H1 FY21 Results

 

 

Watches of Switzerland Group PLC

H1 FY21 Results

for the 26 weeks to 25 October 2020

 

Robust H1 performance with leading position in luxury watches further strengthened

Full year guidance on sales and profitability revised upwards

 

Watches of Switzerland Group PLC ("the Group") today provides the following financial results relating to the 26 weeks ending 25 October 2020 (HY FY21) and an update on trading for the seven weeks to 13 December 2020.

 

Brian Duffy, Chief Executive Officer, said:

"We have continued to deliver on our strategic priorities during the first half, achieving a robust performance against significant headwinds, further consolidating our position in luxury watches and demonstrating the unique, supply-driven qualities which underpin the resilience of our category and the strength of our business."

 

Strong H1 FY21 Performance Delivered Despite Significant Headwinds

·   Revenue of £414.3 million (H1 FY20: £428.7 million), -2.6% in constant currency terms, -3.4% in reported terms

o  Strong trading during Q2, +21.5% in constant currency terms, +19.8% in reported terms

o  Stores trading at 59% of total potential hours across H1 FY21, due to lockdown and disruptions

o  Ecommerce sales +65.4%

·    Adjusted EBITDA¹ +26.5% to £52.2 million (H1 FY20: £41.2 million), achieving Adjusted EBITDA margin¹ of 12.6% (H1 FY20: 9.6%)

·     Adjusted EBIT¹ +33.1% to £41.5 million (H1 FY20: £31.1 million)

·     Statutory operating profit +52.1% to £45.6 million (H1 FY20: £30.0 million)

·     Statutory profit before tax £36.2 million (H1 FY20: Loss before tax £(9.0) million)

·    Expansionary capital expenditure² of £9.1 million (H1 FY20: £12.5 million) with six new stores opened, two  stores expanded and one refurbished

·     Free cash¹ flow of £116.1 million (H1 FY20: £44.1 million) with conversion of 222.6%

·     Return on capital employed¹ increased to 17.2% (H1 FY20: 15.7%)

·     Net debt¹ reduced to £22.7 million as at 25 October 2020 (27 October 2019: £92.0 million); EBITDA leverage¹ of 0.25x (H1 FY20: 1.1x)

 

Operational Highlights

·    Agility and adaptability have characterised the Group's response to the global pandemic during this period, leveraging on a robust business model with a strong customer focus

·   Resilient UK performance with H1 FY21 sales -7.4% achieved despite the significant headwinds from the pandemic resulting in store closures, lower traffic since reopening and impact to global travel

o  Strong domestic sales offset lower tourist and airport business which accounted for 7.4% of Group revenue (H1 FY20: 33.6%) 

·    Increased investment enabled the Group to adapt to the changing customer behaviour and evolving retail   landscape throughout pandemic

·    US business continues to advance, with H1 FY21 sales +11.0% in constant currency terms, illustrating the adaptability of the business model

·   Delivering an exceptional customer experience remains a priority, further initiatives were introduced and   further enhancements were made to CRM and clientelling

·      Focus on digital marketing with impactful events and campaigns launched

·      Continued investment in stores with several important projects completed

o  Five new mono-brand boutiques opened in the UK including one Rolex boutique, three TAG Heuer boutiques and one Tudor boutique, the first in Europe

·    Acquisition of Analog Shift, US retailer of vintage and pre-owned watches to further advance the Group's   strong and growing position in the US market

 

Current Trading

·     Q3 FY21 to date has had a positive, stronger than anticipated start despite the impact of national lockdowns in the UK and reduced international clientele and shopping centre traffic

·    Group revenue for the seven weeks to 13 December 2020, +11.9% in constant currency, +11.2% in reported terms

·    Stores were closed for four weeks due to the national lockdown in England and for shorter periods in Wales and Scotland and as a result the UK store network traded 44% of potential trading hours

·     Higher conversion is more than offsetting lower traffic across both the UK and US

·     UK sales +7.7%

o  Business optimised with ecommerce, CRM, clientelling, digital, new click and collect service

o  Ecommerce sales +102.4%

o  New Watches of Switzerland store opened in Broadgate, London

o  Refurbished, expanded Watches of Switzerland store opened in Knightsbridge, London

o  Stores in England reopened on 2 December 2020, when trading returned to a lively pace

·     US sales +22.7% in constant currency

o  Continued strong momentum across Mayors in Florida and Georgia and in Watches of Switzerland stores in New York

o  Five mono-brand boutiques opened in the US (TAG Heuer, Breitling, OMEGA)

o  Moderated trends in Las Vegas reflecting the impact from lower domestic tourism

 

Outlook

·    Stronger than anticipated H1 performance and positive start to Q3 FY21 trading; as a result, the Group revises upwards FY21 guidance (pre-IFRS 16 adjustments, based on a 53-week period):

o  Revenue: £900.0 million to £925.0 million (previous guidance £880.0 million to £910.0 million)

o  EBITDA margin and Adjusted EBITDA margin %: +1.5% to 2.0% vs last year (previous guidance +1.0% to 1.5% vs last year)

o  Underlying tax rate: 20.0% to 21.5% (previous guidance 21.0% to 22.5%)

o  Depreciation, amortisation, impairment and profit/loss on disposal of fixed assets: based on the planned elevation of Goldsmiths luxury stores and a review of the frequency of change of branded furniture (performed in H2), we have revised the useful lives of store assets which will result in an increase to depreciation of £5.4 million; this is reflected in the guidance which is now £26.4 million to 28.4 million (previous guidance £21.0 million to £23.0 million)

o  Net debt: £60.0 million to £80.0 million (previous guidance £80.0 million to £100.0 million)

o  All previous guidance remains unchanged:

§ Total finance costs: £5.3 million to £5.8 million

§ Capex: £28.0 million to £30.0 million

·     We intend to repay furlough support received from the UK Government during this financial year, subject to no significant disruptions affecting our performance during the remaining months of FY21

·     Brexit assessment has been carried out and we do not foresee any material impact on our supply chain

·     New elevated store design for Goldsmiths luxury locations in the UK to be rolled out from Summer 2021

 

 

Brian Duffy, Chief Executive Officer, continued:

"I am proud of our colleagues who have demonstrated a positive attitude and commitment whilst continuously adapting to this year's many challenges.  I am pleased we have been able to maintain full employment and salary payment throughout lockdown and disrupted trading.  We received the UK Government's furlough support while our stores were closed due to Covid-19 restrictions, however, given the very strong performance to date and projected, we are now planning to repay it.

 

Despite significant headwinds throughout the period, we achieved a good sales performance with domestic customers offsetting lower tourist and airport sales in the UK, and elevated momentum in the US.  The Group's ambition, adaptability and technical strength were positively demonstrated through enhanced digital activity, a step up in online, increased marketing, CRM and click and collect.  With positive cash management, we have further reduced debt and have a significant liquidity headroom.

 

We were fully prepared for the re-opening of our stores in England on 2 December 2020 with trading resuming at a brisk rate.  As a result of our stronger than anticipated first half performance and positive trading in the first part of Q3, we have revised our full year guidance upwards.  Our guidance assumes some further negative trading impact from potential lockdown measures in January and February 2021.  We have also taken into account the removal of tax-free shopping in the UK from 1 January 2021.  We believe that the UK Government has misjudged the impact of removing tax-free shopping for tourists and we will continue to support all efforts to have this changed.

 

We are confident we are well positioned for future growth, with plans to continue to invest in further cementing our market leadership in the UK and to build upon our early success generated to date in the US."

 

H1 FY21 Revenue Performance by Geography

 

	Q2				H1
(£m)	13 weeks to 25 Oct 2020	13 weeks to 27 Oct 2019	YoY variance %	Constant currency YoY variance %	26 weeks to 25 Oct 2020	26 weeks to 27 Oct 2019	YoY variance %	Constant currency YoY variance %
UK	185.9	162.6	14.3%	14.3%	294.2	317.6	(7.4)%	(7.4)%
US	76.8	56.7	35.5%	42.6%	120.1	111.1	8.1%	11.0%
Group Revenue	262.7	219.3	19.8%	21.5%	414.3	428.7	(3.4)%	(2.6)%

 

Q2 and H1 FY21 Revenue Performance by Category

 

	Q2			H1
(£m)	13 weeks to 25 Oct 2020	13 weeks to 27 Oct 2019	YoY variance %	26 weeks to 25 Oct 2020	26 weeks to 27 Oct 2019	YoY variance %
Luxury watches	230.5	188.0	22.6%	362.1	365.5	(0.9)%
Luxury jewellery	16.4	15.4	6.2%	26.3	31.5	(16.3)%
Other	15.8	15.9	(1.0)%	25.9	31.7	(18.6)%
Group Revenue	262.7	219.3	19.8%	414.3	428.7	(3.4)%

 

Q2 and H1 FY21 % Total Potential Traded Hours

 

	Q2	H1
UK	86%	61%
US	68%	56%
Group	81%	59%

 

 

 

Conference call

A webcast conference call for analysts and investors will be held at 9.00am (UK time) today. To join the call, please use the following details:

 

https://www.investis-live.com/thewosgroupplc/5fd0e0a111f22511008c5539/hjks

 

[1] This is an Alternative Performance Measure and is shown on a pre-IFRS 16 basis.  Refer to the Glossary on page 42 for definition, purpose and reconciliation to statutory measures where relevant.

2 Refer to the Glossary on page 42 for definition.

 

Contacts

The Watches of Switzerland Group

Anders Romberg, CFO                                                                                      +44 (0) 116 2817 401

Allegra Perry, Investor Relations                                                                         +44 (0) 20 7317 4600

[email protected] 

 

Headland

Lucy Legh / Rob Walker                                                                                     +44 (0) 20 3805 4822

[email protected] 

 

About the Watches of Switzerland Group

The Watches of Switzerland Group is the UK's largest luxury watch retailer, operating in both the UK and US, comprising four prestigious brands; Watches of Switzerland (UK and US), Mappin & Webb (UK), Goldsmiths (UK) and Mayors (US), with complementary jewellery offering.

 

The Watches of Switzerland Group has 138 core stores across the UK and US (which includes 27 dedicated mono-brand stores in these two markets in partnership with Rolex, TAG Heuer, OMEGA, Breitling, Audemars Piguet, Tudor and FOPE) and has a leading presence in Heathrow Airport with representation in Terminals 2, 3, 4 and 5 as well as five 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.

 

https://www.thewosgroupplc.com 

 

 

 

Group Strategy Continuing to Deliver Results

 

The Group delivered a strong performance during H1 FY21, further cementing its leadership in the UK luxury watch market and continuing to build on the strong position established in the US.

 

The Group continued to deliver on its six strategic priorities despite a backdrop of COVID-19 related disruption and significant headwinds. 

 

1) Grow revenue, profit and return on capital employed

           

Despite the challenges posed by the pandemic, we have continued to develop our store portfolio at pace, both in the UK and the US.  Progress already delivered this year includes:

 

UK

 

·      Further development of mono-brand boutique channel:

o  Three new UK TAG Heuer boutiques (June and July 2020)

o  Rolex boutique in Glasgow, converted from Watches of Switzerland (July 2020)

o  First Tudor boutique in White City, London (September 2020)

·      Expansion and refurbishment of Watches of Switzerland Knightsbridge flagship store (December 2020)

·      New Watches of Switzerland flagship store in Broadgate, London (December 2020)

 

US

 

·      Five new mono-brand boutiques in three locations (December 2020):

o  Two new TAG Heuer boutiques (Long Island, Philadelphia)

o  Two new Breitling boutiques (Philadelphia, San Jose)

o  One new OMEGA boutiques (Long Island)

 

We continue to have an exciting pipeline for future store projects across both our markets including several new mono-brand boutiques, the continued elevation of the Mayors estate in Florida and Georgia, refurbishments of the recently acquired Fraser Hart stores in the UK as well as the continual upgrade and modernisation of the core store portfolio in the UK, with the roll out of Goldsmiths Luxury planned from Summer 2021.

 

2) Enhance strong brand partnerships

 

We are proud of our strong and long-standing relationships with the most recognised and prestigious luxury watch brands, which remain a point of distinction and which have further strengthened during this period. 

 

Collaboration with our key brand partners spans all operational areas of our business.  We maintain an active dialogue with our brand partners to identify distribution opportunities and partner on demand forecasting, product development and launches, store projects, online platform, clientelling initiatives and marketing activities.

 

In order to ensure our colleagues have the required training and expertise to deliver an exceptional customer experience, we focus on extensive learning and development with the ongoing support of our brand partners.  This was further advanced during the first half with approximately 20,000 e-learning modules completed.

 

We have further developed the mono-brand boutique channel in the UK and established a significant presence in the US with further planned in both markets going forward.

 

As a key component of our multi-channel strategy, we continue to further develop our capabilities in ecommerce, enhancing the range of brands transacted online at the beginning of the financial year with the addition of several brands which had previously only been transacted in store: Jaeger-LeCoultre, Panerai, Vacheron Constantin, Piaget, Roger Dubuis, Grand Seiko.

 

Co-operative marketing continues to be a key area of our cooperation with the brands, which we continue to enhance across various initiatives including digital communications, events and advertising.

 

3) Deliver an exceptional customer experience

 

Developments and enhancements to customer experience allowed us to adapt to pandemic-related store closures and disruptions and trade continuously.   An online appointment system, "By Personal Appointment" was developed and launched in the UK, allowing customers to book an instore, phone or virtual appointment.  Over 70,000 appointments have been made and achieved a strong conversion rate.  We also introduced the Virtual Luxury Boutique where customers can talk directly online to one of our specialist luxury watch experts.

We adapted to the changing environment and new regulations introduced by further increasing our engagement and communication with our valued clients through new virtual events. Within the UK, we introduced our purpose-built, Watches of Switzerland Group branded digital event platform allowing us to connect with our key clients in a format that maintains our luxury experience, whilst allowing our clients to enjoy the experience from the comfort and safety of their own location.  Between June and October 2020, we held 22 successful virtual events, entertaining over 1,000 VIP clients in the UK.

4) Drive customer awareness and brand image through multimedia with bold, impactful marketing

 

Investment in our digital marketing channels and campaigns has continued to be a core pillar during 2020.  During Q1, we launched a digital display first campaign in the UK, focusing on communicating the breadth of range available online to a highly targeted luxury audience.  The campaign delivered both increased awareness of Watches of Switzerland in the UK and contributed to a strong ecommerce performance. 

During Q2, the campaign evolved into our first 'Global Group campaign' combining our Search & Shopping strategy with YouTube, Display and Paid Social to deliver a market leading digital first initiative and highlighting a broader range of luxury watch brands in both the UK and the US.  Supported by best in class creative concepts, the channels continue to generate above benchmark results for luxury retailers in both markets.

During the first half, in the UK we achieved an average monthly digital social media reach of 41.7 million and a total 1 billion digital impressions and 10.7 million total clicks.

We introduced dedicated launch plans across PR, social media and email to support the Group's mono-brand expansion strategy in the UK.  We also held a virtual opening event for our new Tudor boutique with signed watch boxes and a 'virtual appearance' from the Tudor brand ambassador, David Beckham. 

We also transitioned from in-person to virtual events in the US, partnering with brands to unveil product launches, including new lines from Grand Seiko and Tudor. 

We held an in-person event during October 2020 in New York with artist and director Curtis Jackson (50 Cent), hosting 30 notable influencers in our Watches of Switzerland SoHo store from the film, fashion and music industries including Starz CEO Jeffrey Hirsch, Actor and Watchmaker Aldis Hodge and Emmy Award-winning actress and journalist Alicia Quarles.

 

During the first half, in the US, Mayors achieved monthly digital social media impressions of 2.2 million, whilst our digital campaign generated 47 million impressions and we achieved 1 billion PR impressions.

 

5) Leverage best in class operations

 

Merchandising

 

We continue to improve and enhance our merchandising function as a customer-focused driver of product availability and access, providing a unique point of difference in the way we run our stores. 

 

Underpinned by a customer-centric approach, our merchandising capabilities optimise stock availability, enhance store productivity and allow for nationwide coverage.  Advanced market analysis run on SAP software enables extensive store profiling, productivity and trend analyses, seasonal changes and sales and inventory forecasting.

 

Retail operations

 

We run all our stores to be profitable.  In order to achieve this, a high level of accountability and performance management is used to run our retail network.

 

During the period we closed two non-core stores in the UK, in line with the prior year.  The Group successfully renegotiated certain rental arrangements and transitioned from turnover rent to fixed rent agreements across some of its UK store base.

 

IT Systems

 

We further refined and enhanced our SAP-based ecommerce platform and updated IT equipment within our distribution centre to maximise performance and efficiencies.  This includes simplifying the inventory sharing processes for our store staff ready for launch across all facias early in the new year.

 

We have released a remote selling payment platform to our US stores following the UK PayByLink solution release earlier this year, enabling company-wide simplified payments with reduced risk.

 

6) Expand multi-channel leadership

A programme of sustained and elevated investment in our multi-channel model has enabled us to enhance our platform and react with speed and agility to the rapidly evolving retail and consumer dynamics whilst further building our leadership position.   Our focus remains on developing the growing channels of multi-brand stores, online, travel retail and mono-brand boutiques.

Multi-brand stores

Our multi-brand store network is present in the UK with nationwide scale and in the US with a strong and growing presence in Florida, Georgia, New York and Las Vegas.  Through our modern and inviting store environments, we showcase a selection of the world's finest watches.  We continue to invest in these beautiful stores, both in elevating and upgrading the existing network as well as opening in new, strategic locations.

Online

Online, supported by a strong retail presence, has become increasingly important during this period, not only as a major starting point in the customer journey, but also as a key channel of communication for transactions made both in store and online.  We have continued to adapt to market trends and changing customer behaviours with reactive initiatives, accelerating our roadmap with the following initiatives:

·      By Personal Appointment: new client to store appointment booking system, allowing easier communication with the store of choice via safety-assured physical appointment, over the phone or Zoom video

·      Luxury Watch Virtual Boutique: a service which enables our customers to reach out and seek instant pre-sale advice from the Group's watch experts, leveraging video, text and voice with co-browsing capabilities

·      Ecommerce: several luxury watch brands which were previously only transacted in store were added to our ecommerce platform, further enhancing the online experience

·      AI-driven digital marketing:  our machine-driven marketing pulls on real-time store/online signals and changes in consumer behaviour as clients migrated online

 

 

Mono-brand boutiques

 

We continue to develop and expand the network of mono-brand boutiques in both the UK and the US.  We operated 22 mono-brand boutiques in the UK and five in the US as at 25 October 2020.  In addition, we opened a further two mono-brand boutiques in the UK and five in the US since the end of the first half.

 

We plan to continue to develop and enhance our boutique network with a strong pipeline of projects planned for FY21 and beyond.

 

Travel retail

 

Travel retail has remained under pressure due to the ongoing impact to global travel from COVID-19.   The Group believes this channel enhances our presence with the international customer base and offers a significant medium and long-term growth opportunity for the business.  We continue to enhance the network in order to be best positioned when industry trends improve.

 

We renegotiated the contracts for our stores in Heathrow Airport and agreed a short-term extension to end FY21 on revised terms with a view to negotiating a further contract from the beginning of FY22.

 

 

 

 

Chief Financial Officer's Review

 

We are very pleased with the results we have delivered for H1 FY21.  The business continues to show resilience in the face of the pandemic and the supply-driven dynamics of our category continue to deliver growth in profit.  Our trading results for the first half of FY21 have been a tale of two halves;  Q1 was significantly impacted by the national lockdown of stores in the UK and US, leading to Group sales being down 27.6% (-27.7% on constant currency basis), whilst Q2 performance was stronger than expected with Group sales up 19.8% (21.5% on a constant currency basis). Subsequent to the end of Q2 FY21, the Group experienced a four week lockdown impacting all stores in England from 5 November 2020 until 2 December 2020.  Trading during this period was encouraging and as a result we have upgraded our sales and profit guidance for the full year.

 

The Group's Statutory Income Statement is shown below which includes IFRS 16 adjustments and exceptional items.

 

Statutory Income Statement (£million)	26 weeks to 25 October 2020	26 weeks to 27 October 2019	YoY variance %
Revenue	414.3	428.7	(3.4%)
Operating profit	45.6	30.0	52.1%
Net finance costs	(9.4)	(39.0)	(75.9%)
Profit before tax	36.2	(9.0)	-
Tax	(7.3)	1.0	-
Profit after tax	28.9	(8.0)	-
Basic Earnings Per Share	12.0p	(3.5)p	-

Management monitors and assesses the business performance on a pre-IFRS 16 and exceptional items basis, which is shown below. This aligns to the reporting used to inform business decisions, investment appraisals and incentive schemes. A full reconciliation between the pre- and post-IFRS 16 results are shown in the Glossary on page 42.

 

Income Statement - pre IFRS 16 and exceptional items (£million)	26 weeks to 25 October 2020	26 weeks to 27 October 2019	YoY variance %
Revenue	414.3	428.7	(3.4%)
Net margin1	150.5	160.6	(6.3%)
Store costs	(72.1)	(93.1)	22.6%
4-Wall EBITDA1	78.4	67.5	16.2%
Overheads	(24.3)	(23.8)	(2.3%)
EBITDA1	54.1	43.7	23.7%
Store opening and closing costs	(1.9)	(2.5)	22.2%
Adjusted EBITDA	52.2	41.2	26.5%
Depreciation, amortisation and loss on disposal of fixed assets	(10.7)	(10.1)	(6.1%)
Segment profit (Adjusted EBIT)	41.5	31.1	33.1%
Net finance costs	(3.2)	(4.6)	31.7%
Adjusted profit before tax1	38.3	26.5	44.5%
Adjusted basic Earnings Per Share1	12.6p	9.3p	35.5%

 

 

 

Revenue

 

Revenue in H1 FY21 reduced by 3.4% on the prior year to £414.3 million (-2.6% on a constant currency basis). US revenue made up 29.0% of Group revenue, increasing from 25.9% in the prior year.   The first quarter was heavily impacted by store closures as a result of COVID-19, resulting in a revenue decline of 27.6% (-27.7% on a constant currency basis).  However, this performance improved significantly in Q2 as stores re-opened and we delivered an increase in revenue of 19.8% in comparison to the prior year.  This was delivered in spite of reduced UK store footfall, lower airport passenger numbers and minimal tourist business and is testament to the Group's focus on enhanced CRM activities, digital marketing and ecommerce growth.

 

Revenue by Quarter (£million)	Quarter 1 FY21	YoY variance%	Quarter 2 FY21	YoY variance %	Total	YoY variance %
UK	108.3	(30.1%)	185.9	14.3%	294.2	(7.4%)
US	43.3	(20.4%)	76.8	35.5%	120.1	8.1%
Total	151.6	(27.6%)	262.7	19.8%	414.3	(3.4%)

 

During Q1 FY21, the Group traded for approximately 38% of normal trading hours as a result of the COVID-19 lockdown. In the UK, stores were closed for a seven-week period from the start of the year until 15 June 2020, with some airport stores remaining closed throughout the half year period.  In the US, Mayors stores in Florida and Georgia began to re-open from early May 2020, followed by Las Vegas in June 2020, Soho, New York in late June 2020 and finally with Hudson Yards in early September 2020.  Following re-opening, the US business faced continued disruption through localised social unrest.  Overall, the Group's trading hours increased to c81% of normal trading hours in Q2.

 

In the lead up the first COVID-19 lockdown in Q4 FY20, the Group was trading with revenue up around +15% versus the prior year.  We estimate the Group lost sales of approximately £80.0 million during H1 FY21 due to the enforced store closures affecting the first six weeks of Q1 and disruption related to the pandemic throughout the period.  This has been estimated based on Q1 FY21 maintaining the same pre-lockdown run rate of sales +15% versus the prior year.

 

Revenue by category

 

26 weeks to 25 October 2020 (£million)	UK	US	Total	Mix %
Luxury watches	249.9	112.2	362.1	87.4
Luxury jewellery	20.5	5.8	26.3	6.4
Other	23.8	2.1	25.9	6.2
Total revenue	294.2	120.1	414.3	100.0

 

 

26 weeks to 27 October 2019 (£million)	UK	US	Total	Mix %
Luxury watches	264.1	101.4	365.5	85.3
Luxury jewellery	25.3	6.2	31.5	7.3
Other	28.2	3.5	31.7	7.4
Total revenue	317.6	111.1	428.7	100.0

 

As a result of high demand and the continued execution of the Group's strategy, luxury watches now make up 87.4% of Group revenue, up 210bps on the prior year.  We have continued to observe strong demand for luxury watch brands and the Group's luxury watch sales in the first half were down just 0.9% on the prior year, in the face of stores being closed for several weeks.

 

 

Jewellery sales have been impacted more significantly by the COVID-19 lockdowns as these purchases are more footfall and impulse driven than luxury watches.  Despite this however, the relaunched jewellery ranges generated a positive response from customers and the category performed well relative to the market.  Luxury jewellery sales decreased by 16.2% in the first half of the year but were up 6.2% in Q2 FY21.

 

Other revenue consists of servicing, repairs and insurance services and the sale of fashion and classic watches and jewellery.  Sales of fashion and classic watches and jewellery now make up less than 3.5% of Group sales.

 

UK revenue

 

UK revenue decreased by £23.5 million (7.4%) versus the prior year to £294.2 million, impacted by the significant period of lockdown.  Luxury watch sales have continued to outperform other categories, making up 84.9% of the sales mix (H1 FY20: 83.1%), with sales decreasing by 5.4% during the first half of the year.

 

The UK performance continues to be driven by strong domestic sales offsetting the lower tourist and airport business.  Tourist and airport sales accounted for 7.4% of Group sales in H1 FY21 compared to 33.6% in the prior year. Throughout the half year period the Heathrow Terminal 3 and 4 stores remained closed.  Regional stores continued to outperform London stores where footfall remains weak.

 

Incremental sales of £30.1 million were achieved by capital enhancement projects, which were offset by £4.2 million of lost revenue from two closed stores.  The Group has continued to progress its mono-brand strategy by opening five mono-brand stores during the 26 week period.  This included the Glasgow Rolex boutique and Tudor boutique in White City.  A further three stores underwent major refurbishment, including the expansion of the Watches of Switzerland Knightsbridge Rolex room and the expansion of Mappin & Webb Cambridge. The Group also had positive performance from the four Fraser Hart stores acquired in March 2020. 

 

As expected, ecommerce has performed very strongly during the period, with sales increasing by 65.4% in the first half of the year. 

 

US revenue

 

Momentum in the US has continued, with revenue of £120.1 million up by £9.0 million (8.1%) on the prior year and (11.0% in constant currency).  US stores began to re-open in May 2020, with c65% of the estate opening in that month, with a further c22% re-opening in June 2020.  As with the UK, luxury watch sales drove the revenue performance, increasing by 10.7% (13.6% in constant currency) and with a sales mix of 93.4%.

 

Incremental sales of £4.5 million were achieved by capital enhancement projects which were completed in the prior year, demonstrating that the store elevation programme is also proving successful in the US. 

 

On 1 September 2020, the Group completed the acquisition of Analog Shift, a US retailer of vintage and pre-owned watches to further advance the Group's strong and growing position in the US.

 

Profitability

 

The profitability achieved in the first half of FY21 should be considered in the context of an extended period of store closures and pandemic-related disruption which affected Q1 in particular.  The chart below is for illustrative purposes and shows revenue, net margin and Adjusted EBITDA.  In the second half of the table, we have normalised the results, showing the impact of lost sales and associated margin along with one-off government support received.  For H1 FY21, we estimate the Group lost sales of approximately £80.0 million which translated to approximately £16.0 million in lost Adjusted EBITDA.  During the period, the Group received a total of £13.3 million in government support including UK furlough, US Paycheck Protection Program (PPP) and benefit from the UK business rates holiday.

 

 

 

 

Illustrative COVID-19 Impact (£million)	26 weeks to 25 October 2020	26 weeks to 27 October 2019	YoY variance
Revenue	414.3	428.7	(3.4%)
Net margin	150.5	160.6	(6.3%)
Net margin %	36.3%	37.5%	(120) bps
Adjusted EBITDA	52.2	41.2	26.5%
Adjusted EBTDA %	12.6%	9.6%	300 bps
COVID-19 impact:
Estimated sales loss	(80.0)
Estimated Adjusted EBITDA loss*	(16.0)
Government support:
UK furlough	3.3
US PPP	3.9
UK rates holiday	6.1
Total government support	13.3
Net COVID-19 impact	(2.7)

 

*estimated at 20% of sales to represent net margin less variable costs that would have been incurred in making those sales.

 

 

Net margin % decreased by 120bps from 37.5% in the prior year to 36.3%, driven by product mix, as luxury watches outperformed jewellery. 

 

Store costs decreased £21.0 million (22.6%) from the prior year, to £72.1 million.  Store costs as a percentage of sales decreased by 430 bps from 21.7% to 17.4% due to a reduction in occupancy costs, government support and cost control.

 

During the period the Group saved £9.9 million in store costs, including £7.0 million of rent costs, mainly relating to turnover rent.  The Group also benefited from the business rates suspension in the UK which saved £6.1 million in the period.  This was offset by pay increases and additional costs relating to new stores, which increased store costs by £1.3 million.  The Group also increased investment in digital marketing by £2.5 million, which successfully drove further traffic and conversion both online and in stores. 

 

Whilst the UK stores were closed due to COVID-19 restrictions, the Group accessed the UK Government's furlough scheme.  Around 1,300 colleagues were furloughed, and the Group continued to supplement employee pay to the full contractual rates, as we did in the previous year.  This scheme contributed £3.3 million towards UK stores payroll during this closure period.  The Group also received £3.9 million of income under the US Government PPP, this is a loan which is convertible to a grant under certain circumstances.  The US PPP contributed to payroll and rent costs during the period of the pandemic disruption.

 

This government support contributed to but did not cover all of the costs of operating the stores during lockdown.  We intend to repay furlough support received from the UK Government during this financial year, subject to no significant disruptions affecting our performance during the remaining months of FY21.

 

Overheads were well controlled in the period and only increased 2.3% to £24.3 million.  Accruals for colleague incentives were £1.9 million higher than the prior year, reflecting the performance of the business during this period. 

 

 

 

Store opening and closure costs

 

Store opening and closure costs (£million)	26 weeks to 25 October 2020	26 weeks to 27 October 2019
Store opening costs	1.3	0.9
Store closure costs	0.6	1.6
Total	1.9	2.5

 

Store opening costs include the cost of rent (pre-IFRS 16), rates and payroll prior to the opening of the store, normally during the period of fit out. This cost will vary annually depending on the scale of expansion in the year. We opened seven stores during HY FY21 compared to three in the previous year.

 

In line with the prior year, the Group closed two non-core¹ stores with associated costs including rent (pre-IFRS 16), rates and redundancy. 

 

Exceptional administrative items

 

Exceptional items are defined by the Group as those which are significant in magnitude and are linked to a one-off, non-recurring events.  These items are detailed in the table below.

 

Exceptional items (£million)	26 weeks to 25 October 2020	26 weeks to 27 October 2019
IPO costs	2.1	5.7
Reversal of expected credit losses	(0.2)	-
Reversal of impairment of right-of-use assets	(0.1)	-
Total	1.8	5.7

 

The IPO costs of £2.1 million in the current year relate to IPO-linked share-based payments (HY FY20: £1.8 million), these costs will continue to be expensed until the second anniversary of the IPO.  In the prior year the Group also incurred £1.8 million of IPO related legal costs and a one-off discretionary IPO bonus to employees following the success of the IPO of £2.1m.

 

The reversal of expected credit losses and impairment of right-of-use assets reflect the updated review of prior year COVID-19 related provisions.  In the second half of FY20, a £4.8 million impairment of right-of-use assets was treated as an exceptional item, along with expected credit losses of £0.7 million. 

 

Adjusted EBIT and statutory operating profit

 

As a consequence of the items noted above, Adjusted EBIT was £41.5 million, an increase of £10.3 million (+33.1%) on the prior year.

 

After accounting for exceptional costs of £1.8 million and IFRS 16 adjustments of £5.9 million, statutory operating profit (EBIT) was £45.6 million an increase of 52.1% on the prior year. The total impact of IFRS 16 adjustments on profit before tax was (£0.3) million.

 

 

 

Finance costs

 

Net finance costs (£million)	26 weeks to 25 October 2020	26 weeks to 27 October 2019
Interest payable on borrowings	2.3	4.3
Amortisation of capitalised transaction costs	0.5	0.4
Other	0.5	0.2
IFRS 16 interest on lease liabilities	6.3	5.9
Interest receivable	(0.2)	(0.3)
Pre-exceptional finance costs	9.4	10.5
Exceptional finance costs	-	28.5
Total net finance costs	9.4	39.0

 

Interest payable on borrowings reduced by £2.0 million in the period, largely due to the refinancing which took place in June 2019.  The prior year cost included 37 days of interest on the pre-IPO debt.

 

The IFRS 16 interest on lease liabilities has increased by £0.4 million as a result of lease additions in the period.

 

In the prior year, the Group incurred a one-off early redemption fee of £21.7 million and wrote off £6.8 million of transaction costs capitalised under the pre-IPO facility. These were treated as exceptional finance costs.

 

Taxation

 

The effective tax rate for the half year was 20.2%, 120bps higher than the UK Corporation tax rate due to higher rates of tax in the US and non-deductible expenses.

 

The pre-exceptional, pre-IFRS 16 effective tax rate was slightly higher at 21.2% in the first half of the year. 

 

Earnings Per Share

 

Adjusted basic EPS from continuing operations increased by 35.5% to 12.6p in the current year and has been calculated as follows:

 

26 weeks to 25 October 2020	Adjusted EPS (before exceptional items and IFRS 16 adjustments)	Statutory EPS
Profit after tax	£30.2 million	£28.9 million
Weighted average number of ordinary shares	239,456,000	239,456,000
EPS	12.6p	12.0p

 

 

26 weeks to 27 October 2019	Adjusted EPS (before exceptional items and IFRS 16 adjustments)	Statutory EPS
Profit/(loss) after tax	£21.2 million	(£8.1) million
Weighted average number of ordinary shares	228,090,719	228,090,719
EPS	9.3p	(3.5)p

 

 

 

Balance sheet

 

Balance Sheet (£million)	25 October 2020	27 October 2019	26 April 2020
Goodwill and intangibles	151.8	127.0	154.3
Property, plant and equipment	99.0	103.2	101.4
IFRS 16 right-of-use assets	256.8	240.2	251.6
Inventories	221.9	220.7	243.5
Trade and other receivables	11.7	18.0	10.9
Trade and other payables	(190.8)	(164.5)	(138.7)
IFRS 16 lease liabilities	(311.1)	(280.8)	(308.0)
Net debt	(22.7)	(92.0)	(129.7)
Other	9.6	14.8	14.2
Net assets	226.2	186.6	199.5

 

Property, plant and equipment was broadly flat in the period, with capital additions of £9.1 million being offset by depreciation.  Including software costs, which are disclosed as intangibles, total capex was £9.4 million (HY FY20: £12.9 million) of which £9.1 million (HY FY20: £12.5 million) was expansionary.  Expansionary capex relates to new stores, relocations or major refurbishments (defined as costing over £250,000).  In the period the Group opened six stores, expanded two stores and refurbished one store.  The investment in our store portfolio is paramount to our strategy.  In making capital investment decisions the Group follows a disciplined payback policy. 

 

Lease right of use assets have increased since 26 April 2020 by £5.2 million to £256.8 million.  Additions to the lease portfolio along with lease renewals or other lease changes have increased the balance by £30.1 million.  This has been offset by depreciation of £19.0 million and a foreign exchange impact of £5.2 million.

 

The lease liabilities have also increased as a result of the portfolio changes above by £30.1 million.  Interest charged on the lease liability also increased the balance by £6.3 million.  Lease payments have reduced the balance by £25.9 million along with foreign exchange of £6.2 million, giving a lease liability balance of £311.1 million.  This means that the net lease balance at 25 October 2020 is £54.3 million, compared to £56.4 million at the FY20 year end.

 

Inventory levels have been well controlled during the period and are only £1.2 million (0.5%) higher than at October 2019. 

 

Trade and other receivables are broadly in line with the FY20 year end, but £6.3 million lower than H1 FY20.  As disclosed in the FY20 Annual Report, the Group switched from an in-house credit offer to one which was offered by third parties.  The debtors balance reduced over the past 12 months by £3.4 million as result of existing customers paying down their balances.  On 16 September 2020, the Group completed a transaction to remove the recourse obligation on £1.3 million of in-house credit balances provided by a third-party.  As the Group has no future liability for this, the balance is no longer recognised as a debtor.  A gain of £0.4 million was made on the transaction, of which £0.2m has been recognised in exceptional items.  

 

On 13 November 2020, after the balance sheet date, the Group sold all of its remaining in-house credit debtors totaling £0.8 million (after provisions for expected credit losses) to a third-party.  This sale has been made on a servicing-released basis and no gain or loss was made on this transaction.  This means that the Group no longer holds any balances or risk relating to consumer credit offered to customers.

 

Compared to HY FY20, trade and other payables have increased by £26.3 million.  Supplier creditors are higher than the prior year by £15.2 million, as a result of the timing of stock intake, which was delayed due to the COVID-19 lockdown.  There was a VAT balance increase of £10.8 million, which includes a £2.9 million deferral, to be paid in March 2021.  The Group also had a higher level of customer deposits (£6.3 million) at 25 October 2020.  These increases were offset by the payment of IPO accruals of £7.2 million and lower capex accruals, due to the timing of spend (£1.5 million).  Deferred consideration of £1.2 million from the Wynn acquisition was paid in the period reducing the balance further. As noted above, the removal of recourse in-house debtors also decreased creditors by £2.1 million.

 

Other includes taxation balances and the defined benefit pension obligation of £4.9 million.  The pension obligation has increased by £2.1 million since 26 April 2020, mainly resulting from the reduction of the discount rate from 2.25% to 1.50%.

 

Net debt and financing

 

Net debt at 25 October 2020 was £22.7 million, a reduction of £107.0 million since 26 April 2020, driven by £116.1 million of free cash flow¹ offset by £8.6 million of expansionary capex.    During the period of lockdown, management focused on cost control and cash preservation.  Net debt at the half year is flattered by a favourable working capital position, which will unwind during the second half of the year. 

 

Year end net debt is expected to be between £60.0 million and £80.0 million.  As FY21 is a 53 week year, a larger amount of creditors will be paid prior to the year end cut off.  Capex and tax expenditure are also expected to be higher in the second half of the year.   

 

During the period, the Group has further strengthened its liquidity position with new financing arrangements.  The Group has entered into a new £45.0 million facility agreement as part of the UK government Coronavirus Large Business Interruption Loan Scheme ("CLBILS") which has a maturity of November 2021. 

 

At 25 October 2020, the Group had a total of £261.1 million of available committed facilities as follows:

 

Facility	Expiring	Amount (£million)
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% to +1.75%	April 2023	$60.0
UK "CLBILS" - UK LIBOR +0.6% to +2.6%	November 2021	£45.0

 

At 25 October 2020, £142.5 million of these facilities were drawn down.  Liquidity headroom (as defined as unrestricted cash plus undrawn available facilities) was £229.9 million.

 

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.  On 18 June 2020, the covenant tests of the Group's facilities were replaced with a monthly minimum liquidity headroom covenant of £20.0 million for the period of June 2020 to September 2021.  The Directors sought the replacement of covenants to provide further flexibility to deal with any unexpected circumstances during that period. The liquidity covenant was met throughout the period from June 2020 to November 2020.

 

 

 

Cash flow

 

Continuing basis (£million)	26 weeks to 25 October 2020	26 weeks to 27 October 2019
Adjusted EBITDA	52.2	41.2
Share-based payments	1.6	0.1
Working capital	69.9	18.4
Pension contributions	(0.3)	(0.3)
Tax	(4.3)	(6.0)
Cash generated from operating activities	119.1	53.4
Maintenance capex	(0.4)	(0.4)
Interest	(2.6)	(8.9)
Free cash flow	116.1	44.1
Free cash flow conversion1	222.6%	107.1%
Expansionary capex	(8.6)	(15.3)
Acquisition	(0.1)	-
Exceptional costs	-	(3.9)
Net proceeds from IPO	-	148.4
Financing activities	(59.7)	(156.2)
Cash flow	47.7	17.1

 

 

Free cash flow increased by £72.0 million (163.0%) to £116.1 million in the period to 25 October 2020.  The main driver of this being the favourable working capital movement, which was £51.5 million higher than the previous year.  Included in working capital are government grants received of £8.9 million relating to the UK furlough scheme and US PPP.  Free cash flow conversion was 222.6% compared to 107.1% in the prior year.  We expect this to normalise in the second half of the year.

 

In the prior year, £8.2 million of the interest payment related to 4.5 months of accrued interest for the listed bond, which was repaid 4 June 2019 using the net proceeds from the IPO.

 

Expansionary capex of £8.6 million (after taking into account the associated creditors movement) was lower than the prior year due to the timing of capital projects. 

 

Return on Capital Employed (ROCE)¹

 

	26 weeks to 25 October 2020	26 weeks to 27 October 2019	52 weeks to 26 April 2020
ROCE	17.2%	15.7%	15.8%

 

ROCE, which is calculated on a Last Twelve Months (LTM) basis, has increased by 150bps to 17.2% in the period demonstrating improved capital efficiency.  This is as consequence of annualised Adjusted EBIT increasing by 14.8%, compared to the increase in average capital employed of 5.1%. 

 

 

 

Second UK Lockdown

On 23 October 2020, Wales entered a COVID-19 lockdown period until 9 November 2020 requiring that all non-essential retail be closed.  This was closely followed by an English lockdown of four weeks starting on 5 November 2020 and various Scottish and Northern Irish lockdowns.  Unlike the previous lockdown in England, the Group initiated a Click and Collect service in over 70 stores nationwide.  This initiative has helped to maintain a level of sales activity and cash collection during this time.

 

Having successfully navigated the previous lockdowns, the Group is well placed to trade through any future closure periods.  The results to date have demonstrated the strength of demand for our products which we expect to continue.  At 29 November 2020 the Group's net debt was £15.9 million and had £202.2 million of available liquidity headroom on its facilities.

 

 

Disclaimer

Certain statements in this results announcement and update on trading constitute forward-looking statements. Any statement in this document that is not a statement of historical fact including, without limitation, those regarding the Company's future plans and expectations, operations, financial performance, financial condition and business is a forward-looking statement. Such forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially. These risks and uncertainties include, among other factors, changing economic, financial, business or other market conditions. These and other factors could adversely affect the outcome and financial effects of the plans and events described in this statement. As a result, you are cautioned not to place reliance on such forward-looking statements. Nothing in this statement should be construed as a profit forecast.