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Watches of Switzerland (LSE:WOSG) shares are down 27% over one month, however solely 8% over the previous yr. As such, £10,000 invested 12 months in the past would now be price £9,200. That’s clearly not an excellent return, however contemplating the latest volatility, I wouldn’t be too disheartened. Generally, it’s all relative.
Tariffs, tariffs, tariffs
I really feel like a damaged file, however Trump’s tariffs are a giant challenge for corporations around the globe. Watches of Switzerland, with operations spanning the UK, US, and elements of Europe, is not any exception. The corporate depends on importing luxurious watches from Switzerland and different European international locations, making it susceptible to modifications in commerce agreements or tariff regimes.
So, let’s take a better take a look at the tariff challenge. The US has imposed a 31% tariff on Swiss imports, concentrating on one of the corporate’s most essential provide chains. The US is not only a main marketplace for Swiss watches — it’s the largest export vacation spot for Swiss timepieces, accounting for 16.8% of Swiss watch exports in 2024 (round CHF4.4bn).
For a retailer like Watches of Switzerland, which specialises in high-end Swiss manufacturers such as Rolex, Patek Philippe, and Omega, this tariff represents a direct hit to its core operations.
In keeping with analysis I’ve come throughout, the tariffs can be utilized to the import worth of the products. Based mostly on a number of calculations, this implies the price of a Rolex Land-Dweller from $16,100 to about $17,900. It’s not a large improve, nevertheless it actually can be noticeable.
Whereas high-net-worth people should still buy luxurious watches regardless of value will increase, mid-tier consumers usually tend to balk at paying 15%-30% extra. This might result in a slowdown in gross sales for entry-level luxurious manufacturers like Longines or Tissot.
Cross-border arbitrage
Constructing on the above, I counsel that the upper finish of Watches of Switzerland’s vary is pretty value inelastic. In different phrases, if you wish to spend £12,000 on a Rolex, you most likely will whatever the tariffs. I’ve been questioning if the tariffs will encourage cross-border arbitrage — travelling overseas to benefit from decrease costs — with US consumers purchasing abroad. Solely time will inform.
Valuation improves on paper
Watches of Switzerland’s ahead valuation displays a combined outlook. The corporate’s ahead price-to-earnings (P/E) ratio is estimated at 9.2 occasions, considerably decrease than historic averages, indicating market skepticism about its progress potential. This determine is predicted to fall to 7.2 occasions by 2027.
Nonetheless, the problem is that these figures are primarily based on earnings projections made earlier than Trump’s tariffs. It’s virtually sure now that we’ll see analysts revise their projections downwards. I’d additionally add to this that the corporate has a modest web debt place of £120m. This clearly must be taken into consideration when contemplating the P/E.
Personally, I’m going to maintain my powder dry on this one. The inventory might be enticing, however there’s a lot uncertainty. It’ll actually pay to maintain my eye on the tariff information. Maybe if the Swiss can negotiate a ‘higher deal’, the fallout could also be extra controllable.
