Watches of Switzerland Group plc Half Year Results

10 December 2019

 

Watches of Switzerland Group PLC - Interim Results for the Half Year ended 27^th October 2019

 

 

Continued Growth and Focused Operational Delivery

 

Financial highlights (on a continuing basis¹ and excluding exceptional items and IFRS 16² adjustments).

 

·       Group revenue +17.3% to £428.7m (+15.9% on a constant currency basis³) with +10.3% like for like³ ("LFL") sales growth driven by higher luxury watch sales

-    UK revenue +10.6% to £317.6m and LFL +11.0% benefiting from strong demand, improved ASP³ together with strong growth in both showrooms (+10.4%) and online (+12.0%) growth

-    US revenue +42.1% to £111.1m boosted by contribution of new showrooms; LFL +7.5%

-    Luxury watch³ revenue +21.6% to £365.5m (85.3% of total revenue, +3.0 ppts)

-    Luxury jewellery³ revenue down -2.5% to £31.5m, but UK LFL +6.2%

·       Adjusted EBITDA³ up +23.5% to £41.2 million, representing an improved margin of 9.6% (+50 bps)

·       Adjusted Earnings Before Interest and Tax³ up +23.0% to £31.1m

·       Capital expenditure of £12.9m in the first half (compared to HY19 of £16.5m)

·       Net cash from operating activities of £49.6m up £12.2m

·       Adjusted profit before tax³ of £26.5m up 112.0% from £12.5m

·       Adjusted basic Earnings Per Share³ of 9.3p up 4.5p

·       Net debt⁴ at £92.1m compared with £234.9m in the prior year.  EBITDA leverage³ of 1.1x

 

Statutory financial measures

The Group implemented IFRS 16 'Leases' for the first time in FY20 using the modified retrospective approach.  Comparatives have not been restated and therefore the statutory results are not comparable to the prior year.  Further information on the implementation of IFRS 16 is included in the Appendix.

·       Revenue £428.7m (unchanged by IFRS 16)

·       Operating profit of £30.0m (£25.4m pre-IFRS 16)

·      Loss before tax of £9.0m (£7.7m pre-IFRS 16) impacted by one-off exceptional costs of £34.2m relating to the IPO and subsequent refinancing

·       Basic Earnings Per Share of (3.5)p ((3.1p) pre-IFRS 16)

·       Net cash from operating activities £72.4m (£49.6m pre-IFRS 16)

 

Operational highlights

 

·       Market conditions for luxury watches continue to be buoyant in the UK and US

·       Growth driven by luxury watches.  Demand continues to exceed supply on Rolex in particular.  We continue to manage this. as in recent years, through the optimisation of showroom stock rotation, ASP enhancement and increasing supply through showroom investments

·       Expansionary capex³ of £12.5m in the half year

·     In the UK we have opened one new, refurbished six and relocated three showrooms.  In the US we have opened one new, refurbished one and relocated two showrooms

·       US strategy is on-track and results are in line with plans and expectations

·       Further expansion in the Travel retail market with the opening of Gatwick North

·       Continued roll out of mono-brand plan in the UK along with the launch of the mono-brand strategy in the US

·       Agreement reached to purchase four showrooms from Fraser Hart for c£31.7 million.  These four showrooms had a combined annual revenue of £25.7m and 4-Wall EBITDA³ of £5.0m.  The transaction is expected to complete in January 2020

 

 

 

Outlook and guidance

 

Trading in the first half of FY20 was positive and the markets for luxury watches remain robust in both the UK and US, as illustrated by demand in the first half generally exceeding supply.  Profitability is improved due to good gross margin management and the leverage of showroom overheads.

There is a strong pipeline of projects in both the UK and US, including the expansion and refurbishment of existing showrooms and the continued roll out of new showrooms, with returns on investment expected to be in line with recent history.

The Group remains well-positioned to deliver on its strategic aims and pre-tax profit for FY20 is expected to exceed the guidance issued at the time of the IPO and is now in line with current market consensus.  Detailed guidance for FY20 is set out on page 16.

The Watches of Switzerland Group CEO, Brian Duffy, said: 

"I am delighted to report our first half year results as a listed business.  Strong progress was made in both the UK and US markets as we continue to deliver on our growth plans.

 

The growth in revenue and profitability is testament to the distinctive luxury experience we provide. Customers continue to react very positively to our showroom portfolio elevation programme - as reflected in increased average selling price, conversion rates, and sales uplift. Our showroom projects in the UK and US have been a success in the year to date.  Our omni-channel strategy continues as we expand our mono-brand programme in the UK along with mono-brand openings planned in the US, expansions in UK Travel retail and continued momentum online.

 

We are also delighted to announce the addition of four more showrooms to our well invested network through the acquisition from Fraser Hart. These four showrooms are all in excellent locations with high visibility and awareness and have been important distribution points for luxury brands over the years.  These showrooms will be renamed as either Watches of Switzerland or Mappin & Webb and the product ranges elevated to all luxury.   We will immediately install our advanced systems and incorporate these showrooms into our sales management structures.

 

We are proud of our strong and long-standing relationships with brand partners. Exceptional customer service is central to our offering and we have pushed this even further with intensive offsite showroom manager training over the summer. We continue to develop our best-in-class business practices in marketing, merchandising and retail operations.

 

With a good project pipeline, we are well positioned to deliver against our strategic targets going forward."

 

 

Notes

 

¹In the prior year the Watch Shop and The Watch Lab businesses were carved-out of the Group, these financial results reflect the continuing business only

²IFRS 16 was adopted in FY20 and prior year comparatives were not restated.  These results have been provided pre-IFRS 16 adjustments for comparability

³Refer to the glossary for definition

⁴Net debt is shown net of capitalised transaction costs, refer to the glossary for details

 

 

Analyst and Investor Presentation

A presentation for analysts and investors will be held today starting at 9.00am at the Dorchester Hotel, Park Lane, London.  An audio recording of the event will be available on our corporate website shortly afterwards at https://www.thewosgroupplc.com/investors/results-centre/year/2019.

 

About the Watches of Switzerland Group

The Watches of Switzerland Group is the UK's leading luxury watch specialist, operating in both the UK and US, with a complementary luxury jewellery offer.

The Group is comprised of four prestigious retail brands; Watches of Switzerland, Mappin & Webb, Goldsmiths and Mayors and has been transformed over the last five and a half years into a modern, technologically advanced, omni-channel retailer with a foundation of success based on strong watch brand partnerships, impactful marketing and unrivalled customer experience.

The Watches of Switzerland Group has 132 core showrooms across the UK and US (which includes 20 dedicated mono-brand boutiques in partnership with Rolex, TAG Heuer, Omega and Breitling) and has a leading presence in Heathrow Airport with representation in Terminals 2, 3, 4 and 5 as well as five online transactional websites. 

The Watches of Switzerland Group is proud to be the UK's largest retailer for Rolex, Cartier, Omega, TAG Heuer and Breitling watches.

Mappin & Webb holds Royal Warrants as goldsmiths, silversmiths and jeweller to Her Majesty The Queen and silversmiths to His Royal Highness The Prince of Wales. The Mappin & Webb master jeweller has been Crown Jeweller, custodian of the Crown Jewels of Her Majesty The Queen since 2012.

 

Analyst & shareholder enquiries 

The Watches of Switzerland Group

Anders Romberg

Telephone: + 44 (0) 20 7317 4605

Email: [email protected] 

Media enquiries

Finsbury

Ed Simpkins/Charles O'Brien

Telephone: + 44 (0) 20 7251 3801

Email: [email protected]

 

Introduction

We are pleased with the results for the half year ended 27 October 2019.  Group revenues of £428.7m were up 17.3% with LFL growth of +10.3%, and, on a pre-IFRS 16 basis, adjusted operating profit rose by +23.0% to £31.1m and Basic Adjusted Earnings Per Share of 9.3p were generated.

 

 

Group strategy

 

We are committed to delivering on our key strategic aims which have underpinned the success we have achieved. The pillars of our strategy can be summarised as follows:

 

1.   Investment in and elevation of our showroom portfolio and new showroom opportunities

2.   Being a strong partner for our luxury brands

3.   Delivering exceptional customer service

4. Continuing to develop best in class practices and leverage our scale across merchandising, marketing (including digital marketing, social media and CRM) and retail operations

5.   Expanding omni-channel market leadership

 

This strategy is at the heart of everything we do, and we believe it will allow us to continue to achieve sustainable revenue and profitable growth into FY20 and beyond. Details of how this strategy has been and will be implemented in FY20 is set out below.

 

 

1. Investment in and elevation of our showroom portfolio and new showroom opportunities

 

The Group's investment in showrooms has continued to progress in line with previous guidance.  Our showroom design philosophy is part of what makes us unique.  Our showrooms are luxurious, open, modern and inviting with prominent frontages in the best locations. 

 

In HY20 the Group incurred £12.5m in expansionary capex including, but not limited to:

 

UK

·    Expansion within the travel retail market with the opening of our first Watches of Switzerland showroom at Gatwick North Terminal (August 2019) 

·      Relocation of the Watches of Switzerland Brighton, Goldsmiths Nottingham showrooms and Glasgow Omega boutique

·    Refurbishment of Goldsmiths Merry Hill, Goldsmiths Watford, Mappin & Webb Old Bond Street, Mappin & Webb Manchester, Mappin & Webb Bluewater and Watches of Switzerland 155 Regent Street showrooms

 

Payback on our new UK showrooms is in line with our expectations.  We have typically seen sales uplifts in our refurbished or relocated UK showrooms of c25% in year 1, 40% in year 2 and 50% in year 3.

 

US

·     Commenced our Mayors refurbishment programme with the completion of the Miami International showroom (April 2019)

·     Relocation of Mayors Merrick Park, Coral Gables (June 2019) and conversion to the new Mayors showroom concept

·      Opened the Watches of Switzerland Encore showroom in Boston (June 2019)

·   Mayors Lenox Square, Atlanta relocation (July 2019) incorporating a Mayors showroom and Rolex and Audemars Piguet boutiques

 

Over the last two years we have had success with our US expansion.  With our acquisitions of Mayors and Wynn's showrooms, we have fully integrated and improved operations in line with our best-in-class practices in the UK.

 

Within Mayors, we have seen a positive uplift in performance from refurbished or relocated showrooms. 

 

Opening our New York flagship showrooms required us to build a client base along with promoting the Watches of Switzerland brand to this new market.  We are pleased with the performance of these showrooms and we have seen the revenue in these showrooms continue to grow.  In particular, our Soho showroom has gained much success from holding events such as the Sneaker Time collection, Nas Haute Living cover dinner and various pop-up events for luxury watch brands.

 

 

Showroom / project pipeline:

 

The new project pipeline for the Group continues to be strong and the timing and scope of investment is broadly in line with the guidance set out at the IPO:

 

UK

·      Goldsmiths Edinburgh Fort (November 19)

·      Our first Fope jewellery boutique on Old Bold Street, London (November 19)

·      Conversion of our Watches of Switzerland, Glasgow showroom to a Rolex boutique (April 20)

·      Watches of Switzerland, Knightsbridge extension and new Rolex room (Spring 20)

·      Four new TAG Heuer mono-brand boutiques in Watford, Oxford, Kingston and Cardiff (Spring/Summer 20)

·      Our first Tudor mono-brand boutique in White City (Spring 20), the first in Europe

·    Awarded a new five-year contract with Heathrow for Terminal 3 in conjunction with the development of the showroom to include a new Rolex room (September 20)

·      Watches of Switzerland Broadgate, London (Summer 20) with Rolex and Omega as lead brands

·      Watches of Switzerland Battersea Power Station is now expected to complete in Spring 21 with Rolex as lead brand

 

US

·      Mayors Avalon, Atlanta relocation (March 20)

·      Watches of Switzerland American Dream, New Jersey now expected to complete in Autumn 20 with Rolex as the lead brand

·      Refurbishment of the Wynn Rolex boutique (Autumn 20) and Mayors Aventura, Miami (Summer 2020)

Following the success of our mono-brand strategy in the UK, we have agreed to open eleven boutiques in four locations in the US partnering with Omega, TAG Heuer and Breitling. 

 

Acquisition

 

On 9 December 2019, the Group entered into an agreement with Fraser Hart Limited to purchase four luxury watch and jewellery showrooms.  The showrooms in Stratford, Brent Cross, Kingston and York and offer a variety of luxury watches and jewellery. The showrooms will be rebranded as Watches of Switzerland (Stratford and Brent Cross) and Mappin & Webb (Kingston and York) on completion. 

 

This acquisition complements the Group's UK showroom network and enables us to apply our best in class practices in merchandising, marketing, systems and retail operations. 

 

The four showrooms had a combined annual revenue of £25.7m and 4-Wall EBITDA of £5.0m for the financial year ended 24 June 2019.  Gross tangible assets subject to the transaction are expected to be in the region of £5.5m.

 

The transaction is expected to complete in January 2020 for a total purchase price of £31.7m, subject to working capital adjustments on completion and represents a valuation of 6.3x EBITDA.  The acquisition will be paid in cash from existing borrowing facilities.  The transaction is expected to contribute revenue of c£6m and EBITDA of c£1m in FY20 and will be immediately earnings accretive. 

 

2. Being a strong partner for our luxury brands

 

We hold strong and long-standing relationships with our key brand partners. We are proud of our collaborations with these key partners across all operational areas of our business. 

 

Testament to our strong relationships we have recently partnered with TAG Heuer to open four new mono-brand boutiques in the UK.  We will also partner with Tudor to open their first mono-brand boutique in Europe in White City in Spring 20. 

 

In the US we have opened our first Audemars Piguet boutique in Lenox Square Mall, Atlanta.  Following the success of our mono-brand strategy in the UK, we are now opening eleven boutiques in four locations in the US partnering with Omega, TAG Heuer and Breitling. 

On the jewellery side, we have opened our first Fope boutique on Old Bond Street, London and now offer the full range of Fope lines on our websites.

 

In addition, the strong pipeline of new showrooms and refurbishments that we have laid out is carefully planned and implemented in close collaboration with our supplier partners. 

 

3. Delivering exceptional customer service

 

Customer experience is considered and treated as a major point of difference.  In our competitive and discretionary purchase market, the way we make our customers feel is always a primary focus. With an emphasis on local reputation, trust and networking, every customer is treated as a potential loyal client-for-life by our retail professionals.

 

The training of our showroom colleagues is paramount to delivering exceptional customer service and the Group invests heavily in training and development.  For example, over the Summer, 90 members of showroom management representing every Rolex agency in our UK network attended a two-day offsite programme focussing specifically on customer experience and what it means to partner with such an iconic brand.

 

 

4. Continuing to develop best in class practices of merchandising, marketing (including digital marketing, social media and CRM) and retail operations

 

Merchandising

 

In the first half of the year we concentrated on ensuring we maximise the depth and availability of our stock holding for the best-selling lines of our key partner brands. At the end of HY20, stock levels were good overall across our brand portfolio, as was stock turn.  On the back of strong demand, Rolex stock levels were reduced, and we will continue to proactively manage supply in the second half, as we have done successfully in the past.

 

We have relocated our jewellery workshop and studio to a new state of the art facility in central London.  This workshop is used for the development of commissioned jewellery pieces and includes a VIP consultation room and a large Computer Aided Design and presentation room.  Mappin & Webb's master craftsman, who holds the position of Crown Jeweller, is based in this facility.

 

Marketing

 

A key focus at the beginning of the year was the celebration of our 100 year partnership with Rolex.  Our historic store in Newcastle, Northern Goldsmiths was the first authorised UK stockist of Rolex in 1919.   To celebrate the monumental milestone, we hosted a prestigious event with Rolex at the BALTIC Centre for Contemporary Art in Newcastle to commemorate and thank our loyal North East clients and businesses.  In addition, we also held a series of events across the UK with our loyal Rolex customers to celebrate both our Centenary and the Baselworld Rolex Collection.

 

In the first quarter, we delivered our first YouTube campaign for Goldsmiths across watches and jewellery with a combination of 30 second, 15 second and 6 second edits, which was supported with a GDN (retargeted adverts on websites consumers are browsing) and Local Catalogue Adverts (targeted activity when consumers are searching) which delivered 10 million video views and 60 million advertising impressions.  Due to the success of the campaign, additional campaigns have been developed throughout the year with YouTube being a key strategy for the Christmas campaign.

 

Retail operations

 

In September 2019, we opened a purpose-built National Watch Service Centre in Manchester, expanding our after-sales and service proposition in the UK for luxury watch services.

 

The Service Centre has been designed with two spacious workshops offering a comfortable, high-end working environment, housing cutting-edge equipment and a team of experts that initially includes eleven watchmakers, three case polishers and an administration/customer service team.

 

The facility has been designed and built with significant expansion in mind, offering career opportunities for watch-making graduates as well as brand accredited watchmakers. The Centre's staff benefit from incentives that include the Group's training partnerships with luxury Swiss brands.

 

The Group already has more accredited watchmakers, (primarily based in showroom workshops) than any other UK retailer, and is proud to be a brand-accredited agent of luxury Swiss horology houses including Rolex, Omega, Breitling and Cartier.  This follows the Group's rebranding of its aftercare services earlier this year.

 

As well as complementing the unrivalled in-house services on offer across the network of Watches of Switzerland, Mappin & Webb and Goldsmiths showrooms, the new Service Centre will further improve turnaround times for clients. Consulting closely with key brand partners we have invested in the latest specialist technical, testing and finishing equipment to ensure we comply with brand quality standards.

 

5. Expanding omni-channel market leadership

 

HY20 saw another period of strong growth for our ecommerce business with revenue up +12.0% compared to last year. This was driven through a continuation of improving and evolving our luxury and e-commerce strategies.

 

We continue to push the boundaries of omni-channel digital marketing by leveraging the rapidly evolving Artificial Intelligence and machine learning technologies.  Our aim is to connect customer engagements on an ever-increasing number of devices and touch points, from initial research online through to visiting either our websites or physical showrooms, then through to online or offline purchase.

 

By leveraging the unique capabilities of the Watches of Switzerland Group's retail estate, along with Google's latest technology, we are able to link our physical Stores Sales Data (SSD) to our online digital marketing activity.  This allows us to accurately measure both our showroom and websites' Return on Advertising Spend (ROAS).  Being able to accurately understand and measure the effect that our digital online marketing has on our physical showroom sales means that we are thus able to further optimise our advertising investment.

 

In May 2019 we also updated our online customer experience to include 9pm order cut-off seven days per week, increased next day delivery through DPD and improved luxury packaging.

Watches of Switzerland in the community

We have continued to develop our corporate partnership with The Princes Trust and were sponsor to the National Young Ambassador of the Year award.  As part of our centenary year with Rolex, we retailed 100 exclusive Rolex watches, each with an engraving to mark the anniversary.  The Watches of Switzerland Group and Rolex have each donated £1,000 to the Prince's Trust for every watch sold.

 

We have been delighted to see colleagues engaging with our chosen charity partner on a number of different fronts. Our first team of mentors are trained and ready to be assigned to local schools in November and we have hosted World of Work Days for young people in Leicester and Birmingham.

 

Financial review

 

These tables below and commentary exclude the impact of IFRS 16 and are shown on a continuing basis, to allow for comparability of the results.  A reconciliation between the loss before tax pre-IFRS 16 and post-IFRS 16 is included on page 17.

 

Continuing basis (£m)	HY20	HY19	%
Luxury watches	365.5	300.7	21.6
Luxury jewellery	31.5	32.3	(2.5)
Fashion & classic (incl. jewellery)	14.7	15.5	(5.4)
Other	17.0	16.9	0.6
Revenue	428.7	365.4	17.3
Adjusted EBITDA pre-exceptional and non-underlying items3	43.7	36.8	18.8
Showroom opening and closing costs and other non-underlying items	(2.5)	(3.4)	26.6
Adjusted EBITDA	41.2	33.4	23.5
Depreciation, amortisation, loss on disposal of fixed assets and other non-trading fees	(10.1)	(8.1)	25.1
Adjusted EBIT/operating profit	31.1	25.3	23.0
Net finance costs - ongoing	(4.6)	(12.8)	63.8
Adjusted profit before tax	26.5	12.5	112.0
Exceptional and other non-trading items	(5.7)	(0.1)
Exceptional finance costs	(28.5)	-
(Loss)/profit before tax	(7.7)	12.4	(162.0)
Adjusted basic Earnings Per Share (pre-exceptional items)	9.3p	4.8p	95.2

 

Revenue

Revenues grew strongly in HY20 to £428.7m, up +17.3% on the prior year and LFL +10.3%. Our revenues are spread geographically across our portfolio of showrooms and online as can be seen in the table below:

 

Region (£m)	HY20	HY19	%
UK	317.6	287.2	10.6
US	111.1	78.2	42.1
Total revenue	428.7	365.4	17.3

 

UK revenue is up by +10.6% to £317.6m, driven by LFL sales growth of +11.0% which contributed £29.5m of revenue in the period. 

US revenue has increased by 42.1% in the year to £111.1m, and 35.4% on a constant currency basis.  LFL growth was +7.5% and contributed £5.6m to revenue in the period.  The additional revenue from new showrooms or relocations/expansions of £25.8m was offset by the loss on revenue from closed showrooms of £1.2m.  The impact of the HY20 average US Dollar: Sterling exchange rate decrease from 1.315 to 1.253 over the previous year, resulted in an increased revenue of £3.9m.

US revenue now makes up 25.9% of Group revenue, up from 21.4% in the previous year, showing the success of our US business.

LFL sales

Region	HY20	HY19
UK	+11.0%	+8.3%
US (local currency)	+7.5%	+12.4%
Group	+10.3%	+9.2%

 

UK Like for like sales growth in the first half is higher than we would expect in the second half of the year.  Price increases in the second half of FY19 will annualise in Q3 FY20.  Pricing favourably impacted first half LFL sales growth in the UK by c2%.

Revenue by category

The Group continues to increase revenue in the luxury watch sector, with an increase in revenue of 21.6% in the year.  The split of revenue by category is shown below:

 

HY20 (£m)	UK	US	Total	Mix %
Luxury watches	264.1	101.4	365.5	85.3
Luxury jewellery	25.3	6.2	31.5	7.3
Fashion & classic	14.2	0.5	14.7	3.4
Other	14.0	3.0	17.0	4.0
Total revenue	317.6	111.1	428.7	100.0

 

HY19 (£m)	UK	US	Total	Mix %
Luxury watches	233.4	67.3	300.7	82.3
Luxury jewellery	25.3	7.0	32.3	8.8
Fashion & classic	15.0	0.5	15.5	4.2
Other	13.5	3.4	16.9	4.7
Total revenue	287.2	78.2	365.4	100.0

 

As a result of high demand and the continued execution of the Group's strategy, luxury watches now make up 85.3% of our revenue, an increase of 300bps on last year.   Demand for certain product continues to outstrip demand, restraining potential revenue growth.

 

Luxury jewellery sales were flat in the UK as they were impacted by the closure of non-core stores which were more heavily jewellery based.  UK LFL jewellery sales were +6.2% despite a highly promotional market.  In the US, jewellery sales declined by -10.4% as the Group focused on driving profitability through less promotional activity and a rebalancing of the product ranges in Mayors. 

 

Sales of fashion & classic watches and jewellery reduced in line with our strategy to focus on luxury watches and this category now makes up less than 3.5% of our Group sales.

 

Other revenue, primarily servicing and insurance, rose by +0.6%.

 

Focus on profitable growth

The table below analyses our key costs and margins on a continuing basis:

 

£m	HY20	HY19	%
Net margin3	160.6	136.6	17.6
as % of revenue	37.5	37.4	0.1
Showroom costs	(93.1)	(82.0)	(13.5)
as % of revenue	21.7	22.4	0.7
4-Wall EBITDA	67.5	54.6	23.7
as % of revenue	15.7	14.9	0.8
Overheads	(23.8)	(17.7)	(33.9)
as % of revenue	5.5	4.9	(0.6)
Showroom opening and closing costs	(2.5)	(2.4)	(7.2)
Other non-trading items	-	(1.1)	(100.0)
Adjusted EBITDA	41.2	33.4	23.5
Adjusted EBITDA margin %3	9.6	9.1	0.5

 

Net margin

 

Net margin % increased by 10bpts to 37.5% in HY20.  Margin was negatively impacted by the increase in mix towards luxury watches, which have a lower gross margin.  This impact decreased margin by 60bpts.

 

The impact of product mix on margin has been mitigated by actions taken by management in relation to the Group's credit offer and a reduction in incentives as discussed in the table below.  These benefits will annualise in Q4 FY20.

 

Credit offering

In the UK we offer interest-free and interest-bearing credit to our customers, which is provided through a third-party.  In the US we also offer both interest-free and interest-bearing credit. 97% of credit is provided by a US based third party with 3% provided in-house via a Mayors and Watches of Switzerland proprietary credit card.  By switching more customer purchases to interest bearing credit, we have reduced the costs with our external providers.

Incentives

The luxury products we showcase are in high demand, therefore we have focused on the reduction of incentives to a low level.  This not only improves margin, but better represents the prestige of the brands we offer.

 

Showroom costs

 

Showroom costs have increased by £11.1m (13.5%) in the period as result of new showroom openings (£6.4m), wage inflation (£0.7m) and the increase in variable costs (£3.9m) reflecting the increase in sales. The focus on cost control and showroom efficiency, assisted by the closure of non-core stores, has reduced showroom costs as a % of revenue by 70bps to 21.7%.

 

Overheads

 

Overheads have increased by £6.1m in the period due to additional costs in relation to the introduction of new bonus and LTIP schemes (£1.2m) and additional headcount and legal, professional, board and advisory costs reflecting the listed nature of the business. We have also incurred additional marketing spend in the first half of the year of FY20 of £1.2m, due to the timing of front-loaded spend.

 

Showroom opening and closure costs

 

£m	HY20	HY19
Showroom opening costs	(0.9)	(2.1)
Showroom closure costs	(1.6)	(0.3)
Total	(2.5)	(2.4)

 

Showroom opening costs include the cost of rent (pre-IFRS 16), rates and payroll prior to the opening of the showroom, normally during the period of fit out.  This cost will vary annually depending on the scale of expansion in the year.  We opened two showrooms during HY20 in line with the prior year.

 

During the period we closed a total of two showrooms (both being non-core stores) with associated costs including rent (pre-IFRS 16), rates and redundancy. 

 

Other non-trading items and exceptional costs

 

Other non-trading items in the prior year are made up of a number of costs which are either non-recurring or not related to trading.  These costs have been treated as operating costs in HY20 and the HY19 costs are analysed below:

 

£m	HY20	HY19
Redundancy costs	-	(0.2)
Share-based payments	-	(0.2)
Other one-off legal, professional fees and advisory fees	-	(0.7)
Total	-	(1.1)

 

Reported profit in HY20 was impacted by costs incurred in relation to the IPO of £5.7m. 

 

Finance costs

 

Ongoing net finance costs (pre-IFRS 16) reduced in the period by £8.2m to £4.6m as a result of the refinancing which took place in June 2019 (see below).  This included 37 days of interest cost in the current year under the old financing agreement.  Had the current financing facility been in place for the entire HY20 period, net finance costs would have been £1.7m lower than reported.

 

As a result of the refinancing, the Group incurred a one-off early redemption fee of £21.7m and has written off £6.8m of transaction costs capitalised under the old facility.  These have been treated as exceptional finance costs in the period.

 

Profit before tax

 

As a consequence of the items noted above, adjusted profit before tax (before exceptional items and IFRS 16 adjustments) was £26.5m, an increase of £14.0m (112.0%) on the prior year.  Adjusted profit before tax benefited from the favourable US Dollar to Sterling exchange rate by £0.2m.

 

After accounting for exceptional administration costs of £5.7m, exceptional finance costs of £28.5m and IFRS 16 adjustments of £1.3m, statutory loss before tax was £9.0m.

 

Taxation

 

The effective pre-exceptional tax rate (pre-IFRS 16) for the year is expected to be 20.5%, broadly comparable to the UK corporation tax rate of 19.0%.    The IPO costs and early repayment fees on the bond subject to interest restriction, which are disallowed costs for tax purposes in HY20.  This resulted in a lower recovery of tax £0.5m against the pre-tax loss of £7.7m. Post exceptional effective tax rate for the full year is expected to be around 25.5%.

 

Earnings Per Share

 

Basic EPS from continuing operations for the current year has been calculated as follows:

 

HY20	Adjusted EPS (before exceptional items and IFRS 16 adjustments)	EPS (after exceptional items but before IFRS 16 adjustments)	Statutory EPS (incl. IFRS 16)
Profit after tax	£21.2m	(£7.2m)	(£8.1m)
Weighted average number of ordinary shares	228,090,719	228,090,719	228,090,719
EPS	9.3p	(3.1)p	(3.5)p

 

In HY19, the Watches of Switzerland Group PLC company did not exist.  For comparative purposes we have calculated basic EPS using the number of ordinary shares of Watches of Switzerland Group PLC immediately prior to the IPO, occurring on 4 June 2019.  The results are as follows:

 

HY19	Adjusted EPS (before exceptional items)	Statutory EPS
Profit after tax	£8.6m	£8.5m
Weighted average number of ordinary shares	182,000,000	182,000,000
EPS	4.8p	4.7p

 

The weighted average number of shares at 26 April 2020 will be 233,733,137, assuming no further ordinary shares are issued.

 

Balance sheet

 

The balance sheet below is shown pre-IFRS 16 adjustments for comparability.  A reconciliation to the post-IFRS 16 balance sheet is included on page 18.

 

£m	HY20	HY19
Intangibles	127.0	126.2
Property, plant & equipment	105.3	89.5
Inventories	220.7	212.6
Trade and other receivables	25.7	34.2
Other	4.9	5.9
Net assets of discontinued operations	-	35.5
Trade and other payables	(183.7)	(172.2)
Net debt	(92.1)	(234.9)
Net assets	207.8	96.8

 

Property, plant & equipment

 

Total capital additions in the period was £12.9m made up of £12.5m of expansionary capex and £0.4m maintenance capex.  The investment in our showroom portfolio is paramount to our strategy as discussed previously. 

 

Capital additions (£m)	HY20	HY19
Expansionary	12.5	15.6
Showroom maintenance	0.2	0.4
IT and technology	0.2	0.5
Total	12.9	16.5

 

Inventories

Inventories are £8.1m higher than the prior year (3.8%) reflecting the increase in the showroom estate and higher like for like sales.  The Group has invested in increasing the depth of stockholding of best-selling brand lines to maximise sales.  Whilst stock is 3.8% higher than last year, revenue for the Group is +17.3% with intake lower than demand and with lower core stockholding across our showroom estate for certain brands.

 

Trade receivables

 

Trade receivables have reduced by £8.5m (24.9%) primarily due to the planned reduction in the level of in-house credit offered in our US business, favouring the use of external financing companies.

 

Net assets of discontinued operations

 

These assets represent the net assets of the Watch Shop and The Watch Lab businesses which were carved out of the Group in December 2018.  These have been shown separately to provide better comparability of the ongoing net assets of the Group.

 

Trade and other payables

 

Trade and other payables have increased by £11.5m (6.7%) reflecting the increase in inventories and accruals for bonus and IPO related exceptional costs which were not yet paid at the end of HY20.

 

Net debt and financing

 

The net proceeds of the IPO of £148.4m were primarily used to reduce our external debt to a level more appropriate for a publicly listed company.  Accordingly, on 4 June 2019 the outstanding principal of the UK bonds were repaid, including an early redemption premium of £21.7m. On the same date, the Group drew down on a new term loan facility at a significantly lower rate of interest.  The facilities of the Group are now as follows:

 

Type	Expiring	Amount (£m)
UK Term Loan - UK LIBOR +2.25%	June 2024	£120.0
UK Revolving Credit Facility - UK LIBOR +2.0%	June 2024	£50.0
US Asset Backed Facility - US LIBOR +1.25%	April 2023	$60.0

 

HY20 net debt was £92.1m, which was £142.8m lower than the prior year.   EBITDA leverage improved to 1.1x benefiting from the IPO, refinancing and strong cash generation in the period.

 

Covenants

 

The debt facility is subject to a six-monthly financial covenant test on leverage and fixed charge cover ratio.  These tests are based on pre-IFRS 16 measures and therefore the implementation of IFRS 16 has had no impact on financial covenants.

 

Pension

 

The Group operates two defined contribution pension schemes and one defined benefit scheme.  The defined benefit scheme was closed on 28 February 2002 to new employees and future accrual.  The latest full actuarial valuation was carried out on 6 April 2017 which reflected a technical deficit of £1.7m.  As a result, minimum funding contributions of £550,000 per annum are being paid into the scheme until 5 April 2020.

 

The pension liability for accounting purposes at 27 October 2019 was £3.4m, an increase of £0.3m from the FY19 year end, primarily driven by the change in discount rate. 

 

Cash flow        

£m	HY20	HY19
Adjusted EBITDA	41.2	33.4
Exceptional costs paid	(2.1)	(0.6)
Working capital and other	16.8	7.3
Pension contributions	(0.3)	(0.4)
Tax	(6.0)	(2.3)
Cash generated from operations	49.6	37.4
Capital expenditure	(15.8)	(16.1)
Interest	(8.9)	(5.8)
Proceeds from IPO	148.4	-
Financing activities	(156.2)	(25.8)
Cash flow	17.1	(10.3)

 

The working capital movement was £16.8m favourable with ongoing reductions in the US in-house consumer debt.  The stock increase has been more than offset by the favourable increase in creditors, due to higher accruals for bonus and IPO costs and inventory creditors at HY20.

 

£8.9m of interest was paid in the period, £8.2m of which related to the accumulated interest, representing 4.5 months of interest for the bond prior to refinancing.  The equivalent HY19 bond interest payment of £5.4m represented three months of interest.  

 

Tax payments are £3.7m higher than HY19 as a result of a change in quarterly tax instalments.

 

As noted above, the proceeds from the IPO were used to refinance the existing bond, this payment included the exceptional early redemption premium for the bond.

 

 

Audit tender

 

Under CMA guidelines, FTSE 350 companies are required to have held a tender for the audit appointment within the last ten years.  As a private company, KPMG had been external auditor of the Group for over ten years.  Therefore, on Admission, the Audit Committee commenced an audit tender for the financial year ending 26 April 2020.  Shareholders voted in favour of the appointment of Ernst & Young LLP at the AGM held on 17 October 2019.

 

Outlook and guidance

 

The results for HY20 have been encouraging and the Group remains well positioned to deliver on its strategy.  There continues to be a strong pipeline of projects, including new showroom, expansions and refurbishments.

 

As a result, we have upgraded our guidance for FY20 from that given at the time of the IPO to come in line with current market consensus. FY20 guidance, before IFRS 16 adjustments, is:

 

FY20 Guidance	Current guidance	IPO guidance
Revenue - like for like sales	+8%-9%	Mid-single digit
Total revenue	In line with market consensus5	n/a
EBITDA3 margin (before pre-opening and closing costs)	Increase of 20 to 40bpts from FY19	Broadly stable
Pre-opening and closing costs	£4m-£5m	In line with longer term averages
Depreciation, amortisation, impairment and loss on disposal of fixed assets	£20m-£22m This includes c£2m write off of fixed assets relating to refurbishment and relocation of existing showrooms	n/a
Total finance costs	£7m-£8m; this includes £1.7m of incremental interest paid on the pre-IPO bond prior to redemption in HY20	n/a
Underlying tax rate	c20.5%	c20.0%
Capital expenditure	£22m-£25m. Lower than the £25m-£29m previously guided as capex on the American Dream project will not be incurred until FY21	£30m-£34m
Net debt	£90m-£100m	n/a

 

 

The acquisition of the four Fraser Hart showrooms is expected to additionally increase revenue by c£6m, EBITDA by c£1m, depreciation by £0.2m and finance costs by £0.2m.  Net debt is expected to increase to £120m-£130m as a result of the acquisition.

 

⁵Market consensus is based on analyst consensus as disclosed on our corporate website at https://www.thewosgroupplc.com/investors/analyst-consensus; consensus is shown before exceptional items and IFRS 16 adjustments as follows: revenue £877.5m, adjusted EBITDA £82.5m, EBIT £65.9m and profit after tax £46.3m.

 

 

Appendix - IFRS 16 Leases

 

The financial results included on pages 1 to 16 exclude the impact of the adoption of IFRS 16 'Leases'.  This means that operating leases have been held off balance sheet with the lease costs recognised on a straight-line basis over the lease term, following the accounting treatment adopted in the prior year.

 

The Group has implemented IFRS 16 using the modified retrospective approach, which means that prior year balances have not been restated.

 

Accounting under IFRS 16

 

IFRS 16 applies a single 'on balance sheet' approach to lease accounting.  Under IFRS 16, leases are accounted for as follows:

 

·     A right-of-use asset is recognised which represents the lessee's contractual right to use the lease asset over the lease term.  The right-of-use asset is depreciated on a straight-line basis over the lease term.

·     A lease liability is recognised which reflects the lessee's obligation to make payments under the lease term.  The lease liability is held at amortised cost, with an associated interest charge.  This results in a higher interest expense in the earlier years of the lease term.

 

IFRS 16 results in the timing of lease expense recognition being accelerated for leases which would be currently accounted for as operating leases.  However, the total expense over the life of the lease will be identical under IFRS 16 and IAS 17.

 

Income Statement impact

 

The impact of the implementation of IFRS 16 on the Income Statement is as follows:

 

£m	Under IAS 17	IFRS 16 adjustments	Under IFRS 16
Adjusted EBITDA	41.2	22.8	64.0
Depreciation and amortisation	(10.1)	(18.2)	(28.3)
Adjusted operating profit	31.1	4.6	35.7
Exceptional items	(5.7)	-	(5.7)
Operating profit	25.4	4.6	30.0
Ongoing finance costs	(4.6)	(5.9)	(10.5)
Exceptional finance costs	(28.5)	-	(28.5)
Loss before tax	(7.7)	(1.3)	(9.0)
Taxation	0.5	0.4	0.9
Loss after tax	(7.2)	(0.9)	(8.1)

 

Adjusted EBITDA increased by £22.8m as a result of adding back the operating lease rentals under IAS 17.  This has been replaced with depreciation of the right-of-use asset and interest on the lease liability.

 

Balance Sheet impact

 

The impact on the Balance Sheet of the IFRS 16 at 27 October 2019 was as follows:

 

£m	Under IAS 17	IFRS 16 adjustments	Under IFRS 16
Non-current assets	245.9	242.0	487.9
Current assets	295.0	(5.9)	289.1
Current liabilities	(189.3)	(42.1)	(231.4)
Non-current liabilities	(143.8)	(215.2)	(359.0)
Net assets	207.8	(21.2)	186.6

 

On implementation of IFRS 16 on 29 April 2019, a transitional adjustment of £20.3m decreased retained earnings and distributable reserves.

 

Net debt on a pre-IFRS 16 basis was £88.9m (including capitalised transaction costs) at 27 October 2019.  This increases to £369.7m under IFRS 16 due to the recognition of the lease liabilities of £280.8m.

 

Our banking covenants are based on a frozen-GAAP basis and therefore the application of IFRS 16 has no impact.

 

 

Cash Flow impact

 

IFRS 16 does not impact the total cash flow during the period.  However, under IAS 17 the rental payments were included within operating activities, whereas under IFRS 16 these are treated as financing activities.  The £nil impact on the cash flow is shown in the table below:

 

£m	Under IAS 17	IFRS 16 adjustments	Under IFRS 16
Net cash from operating activities	49.6	22.8	72.4
Investing activities	(15.8)	-	(15.8)
Financing activities	(16.7)	(22.8)	(39.5)
Cash flow	17.1	-	17.1

 

 

Leases and lease length

 

The average lease term remaining (to the nearest break clause) on our current portfolio of showrooms is 4.4 years.  More than half of our leases (by value) will expire, or can be terminated, within the next 3.7 years.  

 

Only seven of our showroom leases expire in more than 10 years at 27 October 2019, the longest expiry being 11.9 years. 

 

On an IFRS 16 basis, in general leases have been recognised to the end of the lease term rather than the nearest break clause.

 

Market briefing

A presentation for analysts and investors will be held today starting at 9.00am at the Dorchester Hotel, Park Lane, London.  An audio recording of the event will be available on our corporate website shortly afterwards at https://www.thewosgroupplc.com/investors/results-centre/year/2019.

 

 

Cautionary statement

 

This announcement contains certain forward-looking statements with respect to the financial condition and operational results of Watches of Switzerland Group. These statements and forecasts involve risk, uncertainty and assumptions because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements. These forward-looking statements are made only as at the date of this announcement. Nothing in this announcement should be construed as a profit forecast. Except as required by law, Watches of Switzerland Group PLC has no obligation to update the forward-looking statements or to correct any inaccuracies therein.

 

The information contained within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. Upon the publication of this announcement, this inside information is now considered to be in the public domain.