Watches of Switzerland Downgraded by Jefferies on Valuation Concerns; Shares Decline

Shares in Watches of Switzerland Group Plc (WOSG) fell over 3% on Friday after analysts at Jefferies downgraded the stock to "Hold" from "Buy." The firm cited a diminishing potential for valuation expansion as the primary reason for the change, even as it significantly raised its price target on the retailer.

Valuation Headwinds Emerge

Jefferies stated that the downgrade reflects a "reducing runway for valuation expansion," according to its research note. The bank's new valuation places the company on a calendar 2027 price-to-earnings (P/E) multiple of 13.1x, which is near the top end of its post-COVID historical range of 7x to 14x.

In a shift of methodology, Jefferies moved to a sum-of-the-parts valuation. This approach justifies a higher price target of 740 pence, up from 440 pence, by applying different multiples to the company's distinct regional businesses. The new target is based on a roll-over to 2027 earnings.

Contrasting Regional Outlooks

Jefferies' new valuation model reflects the different growth prospects in the company's key markets. The bank assigned a 10x P/E multiple to the more mature UK business, which it noted is in line with the average for FTSE250 retailers. In contrast, it applied a higher 16x multiple to the U.S. business to reflect its greater growth potential.

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However, the note flagged that the U.S. outlook will likely become a "reducing source of positive surprises." While acknowledging an "impressive US re-acceleration," Jefferies pointed to moderating price hikes from major brands like Patek Philippe and Rolex as a potential headwind. For the UK, the bank sees a "very remote" chance of duty-free shopping being reintroduced, leaving the business exposed to a "pressured consumer."

Revised Forecasts and Risks

Despite the rating cut, Jefferies raised its price target to 740p from 440p. The bank forecasts group revenue will grow from £1.65 billion in fiscal 2024/25 to £2.10 billion by fiscal 2027/28.

Risks to the firm's outlook include potentially lower product volumes from key luxury brands, increased competition for acquisitions, and a broader shift in consumer spending away from the hard luxury category, Jefferies noted.