll effectively maintain for the foreseeable future.
This system of having in-store stock for demonstration purposes only is likely to remain, we think, for the indefinite future. What it meant is that we restocked our Rolex position during the quarter, during the half. Consequently, our Rolex sales during the period were actually a bit less than our overall sales growth that we're reporting. Our strong sales growth for the half and for the quarter therefore was due to very strong performances from other luxury watches and jewelry category strong, but we're pretty sure that we are gaining shares through our continued store investment, multi-channel approach, great systems, technology, increased marketing, and I think very importantly, a confident buying decisions that we made.
We decided to buy good quantities and sufficiently far in advance because we were confident about this period, and we're very confident about the upcoming holiday season overall. We think the best way to look at our numbers as you do would be looking at the two-year stack. There's clearly a lot of moving parts when you compare to last year, the influence of the lockdown and significant impacts in traffic and so on. Looking against two years ago, we think is the most relevant comparison, which when you do, you see that we were up around 41% in constant currency against that period. But you've gotta bear in mind that two years ago we had a good amount of international business here in the U.K.
Of our total group, it represented around 33%-34%, a combination of tourism and airports. Effectively now, our business is almost all, it's like 98% domestic. When you make that comparison, you effectively have to take 30% out of the base. When you do that, you see a very, very strong performance with the domestic clients, U.K. and in the U.S. Our business continues to put on. We're reporting strong sales. We're also reporting improved profitability due to the favorable margin mix, coming from the favorable product mix overall, which Anders will comment more on.
In addition to our underlying base business, we're also pleased to report progress on our long range plan objectives of incremental growth through our agreements to acquire stores in Greenwich, Connecticut, Vail and Aspen, Colorado, and complete deals in Minneapolis and Plano, Texas. David Hurley, who leads our business in the U.S., and the U.S. team are doing an amazing job of finding and connecting with potential acquisitions while keeping the current business moving forward very well. All of that has led us to upgrade our outlook due to the improved performance of our base business, plus the incremental acquisitions. I'd like to talk through the outlook and the performance further. I'll pass over to Anders.
Thank you, Brian. Yeah, obviously a really pleasing first half. To Brian's point, the product mix this year is very different from what we experienced last year. The anomaly was last year when we were you know selling to waiting lists of hard to get products. The representation of the sort of supply-constrained brands peaked at about 70% in the first half last year versus a normalized base of around 60 we experienced in 2020 and we've experienced this year as well. The business is back to what it used to be in terms of mix as such. That's driving the margin performance. Obviously sales as such. Particularly positive surprise has been our online performance.
We had planned online down, internally here, given the fact that we were up against the period when stores were closed. We felt that was the right way to look at it. To our surprise, actually, we've done better. We're obviously trading up by 24% from last year. Really pleasing results overall. That has led us then to look at our business and where we see demand sitting at the moment. We're done with the restocking exercise, so we will sell what we get going forward here and throughout the year. On that basis, obviously, we're calling up the year by GBP 100 million. Part of that call up is due to the acquisitions that Brian alluded to. On a trailing twelve months basis, that is worth around $100 million sales.
Obviously, we'll have four months of complete sort of transaction volume going through as part of our balance of the year. Our profit is looking better because we hadn't planned for the margin upside that we've experienced through the first half, and we expect that mix of product to remain in place throughout the balance of the year. In addition to that, we get some better leverage on our cost base. We squeezed out another half point out of that, and that is against the year where we actually benefited from some government support in the first half, as you can see in the disclosures. Very positive all around, I would say. In terms of our capital program, we are on track to deliver on our plans.
We actually have called it up by another GBP 5 million or so, and that is obviously linked to the acquisition to some degree, but we're also investing more in technology throughout the year. Overall, really good. Cash is coming in better than what we had expected. The display stock that Brian was alluding to is obviously paid for. As we get products in, they vanish before we actually have to pay for them. We get cash generation from our stock, which is a new one. Obviously overall, very pleased with the results.
Yep. Okay. With that, very happily move on to your questions.
Thank you very much, sir. Ladies and gentlemen, if you would like to ask a question over the phone at this time, please signal by pressing star one on your telephone keypad. Please note, if you're using a speaker phone, just to make sure your mute function is turned off to allow your signal to reach our equipment. Once again, ladies and gentlemen, that is star one on your telephone keypad to ask a question, and we'll pause for just a brief moment to give everyone an opportunity to signal for questions. I will now move to our first question over the phone, which comes from Anne-Laure Bismuth from HSBC. Please go ahead. Your line is open.
Yes, good morning. I have two questions. The first one is on the U.S. Is it possible to have an idea of the split between like-for-like and store expansion? The reason why I'm asking is that last year around Christmas you added a lot of mono-brand stores. So I'm just wondering if you can give us some indication on that. The second question is around, you know, the commerce. Maybe if you can give us some comments about how the e-commerce development is going in the U.S. as you launch the U.S. e-commerce in the last four seasons. Thank you very much.
Anne-Laure, I hope we had all that, okay. The line wasn't great. I think you were asking, first of all, about like-for-like, which we don't report anymore. We get so many, you know, activities going on and investment in projects. I mean, overall, we haven't hugely increased our space in any significant way. We've invested in it. We've added mono-brand as you know. Proportionate to our big multi-brand stores, the contribution there is less. We get a bit of added year- on- year, but it's really not that significant. The underlying, you know, driver of business demand is there. Market share we're gaining because of our, as I say, confident buying, our investment in technology, our increase in marketing.
The supply situation, as you know, half of our businesses is supply driven, and that is what it is, regardless of, you know, the network situation overall. Like-for-like really isn't honestly that relevant for us, and I think it's just about impossible to calculate, so we haven't really been reporting on that for some time. E-comm in the U.S. is off to a good start. We're pleased about the progress, but it takes a combination of time and money. We are spending behind the business in the U.S. and driving traffic to our site. We've increased the centralized stock to provide a better service to clients. You know, pleased that the progress, our biggest business, of course in e-comm is the U.K.
The number, year-on-year, growth that we're reporting in e-comm of 28.7% is predominantly the U.K. success story, but a small contribution from increase in the U.S. as well. Confident that in the years ahead, e-comm in the U.S. is gonna be big, but it takes time to really build up, you know, that positioning and the awareness and even the support structure and so on to take advantage of the potential market that's there.
Thank you very much.
Thank you. We'll now move on to our next question over the phone, which comes from Flavio Cereda from Jefferies. Please go ahead. Your line is open.
Wonderful. Thank you. Morning. Morning, Brian. Two quick questions here, both on, I guess, fundamentally on Rolex, but generally speaking, as travel, as we now sort of normalize, as it were, right, and travel restarts, a gradual process that, you know, we saw yesterday travel to the U.S. restarted from the U.K. and stuff. The stores that you have where, you know, to what extent are you able to supply these stores as business restarts? Do you have the product to supply these stores given that the dynamics have shifted so much in the last two years? My other question was on pricing, which I guess is number one on Rolex, still no news of a price increase, I guess. Maybe if you could tell us anything about that.
Generally speaking, on pricing for the supply constraint brands, are you seeing anything in particular that we should be aware of? Thank you.
Thanks, Flavio. What we're seeing in the airports is increased traffic and a good level of spend per passenger. There was an uptake on kind of leisure travel with the recent, you know, kind of reopening of holiday destinations in the half term here in the U.K. We saw a nice trend of improving business there. And as you said, now that the U.S. has opened and business travel will step up as well, we're anticipating improvement from that too, of course. There's a real willingness to spend. I mean, obviously the environment overall is strong. Heathrow is a great place to shop. It's convenient. It's also, I think, very, you know, enticing from the great luxury lineup that's there, including us.
Our overall feeling is, and how we've sort of planned it, is that we think the business will come back in at the airport. With the absence of duty free, it won't come back in any foreseeable period until that changes to the level that we had kind of pre-Brexit, pre-COVID. We're assuming, I don't know, 60%-65% potential once traffic is back up again, and assuming that the no duty-free situation remains. Our recent experiences are a wee bit better than that, actually. I think that just talks to how attractive the category is overall. People are spending. Your point is right. If there's incremental business there, we'll have to find a way of getting incremental stock for it.
Of course, it's something that we're openly discussing with our friends at Rolex. Generally, whatever we do at the airports' income next to nothing on last year. Three of the four terminals are open, and we're assuming that remains the case for the foreseeable future. T2, T3, and T5. We'll see. It's positive. You're right, we do have to get more stock to take advantage of it fully, but encouraging. On pricing, we don't have you know, I think your question indicates that the conditions would support price increases. The inflationary economy that we're in globally, increase in Swiss franc, increase in commodity prices and so on, would all underpin a pricing review.
I don't think it's crazy to assume that that would come at some point, but we do not have anything specific from any of our brand partners. You know as much as we do as to whether or not a price increase will come and when.
Okay. Thank you.
You're welcome.
Thank you. We'll now move on to our next question over the phone, which comes from Andrew Gowen from Lombard. Please go ahead.
Hi, Brian. It's Andrew here. Could I just ask, please, for a little bit of color both in the U.K. and in the U.S., on what other brands are particularly doing well and what brands you've got effectively better supply on? Because the situation is you're kind of selling everything you've got. So what are you getting more of? The second question related to that obviously, can you give me just a kind of ballpark guide? Obviously, we know the margins are a little bit lower on the Rolex, but what the differential is, what the spread is 500 basis points, 1,000 basis points on some of the brands you've got better supply on versus a Rolex, which is a bit more constrained.
Okay. I'll let Anders comment on the margin situation. In terms of, you know, brands that are doing well, we're having a great period with Omega. We get Commander Bond to thank for part of that. There's been a huge reaction to the movie. There's a special James Bond watch that's been very popular. In our experience, the most popular ever. I don't know if it's the case, you know, globally or even nationally, but in our case it is. It was more expensive than typical Bond watch. It was the best part of GBP 8,000. It continues to sell very, very well. And then Omega in addition, of course, they play a major part in the official timekeeper and sponsors at the Olympics and the Paralympics over the summer.
They get the Winter Olympics coming next. It's a very kind of high profile investment period for Omega, and the brand is really enjoying the benefit of that. Cartier are also doing super well with us both in store and online. I think all of the new product activity that they've launched over the last couple of years has generally always been successful. Notably Santos and the Tank range doing well. We are chasing supply on these, but generally getting good support from these brand partners. Breitling also doing well. Same again, great marketing, good new product introductions. TAG Heuer doing well.
Tudor doing particularly well and being very clever about you know frequency and excitement around new product launches. One of which just launched yesterday, a new Pelagos, which you know immediately will sell everything that they supply us with. Actually, Tudor is our brand where we could be selling more if we had better supply and of course we're continuing to chase that. I also mentioned jewelry. Our jewelry business is up 50%. It's a good market for jewelry, our buying team doing a fantastic job in selecting the right product.
Our approach to the market, which is a branded approach, we steer clear of promotional activity and you know, protect our margin, but more than anything, protect, I think, the status and the quality of the product that we're selling, and that's working very well, again, in store and online. It's a very brand-based success story from a product standpoint. Generally, we're getting good supply, and buying early and buying bold, I think has you know, clearly put us in a very, very strong position for what we've delivered this half and what we see coming in the holiday season.
Within the watch category, the margin structure is very formulaic. The higher productivity, the lower your intake margin is essentially. It ranges from the mid-30s to mid-40s. That's sort of the range in the watch category. Jewelry comes in at north of 45%, so obviously it's a bit better margin in jewelry traditionally. That's sort of the margin structure within our business.
Great. Thank you.
Thank you. As a reminder, ladies and gentlemen, it is star one in your telephone keypad to queue for a question on today's call. We'll now move to our next question over the phone, which comes from Kathryn Parker from Jefferies. Please go ahead.
Hi. Good morning, and thank you for taking my questions. My first question is on market share. I wondered if you could give us an update on overall market share in the U.S. and the U.K., and maybe the share of Rolex agencies in the U.S., once your new stores have been integrated. My second question is just on the net margin. Obviously you've had a nice uplift in H1, and I wondered if you could give any comments on what to expect for H2 and whether there would be a similar uplift and if that's contained within your guidance. Thank you.
Yeah. I'm not gonna be particularly helpful, Kathryn, on your first question on market share. We're not kind of quoting market share, and it's our reluctance is just reliability of data. The folks that we are tracking the market in the U.S. no longer do, so we don't even have market data to look at. You know, for our annual report and so on, we do try and calculate and adjust for information that's out there, but we don't do it on a regular ongoing basis, so can't really help on market share. Anders, you wanna-
Yeah. In terms of our margin guidance, yes, it includes sort of the balance of the year, obviously. What we've seen in the first half, we do expect similar trends to prevail through the second half. Obviously, as you know, we were closed for about five months in the U.K. last year, which then automatically leads to higher penetration of hard-to-get products because we were clienteling and selling, you know, sort of on waiting lists and so forth. We think the product mix in the second half is gonna be similar to what we experienced in the first half.
In addition to that, obviously, you know, if you look at the government support schemes that we enjoyed last year, the skewness towards the first half is where we had the biggest benefit going through because we took the furlough and we had the PPP. It's all in the disclosures.
Yes. The follow.
We reversed it out in the second half, right? Obviously we had a charge in the second half. Net result of all of that is obviously that you would expect the leverage to come through on the store cost and overheads a bit stronger in the second half.
I think if you walk through the math, the year-on-year profit growth will be relatively similar first half to second half, if you walk through the math on it. I think in the first half, we've quoted the adjusted EBITDA estimated number at between GBP 81 and GBP 83, so a midpoint of GBP 82, I think year-on-year would be like +57%. We'll be just a wee bit ahead of that for the year if you walk through the improved profitability and the sales guidance that we've given.
Thank you. We'll now move on to our next question over the phone, which comes from Frank Manduca from UBS. Please go ahead.
Good morning, team. Thank you for your time. Two quick questions. One is, could you give us an idea of what the proportion of Rolex sales are within your U.K. business, and what, sort of, you'd expect that to settle down at in terms of percentage of overall sales going forwards? Secondly, I just wanted to see what your thoughts are on some of the online retailers. I think people like Chronext made quite a lot of noise recently when they were looking to float about the discounts that they can get on things like TAG and Breitling. I wondered whether that had any impact that you'd seen in the U.K. or whether that is just a European thing and indeed whether that could affect your business in the U.S.
Typically we don't, you know, disclose brand-specific sales by market or anything. As I've quoted, you know, for the group as such, you know, as I said, the supply-constrained brands, which contains Rolex, Audemars and Patek, represents about 60% of the group's revenue in FY 2020. Going into last year, obviously since we were working the waiting list and so forth, that penetration grew to around 69%, and this year it's back down to 59% of our business. That's sort of how we previously disclosed our sales mix. We'll stick with that rather than giving specifics by market.
Generally speaking, you could say that historically, Rolex had a bigger portion of the U.S. business because they could actually impose investments into retailers, which other brands didn't have the leverage to do. We can see that that is getting more balanced, as we invest into our store network in the U.S. The penetration of Rolex in the U.S. is actually somewhat descending.
On your second point, Frank, I honestly didn't see or read anything specific on Chronext that indicated that they were acquiring product at discount, which would really very much surprise me. Obviously, the IPO got pulled reasonably early on and didn't happen. Certainly from our standpoint, Breitling and TAG along with the rest of our ranges, our discount is less than 1%, and so it's almost nothing overall. These brands are doing very well for us at full price, U.K. and U.S. I can't quite reconcile any comment about acquiring product through discounted prices.
Okay, thank you.
Okay.
Thank you. We'll now move on to our next question over the phone, which comes from Rogerio Fujimori from Stifel. Please go ahead. Your line is open.
Oh, hi. Good morning, everyone. Thanks for taking my question. I was just wondering if you could talk about the contribution to growth that you see from new versus existing customers for your non-supply constrained brands. I believe that consumers historically have been more repeat customers, but I was wondering if you see luxury watches attracting more new customers in the U.S. and U.K., and what you see in terms of purchase frequency profile based on your CRM data with the shift to online and as you come out of the pandemic. Thank you.
That is, it's a great question, Roger. We actually don't have those stats exactly, but that's something that we should get. Our feeling is, there's a lot more new clientele in the market. I think your comment in the U.S., I mean, clearly we've very, very good growth, we're experiencing in the U.S. We obviously have two big, beautiful stores that are very, I think, incremental to the whole profile of the watch retailing in Manhattan. They're definitely attracting new consumers. The amount of money we're spending on marketing online. The number of impressions that we're reaching runs into billions. The number of PR impressions we're making in the U.S. runs into several billion. I think we are certainly very, very visible to a very broad audience.
Our feeling is that we are, you know, attracting new and younger consumers. The big change, obviously, that I referred to earlier that's been made is our consumers today are all domestic, whereas, you know, historically, we had a bigger proportion of international. Our feeling as well, I'm giving feelings rather than statistics. Our feeling is that, we have a higher proportion of the female consumers. We have a higher proportion of, people buying self purchasing rather than, gifting. I think a lot of very positive trends for the industry overall that we're delighted to be sharing in and, I think, gaining share on.
Very helpful. Thank you.
Yeah.
We'll now move on to our next question over the phone, which comes from Karina Shooter from Goldman Sachs. Please go ahead.
Hi, Brian. Hi, Anders. Thank you for taking my question. Just a little bit of a broader one from me. Obviously you've benefited, you know, quite strongly from very robust domestic demand in the U.K. and the U.S., and presumably have received, you know, a better supply allocation because of that as tourism has been more constrained. As we see the world opening up, do you have any color on how the brands are thinking about their geographical allocations and how that would potentially impact your business? Thank you.
Again, a great question, Karina. Really, you know, as I think everybody knows, that information's a lot less available in this category than people would logically think it should be. You would be reading the global trends as well as we are. Bit of a slowdown people are seeing in China, which was the fastest growing market, I think probably still is for luxury watches. Hong Kong still subdued. U.S. really, you know, powering ahead as a leading market along with Dubai, maybe, which I think has continued to be strong overall. I was actually at an industry event last week. I was a juror on the GPHG, which is the Grand Prix d'Horlogerie de Genève. The feeling overall was very upbeat from the industry.
I think people were generally enjoying a very good trend. Surprisingly good was the impression from all of the Swiss brands that I interacted with. I think those are the big trends, that China has been quite positive, very positive, but maybe slowing down a little. Maybe as we start the anniversary as well, there'll be a natural sort of slowdown on it. Hong Kong still subdued, and I'm repeating myself now. Dubai and U.S. very strong. U.K. has been very strong, I think, within Europe and better than the main European markets. The European markets have more of a tourist dependency. I would include in that Switzerland.
You know, clearly those markets haven't seen the degree of recovery and don't have quite the same opportunity to focus on domestic locale that we do, I think, in the U.K. and U.S. I think that's all fairly public information that's out there and typical of what's happening in the whole luxury category.
Thank you.
It appears there are no further questions queued at this time. Mr. Duffy, I would like to turn the conference back over to yourself, sir, for any additional closing remarks.
Well, thanks, everybody, for your questions. You know, a big thanks to our team as well for continuing to exceed everybody's expectations, including mine. You know, the enthusiasm, dedication of our team, I think is fantastic and a huge part of our strength. I'm sure as comes over from the RNS and the comments that we made today, we're confident in our model. We're very confident in this category. We're looking forward to a positive holiday season, which we think is underway at the moment. Just generally very pleased with our results and appreciate all of your interest and support. Thank you for joining us.
Thank you very much to today's speakers. Ladies and gentlemen, this does conclude today's call. Thank you very much for your participation. You may now disconnect.