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FTSE 250 Retailer Shares Swiss Watch Group (LSE: WOSG) experienced a boom during the pandemic as watch collectors snapped up luxury timepieces.
As one of the largest sellers of brands such as Rolex, Audemars Piguet and BreitlingThe company managed to sell all the luxury watches it could get its hands on.
The shares hit an all-time high of more than 1,500p in January 2022, before pulling back sharply as the watch market slowed.
As I write this, Watches of Switzerland's share price is at 390 pence, 73% lower than the all-time highs reached two and a half years ago. Is this a buying opportunity? Here's what I think.
A golden opportunity?
In my experience as an investor, I have often seen stock prices skyrocket as investor sentiment spiraled out of control. First, stocks would go too high, and then they would go too low. I think this could be one of those situations.
While market conditions have certainly become more difficult for Watches of Switzerland since 2022, the company has not sat idly by. It has continued to open new stores and remodel existing ones to improve sales.
Management has also made a large acquisition ($130 million) of US jewelry retailer Roberto Coin's OOS, which is expected to boost earnings.
It is too early to say whether this deal will be successful, but what we do know is that Watches of Switzerland's operations so far this year (May to August) are in line with brokers' forecasts.
Sales of luxury watches and jewellery in the UK are said to be stabilising after a difficult period last year when company profits fell by 28%.
“The demand for our main luxury brands” In the UK and the US it is still said to be “outbidding”.
The company is also continuing its expansion into the luxury jewelry market, which could help broaden its customer base.
What I would do
The acquisition of Roberto Coin has left Watches of Switzerland with some debt. It has also complicated the business, at least for a while. This could increase the risk of financial problems if the integration of Roberto Coin does not go as well as planned.
Demand for luxury goods in other market sectors has also slowed, particularly in fashion. I suppose there is a risk that watches will also continue to weaken.
However, overall, I believe that these risks are already included in the market price of Watches of Switzerland, which amounts to 960 million pounds.
I am also excited about the growth potential of the business in the US, a much larger market than the UK.
At current levels, the stock is trading on a 2024/25 forward price-to-earnings (P/E) ratio of nine.
Earnings are expected to continue to rise next year too. Broker forecasts suggest the stock could trade at just eight times forecast earnings for 2025/26.
I think this is too cheap for a market-leading specialist retailer. If Watches of Switzerland can continue to meet forecasts, I think the stock could perform well from here and is worth considering.