Watches of Switzerland (LSE:WOSG) shares are down 27% over one month, but only 8% over the past year. As such, £10,000 invested 12 months ago would now be worth £9,200. That’s clearly not a good return, but considering the recent volatility, I wouldn’t be too disheartened. Sometimes, it’s all relative.
Tariffs, tariffs, tariffs
I feel like a broken record, but Trump’s tariffs are a big issue for companies around the world. Watches of Switzerland, with operations spanning the UK, US, and parts of Europe, is no exception. The company relies on importing luxury watches from Switzerland and other European countries, making it vulnerable to changes in trade agreements or tariff regimes.
So, let’s take a closer look at the tariff issue. The US has imposed a 31% tariff on Swiss imports, targeting one of the company’s most critical supply chains. The US is not just a major market for Swiss watches — it’s the largest export destination for Swiss timepieces, accounting for 16.8% of Swiss watch exports in 2024 (around CHF4.4bn).
For a retailer like Watches of Switzerland, which specialises in high-end Swiss brands such as Rolex, Patek Philippe, and Omega, this tariff represents a direct hit to its core operations.
According to research I’ve come across, the tariffs will be applied to the import value of the goods. Based on several calculations, this means the cost of a Rolex Land-Dweller from $16,100 to about $17,900. It’s not a massive increase, but it certainly will be noticeable.
While high-net-worth individuals may still purchase luxury watches despite price increases, mid-tier buyers are more likely to balk at paying 15%-30% more. This could lead to a slowdown in sales for entry-level luxury brands like Longines or Tissot.
Cross-border arbitrage
Building on the above, I suggest that the higher end of Watches of Switzerland’s range is fairly price inelastic. In other words, if you want to spend £12,000 on a Rolex, you probably will regardless of the tariffs. I’ve been wondering if the tariffs will encourage cross-border arbitrage — travelling abroad to take advantage of lower prices — with US buyers shopping overseas. Only time will tell.
Valuation improves on paper
Watches of Switzerland’s forward valuation reflects a mixed outlook. The company’s forward price-to-earnings (P/E) ratio is estimated at 9.2 times, significantly lower than historical averages, indicating market skepticism about its growth potential. This figure is expected to fall to 7.2 times by 2027.
However, the issue is that these figures are based on earnings projections made before Trump’s tariffs. It’s almost certain now that we will see analysts revise their projections downwards. I’d also add to this that the company has a modest net debt position of £120m. This obviously needs to be taken into account when considering the P/E.
Personally, I’m going to keep my powder dry on this one. The stock could be attractive, but there’s so much uncertainty. It’ll certainly pay to keep my eye on the tariff news. Perhaps if the Swiss can negotiate a ‘better deal’, the fallout may be more controllable.
This post was originally published on Motley Fool
