Watches of Switzerland Group: ROE-Driven Growth and a Mispriced Luxury Play

The Watches of Switzerland Group (LON:WOSG), Europe's largest luxury watch and jewelry retailer, has emerged as a compelling value opportunity amid a stock surge of 13% in the past quarter. While its Return on Equity (ROE) of 10.0%—slightly above the industry average of 8.9%—might seem unremarkable at first glance, a deeper analysis reveals how strategic reinvestment and robust demand in the luxury sector position the company for outsized returns. A PEG ratio of 1.56, coupled with projected revenue growth of 6-10%, suggests the stock remains undervalued, even as risks like high leverage linger. Here's why investors should take notice.

ROE: A Modest Benchmark for Meaningful Growth

The company's ROE of 10.0% (calculated as £54m net profit divided by £540m shareholders' equity for FY2025) may not scream “superior capital allocation.” Yet, it has directly fueled a 9.3% rise in net income over the past year, while contributing to a 12% increase in adjusted EBIT to £150m. Crucially, this ROE is achieved through a business model that thrives in niche, high-margin segments like pre-owned luxury watches and jewelry.

For context, the luxury jewelry division—bolstered by the Roberto Coin acquisition—saw revenue surge 108% in FY2025. Meanwhile, the pre-owned business (e.g., Rolex Certified Pre-Owned) and digital initiatives like the Hodinkee e-commerce platform are growth accelerants with minimal incremental capital requirements. This mix of organic and inorganic growth allows WOSG to generate profits without overextending its balance sheet, at least on paper.

Valuation: A PEG Ratio Suggesting Upside

With a current P/E ratio of 15.92 and projected FY2026 revenue growth of 6-10%, the stock's PEG ratio falls to 1.56 using a midpoint growth rate of 10%. While not outright cheap, this metric becomes compelling when considering the company's strategic advantages:
- Geographic Diversification: The U.S. market now contributes over half of revenue, with FY2025 sales rising 16% (19% in the second half alone). The planned Roberto Coin mono-brand boutiques in Hudson Yards and other luxury hubs promise further U.S. expansion.
- Margin Resilience: Despite margin pressure from tariffs and distribution costs, the 9.1% EBIT margin in FY2025 is a 30-basis-point improvement over prior years, suggesting pricing power in a discretionary sector.
- Capital Efficiency: Capital expenditures of £65m-£70m in FY2026 (down from £73m) indicate a focus on high-ROI projects, such as the Audemars Piguet AP House in Manchester and digital platform upgrades.

The Risks: Leverage and Macroeconomic Uncertainty

The stock isn't without pitfalls. A debt-to-equity ratio of 109.69 highlights the company's reliance on debt to fund acquisitions and expansions—a vulnerability if revenue growth falters or interest rates rise. Additionally, geopolitical tensions and U.S. tariff hikes on Swiss imports could dampen demand, particularly in the high-end watch segment.

Why the “Buy” Call Still Makes Sense

Despite these risks, WOSG's forward-looking strategy and the luxury sector's inherent resilience argue for patience. The Roberto Coin acquisition alone has unlocked a high-growth jewelry segment, while the pre-owned market's 40% average markup provides a steady profit engine. Management's focus on shareholder returns—via a £25m buyback program—also signals confidence in the stock's undervaluation.

A 13% stock rally in recent months hasn't erased the discount implied by its PEG ratio. Even at the low end of its FY2026 growth guidance (6%), the PEG drops to 2.65—still within a “fair value” range for a luxury stock with WOSG's growth profile.

Conclusion: A Worthwhile Gamble on Luxury's Future

Watches of Switzerland Group isn't a high-ROE miracle, but its ability to leverage niche markets, geographic diversification, and digital innovation positions it to outperform peers. While the debt load is a concern, the company's balance sheet remains flexible, with net cash of £112m as of April 2025. Investors seeking exposure to the luxury sector's long-term growth story—while paying less than the PEG suggests—should consider a “Buy” stance.