Watches of Switzerland profits beat expectations but margins may fall in coming year

Watches of Switzerland Group PLC reported record annual revenue of £1.65 billion, up 7%, with underlying adjusted EBIT reaching £150 million, a 12% increase that exceeded analyst forecasts. This performance was bolstered by a 16% surge in US revenue and robust branded jewellery sales, including the Roberto Coin acquisition. However, statutory pre-tax profit declined 18% and free cash flow fell to £98 million. Looking ahead, the company forecasts 6-10% constant currency revenue growth for FY26 but expects adjusted EBIT margins to be flat to down 100 basis points, indicating potential margin pressure despite continued strategic growth initiatives.

Analysis

Watches of Switzerland Group PLC (WOSG) delivered a mixed set of full-year results for FY25, characterized by strong top-line growth and successful strategic execution, but overshadowed by declining statutory profits and a cautious margin outlook. The company reported record revenue of £1.65 billion, a 7% increase, and an adjusted EBIT of £150 million, up 12% and slightly ahead of analyst expectations. This performance was largely driven by a 16% revenue surge in the US, bolstered by the Roberto Coin acquisition, which contrasts with more modest 2% growth in the UK and Europe. However, this underlying strength is challenged by a significant 18% decline in statutory pre-tax profit to £76 million and a fall in free cash flow to £98 million. The balance sheet has also shifted, now showing £96 million in net debt following acquisitions. The forward guidance for FY26 is the critical takeaway for investors: while management projects continued revenue growth of 6-10% at constant currency, it also flags a potential adjusted EBIT margin compression of up to 100 basis points, citing macroeconomic uncertainties and potential US tariffs as key risks.

Key Decisions for Investors

• Investors should closely monitor the company's ability to manage costs and protect its adjusted EBIT margin, as the forecast of flat to -100bps pressure could offset the benefits of the guided 6-10% revenue growth.
• The success of the US expansion and Roberto Coin integration is critical; therefore, investors should assess whether the strong revenue contribution from these acquisitions can translate into improved free cash flow and a reduction in the newly acquired £96 million in net debt.
• Given the significant divergence between the 12% growth in adjusted EBIT and the 18% fall in statutory pre-tax profit, it is prudent to scrutinize the nature of the adjustments and one-off costs to determine the true underlying profitability of the group.
• Potential exposure to US tariff changes and a shifting macroeconomic environment represent key external risks, suggesting a cautious stance may be warranted until there is more clarity on their impact on future earnings.