Watches of Switzerland Downgraded by Jefferies as Valuation Rerating Runs Its Course

Shares of Watches of Switzerland Group PLC declined by 3% to 707.6p following a downgrade by Jefferies from ‘buy’ to ‘hold’, with the investment bank asserting that the luxury watch retailer’s substantial rerating has exhausted near-term valuation expansion opportunities.

The downgrade was issued despite Jefferies raising its price target to 740p from 440p, which suggests limited upside potential of just 4% from current trading levels. Analyst James Grzinic noted that the shares now trade at 13.1 times calendar year 2027 earnings, approaching the upper bound of the post-pandemic range of 7 to 14 times, at a juncture when the US market outlook is expected to deliver diminishing positive surprises.

The robust performance of the American market has been the primary catalyst for the rerating. Jefferies anticipates that the full-year results scheduled for 14 July will confirm continued strong demand in North America. US revenue grew by 22.7% in the previous financial year on a currency-adjusted basis, supported by consumers readily accepting significant price increases and a 40% rally in the S&P 500 index from its April 2025 lows.

However, Jefferies cautioned that pricing momentum is dissipating. The bank’s monitoring of US watch prices across major brands including Patek Philippe, Rolex, Cartier and Omega indicates cumulative price increases of 12.6% since 2025, with momentum slowing since September. Notably, Patek Philippe implemented price reductions in February, signalling a shift in pricing dynamics.

The UK market offers limited support for future growth. Despite substantial industry lobbying efforts, the broker sees no credible evidence that duty-free shopping for tourists will be reinstated, describing the prospect as highly unlikely within the current parliamentary term. This leaves the mature UK business, which is projected to account for approximately 45% of group revenues by the 2027/28 financial year, vulnerable to pressure on domestic consumer spending.

Jefferies has adopted a sum-of-the-parts valuation methodology, applying a multiple of 10 times earnings to the UK operation in line with FTSE 250 retailers, and 16 times to the faster-growing US division. The bank’s upside scenario targets 925p if acquisitions, new retail space and the potential return of VAT-free tourist shopping accelerate growth, whilst the downside case sits at 427p.

Nevertheless, the broker raised its earnings forecasts, with per-share estimates increasing by 13% for financial year 2027 based on projected revenue of £1.97 billion. Jefferies identified several risk factors including reduced product allocation from luxury brands, intensified competition for acquisitions, potential new US tariffs and any possible shift in consumer demand away from hard luxury goods.