Watches of Switzerland Group PLC

H1 FY22 Results

for the 26 weeks to 31 October 2021 (H1 FY22)

Strong performance underpinning recently upgraded guidance

US expansion strategy advanced with acquisitions of five stores now completed

Watches of Switzerland Group PLC ('the Group') today provides the following financial results relating to the 26 weeks ending 31 October 2021.

Strong, broad-based sales performance resulting in significant growth in H1 FY22 profit

·    Group revenue £586.2 million (H1 FY21: £414.3 million), +44.6% vs H1 FY21 and +40.8% vs H1 FY20 (both in constant currency²)

o  Continued strong demand for luxury watches and jewellery, with growth led by a significant increase in volumes of non-supply constrained brands

o  Each individual brand showed positive average selling price (ASP) growth

o  Group ecommerce sales¹ grew +28.7% on last year

·      Adjusted EBITDA² +58.8% to £82.8 million (H1 FY21: £52.2 million)

o  Adjusted EBITDA margin² of 14.1% (H1 FY21: 12.6%)

·      Adjusted EBIT² +62.7% to £67.5 million (H1 FY21: £41.5 million)

·      Statutory operating profit +58.6% to £72.3 million (H1 FY21: £45.6 million)

·      Statutory profit before tax £64.7 million (H1 FY21: £36.2 million)

·    Expansionary capital expenditure³ of £19.1 million (H1 FY21: £9.1 million) with eight new stores opened, two stores   acquired, three stores expanded, and five stores refurbished

·      Free cashflow² of £102.3 million (H1 FY21: £116.1 million) with conversion of 123.6%

·      Return on capital employed² increased to 23.1% (H1 FY21: 17.2%)

·      Net cash² of £30.0 million as at 31 October 2021 (25 October 2020: net debt² of £22.7 million)

Operating highlights

·      Growth achieved through consistent investment in marketing, stores, systems and people

·     Following a period of destocking during Q1 FY22, in Q2 FY22 the Group actively re-built store stock for Rolex in the US and the UK to enhance brand representation

o  Change in management of Rolex store stock to be exhibition-only

·     Outstanding US performance delivered with revenue £167.6 million, +50.2% vs H1 FY21 and +66.7% vs H1 FY20 (both in constant currency)

o  Expansion strategy advanced with previously announced agreements to purchase five stores in Plano (Dallas), Vail, Aspen, Greenwich and Minneapolis. The combined Last Twelve Months revenue for these stores was approximately US$100.0 million and future profitability is expected to be in line with the Group's US average

·     Robust UK performance continues to be generated by a thriving domestic clientele, with revenue £418.6 million +42.3% vs H1 FY21

o  Revenue +31.8% vs H1 FY20 when 33.6% of Group sales were generated by tourists³ and airports (all in the UK) vs negligible tourist and significantly reduced airport business in H1 FY22

·      Continued investment in store network across both the UK and the US with several important projects completed:

o  Opening of enhanced Rolex dedicated space within Mayors Aventura, Phase I of the store's refurbishment plan

o  Introduction of Goldsmiths Luxury concept in two stores (Canterbury and Reading)

o  Refurbishment of a further five stores in the UK

o  Opening of a mono-brand boutique in Trafford Centre

o  Opening of one Goldsmiths store and two mono-brand boutiques in Edinburgh St James

o  Opening of three mono-brand boutiques in Plymouth

Current trading and outlook

·      Q3 trading to date supports full year guidance upgraded on 9 November 2021

·      Well-stocked for Holiday trading period

·     Since the end of H1 FY22, we have opened our first Bvlgari mono-brand boutique in Mayors Aventura, completed the refurbishment of a further three stores in the Goldsmiths Luxury format, acquired a further three stores in the US, and opened an additional two mono-brand boutiques in the UK

·      The Group has an exciting pipeline of store projects planned:

o  Continued investment in the Mayors network in Florida and Georgia

§ Opening of refurbished stores in Aventura Phase II, Florida and Boca Raton, Florida

o  Further expansion of Watches of Switzerland stores in the US:

§ Opening of new stores in American Dream, New Jersey and in Kenwood Towne Centre, Cincinnati

o  Opening of refurbished Rolex boutique in Wynn Resort, Las Vegas

o  Further mono-brand activity in the UK and the US

o  Opening of new Watches of Switzerland store in Battersea

o  Roll out of Goldsmiths Luxury elevated store formats

·     Our guidance reflects visibility of supply of key brands. The Group does not expect the return of tourism and airport business to pre-pandemic levels during the year

·      As announced on 9 November 2021, we upgraded our guidance for FY22 as follows (on a 52-week, pre-IFRS 16 basis):

o  Revenue: £1.15 billion to £1.20 billion (previous guidance £1.05 billion to £1.10 billion)

o  EBITDA and Adjusted EBITDA margin %: +1.0% to +1.5% vs last year (previous guidance flat to +0.5% vs last year)

o  Depreciation, amortisation, impairment and profit/loss on disposal of fixed assets: £30.0 million to £32.0 million (no change vs previous guidance)

o  Total finance costs: £4.0 million to £4.5 million (no change vs previous guidance)

o  Underlying tax rate: 21.0% to 22.5% (no change vs previous guidance)

o  Capex: £45.0 million to £50.0 million (previously £40.0 million to £45.0 million)

o  Net debt: £10.0 million to £20.0 million (previously £20.0 million to £30.0 million)

o  Average USD/GBP full year rate of $1.40

Brian Duffy, Chief Executive Officer, said:

"I am delighted with our excellent first half year performance. We introduced several initiatives and enhancements during difficult trading circumstances last year which have become permanent features of the business, enabling us to continue to maintain high engagement levels with our customers whilst providing an exceptional experience and delivering attractive returns. Our success in both the UK and the US has been testament to our robust multichannel business model, the enthusiasm and commitment of our people, and the attractive dynamics of our category where demand continues to outpace supply.

We have started the third quarter with continued strong momentum and are well positioned heading into the Holiday period.

Through a consistent investment programme, we have further strengthened the business, paving the way for continued success as we advance our Long Range Plan objectives to strengthen our luxury watch leadership in the UK, become the clear market leader in the US and capitalise on the growth potential in the EU market."

H1 FY22 Revenue performance by geography

H1 FY22 Revenue performance by category

H1 FY22 Results Conference call

A webcast conference call for analysts and investors will be held at 9.00am (UK time) today. To access the webcast, please use the following details:

Webcast link:  https://webcasting.brrmedia.co.uk/broadcast/615ad0594e29f55a9419010f

Participant Access Code: 8698080

The presentation will be followed by a live Q&A for analysts and investors, who will be able to ask questions via the following telephone details:

United Kingdom (Local): +44 (0)330 336 9125

Participant Access Code: 8698080

___________________________________________________________________________________________

1 Ecommerce sales are sales which are transacted online

2 This is an Alternative Performance Measure and is shown on a pre-IFRS 16 basis. Refer to the Glossary for definition, purpose and reconciliation to statutory measures where relevant

3 Refer to the Glossary for definition

Contacts

The Watches of Switzerland Group

Anders Romberg, CFO                                                                                                                      +44 (0) 116 2817 401

Allegra Perry, Investor Relations                                                                                                    +44 (0) 20 7317 4600

Caroline Browne, Group Finance Director                                                                                    +44 (0) 116 2817 420

investor.relations@thewosgroup.com 

Headland

Lucy Legh / Rob Walker                                                                                                                   +44 (0) 20 3805 4822

wos@headlandconsultancy.com 

About the Watches of Switzerland Group

The Watches of Switzerland Group is the UK's largest luxury watch retailer, operating in both the UK and US, comprising four prestigious brands; Watches of Switzerland (UK and US), Mappin & Webb (UK), Goldsmiths (UK) and Mayors (US), with complementary jewellery offering.

As at 31 October 2021, the Watches of Switzerland Group has 163 stores across the UK and US including 46 dedicated mono-brand boutiques in these two markets in partnership with Rolex, TAG Heuer, OMEGA, Breitling, Audemars Piguet, Tudor, Grand Seiko and FOPE and has a leading presence in Heathrow Airport with representation in Terminals 2, 3, 4 and 5 as well as six transactional websites.

The Watches of Switzerland Group is proud to be the UK's largest retailer for Rolex, Cartier, OMEGA, TAG Heuer and Breitling watches.

Mappin & Webb holds Royal warrants as goldsmiths, silversmiths and jeweller to Her Majesty The Queen and silversmiths to His Royal Highness The Prince of Wales. The Mappin & Webb master jeweller has been Crown Jeweller, custodian of the Crown Jewels of Her Majesty The Queen since 2012.

https://www.thewosgroupplc.com 

Cautionary note regarding forward-looking statements

This announcement has been prepared by Watches of Switzerland Group PLC (the 'Company'). It includes statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "anticipates", "expects", "intends", "plans", "goal", "target", "aim", "may", "will", "would", "could" or "should" or, in each case, their negative or other variations or comparable terminology. They appear in a number of places throughout this announcement and the information incorporated by reference into this announcement and may include statements regarding the intentions, beliefs or current expectations of the Company Directors or the Group concerning, amongst other things: (i) future capital expenditures, expenses, revenues, earnings, synergies, economic performance, indebtedness, financial condition, dividend policy and future prospects; (ii) business and management strategies, the expansion and growth of the Group's business operations; and (iii) the effects of government regulation and industry changes on the business of the Company or the Group.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future and may be beyond the Company's ability to control or predict. Forward-looking statements are not guarantees of future performance. The Group's actual results of operations, financial condition, liquidity, and the development of the industry in which it operates may differ materially from the impression created by the forward-looking statements contained in this announcement and/or the information incorporated by reference into this presentation.

Any forward-looking statements made by or on behalf of the Company or the Group speak only as of the date they are made and are based upon the knowledge and information available to the Directors on the date of this announcement, and are subject to risks relating to future events, other risks, uncertainties and assumptions relating to the Company's operations and growth strategy, and a number of factors that could cause actual results and developments to differ materially from those expressed or implied by the forward-looking statements. Undue reliance should not be placed on any forward-looking statements.

Before making any investment decision in relation to the Company you should specifically consider the factors identified in this document, in addition to the risk factors that may affect the Company or the Group's operations which are described in the Annual Report and Accounts 2021 in Risk Management and Principal Risks and Uncertainties.

Chief Executive Officer's Review

Our Group has reached new heights during the first half of the financial year, with a further strengthening of the business in our existing markets of the UK and the US. We delivered a strong increase in first half year profit, driven by margin enhancing and broad-based growth, as we progressed on our Long Range Plan objectives. 

Luxury watches continue to benefit from a strong demand environment and we have seen growth in the period led by a significant increase in volumes of non-supply constrained brands.  Luxury jewellery has also experienced robust growth, with sales in the category +54.9% vs last year.

Our robust UK performance has been generated by a thriving domestic clientele.  Despite negligible tourist and much reduced airport business, UK revenue in the first half grew by +42.3% vs H1 FY21 and +31.8% vs H1 FY20, when 33.6% of the business was generated by tourists and airports.  We continue to invest in our stores, where we further expanded and elevated the network. We generated strong growth from our ecommerce business despite stores being fully opened this year and having been partially closed in the prior year period.

In the US, we are continuing to make strides in further establishing a strong presence in the market. US revenue increased by +50.2% vs H1 FY21 and +66.7% vs H1 FY20 (both in constant currency). We continue to enhance the Mayors network with phase I of the Aventura store elevation complete.  We also advanced our expansion strategy through the agreement to acquire five stores in four new states for the Group, broadening our representation in the market to a total of 36 stores (22 multi-brand, 14 mono-brand boutiques).

We have introduced the new customer experience initiative, Xenia, in our business in the UK and in the US and will continue to develop and enhance this in coming months.

I would like to thank our teams who have been remarkable in embracing new ways of engaging with our customers and adapting to new challenges, particularly during the last eighteen months. Their resilience and commitment have enabled the Group to be successful.

As announced, we are very excited to have Bill Floydd join us as CFO on 1 January 2022. Anders Romberg, the current CFO, will be stepping down and will retire from the Group following a suitable handover period with Bill. I want to thank Anders for all his help and support over the past seven years and he goes with our best wishes for the future.

I am proud of the progress we are making on ESG. We held the inaugural meeting of The Watches of Switzerland Group Foundation during the period and have many exciting plans for this initiative in coming months. The recently established ESG Committee has also begun its work in advancing our priorities in this area.

Looking ahead, we will continue to invest in our business in order to deliver on our Long Range Plan objectives.  I am confident that our Group is stronger than ever and well positioned for growth.

Group Strategy Delivering Outstanding Results

The Group delivered an outstanding sales and profit performance during H1 FY22, advancing on the strategic priorities laid out in the Long Range Plan to FY26.

To recognise the importance of our Environmental Social and Governance (ESG) programme, this workstream has been added to the Group's strategic priorities.

Within the framework of its seven strategic priorities, the Group made significant progress through continued elevated levels of investment and focus on further developing a customer-centric business model.

1) Grow revenue, profit and return on capital employed

Against a backdrop of more normalised trading patterns with our store network being open throughout the first half year period, we continued to invest in further enhancing and building our portfolio, both in the UK and the US. Significant progress has been delivered during the half year period including:

UK

·      Introduction of Goldsmiths Luxury concept in two stores (Canterbury and Reading)

·      Opening of three mono-brand boutiques (OMEGA, TAG Heuer, Breitling) in Plymouth

·      Opening of a new Goldsmiths store and two new mono-brand boutiques (OMEGA, Breitling) in Edinburgh and one new TAG Heuer mono-brand boutique in Manchester

·      Further development of store network with five refurbishments across the estate

US

·      Opening of enhanced Rolex dedicated space within Mayors Aventura, Phase I of the store's refurbishment plan

·      Eight mono-brand boutiques recently opened are performing strongly and gathering pace

·      Purchase of five stores (three of which completed on 1 December 2021) leading to the entrance of the Group in four new states with locations in Plano (Dallas), Texas; Vail and Aspen, Colorado; Greenwich, Connecticut and Minneapolis, Minnesota

We will continue to invest in our store portfolio and have an exciting pipeline for future store projects across both the UK and the US including several new mono-brand boutiques, the continued elevation of the Mayors estate in Florida and Georgia, as well as the ongoing upgrade and modernisation of the core store portfolio in the UK, with the continued roll out of Goldsmiths Luxury.

2) Enhance strong brand partnerships

Our strong and long-standing relationships with the most recognised and prestigious luxury watch brands have remained a point of distinction and have further strengthened during this period.

In the US, we debuted a ground-breaking advertising film which served as the most extensive multi-branded timepiece campaign the industry has ever seen.  Featuring eight leading brand partners including Grand Seiko, TAG Heuer, OMEGA, Breitling, MB&F and Ulysse Nardin and entitled 'Anytime. Anywhere.', it was produced in partnership with Creative Director and Photographer, Jay Gullion. The film is an unprecedented artistic undertaking that speaks directly to today's watch connoisseurs.  It imagines a life well-lived, marking exceptional moments with a curated selection of world-class timepieces, worn by industry changemakers in spectacular settings set across the United States.

The mono-brand boutique channel has been further developed in both the UK and the US with several new openings and some enhancements.  This includes several mono-brand boutiques in new markets in the UK across the OMEGA, TAG Heuer and Breitling brands, the enhanced Rolex boutique in Mayors Aventura as well as our first Bvlgari boutique, also in Mayors Aventura.  Further mono-brand boutique openings are planned in both the UK and the US going forward.

We are also proud to have launched exclusive timepieces with key partners brands, further distinguishing our competitive advantage in both the UK and US.

3) Deliver an exceptional customer experience

Our first half saw the global launch of 'Xenia' our new customer experience programme, with retail led training to set new industry standards in client hospitality, with over 250 of our team colleagues in attendance at launch events held in the UK and the US.

We continued our core focus of 'experience', resuming in person, live events. Over 70 events were held in the UK, entertaining over 3,800 clients in localised, private, intimate client appreciation dinners and receptions, or instore exhibitions, the first time since pre-pandemic. In the US, the Summer Watches of Switzerland 'Airstream' event included a 100-person private event for the Doxa brand, where the Group is the exclusive distributor. VIP guests included designer Cynthia Rowley and Dave Guy of the Roots. This culminated in the Group hosting the Hamptons Classic Horse Show in partnership with long time event sponsor, Longines. The mobile retail unit was on site to greet the 25,000 spectators throughout the week. Watches of Switzerland hosted 20 VIP guests for a Grand Prix luncheon celebrating the best in show jumping and awarding the winner with a Longines timepiece.

In the UK, we continued to develop and enhance our customer experience through our online appointment system, 'By Personal Appointment' accounting for approximately 40% of our UK sales during the period. We also invested in our Virtual Luxury Boutique and expanded our in-house photography team to ensure we provide the very best experience to all customers online.

CRM and clienteling remained a core focus with over 30 guides produced in support of new product launches, trends, gift guides and specialist timepieces.

4) Drive customer awareness and brand image through multimedia with bold, impactful marketing

Investment in our digital marketing channels and campaigns has continued to be a core pillar and has grown from strength to strength.

At the beginning of the financial year, we refreshed our digital display first campaign globally, continuing to focus on communicating the breadth of range available to a highly targeted luxury audience, combining our Search & Shopping strategy with YouTube, Display and Paid Social.

In the first half year in the UK, we achieved an average monthly digital social media reach of 40.1 million and a total of 2.9 billion digital impressions. In the US, we delivered 400 million impressions and had an average social media reach of 6 million, in addition to generating over 2.4 billion PR impressions.

We also transitioned 'Calibre', our online platform for all luxury watch knowledge and expertise, to our core websites to benefit from higher traffic.

We launched our new Goldsmiths Luxury stores in the UK with two stores converted to the new concept during H1 FY22. We introduced dedicated launch plans across PR, social media, events and email to support each store, along with a new local advertising campaign and localised sponsorships to elevate the brand awareness locally. To kick start the launch, we held a press lunch in July, hosting over 35 key UK journalists from a range of national and local media titles.

We continue to partner with key brands on co-operative marketing activities with increased investment across both digital and traditional marketing, including new national and local advertising plans to support our core brands and mono-brand boutique business.

The first half has seen us launch seven new mono-brand boutiques globally, six in the UK and one in the US, each with their own local marketing support plan to create localised awareness. Since the end of the period, we have opened the first Bvlgari mono-brand boutique globally, located in Mayors Aventura.

5) Leverage best in class operations

Merchandising

Our merchandising function is a key customer-focused driver of product availability and access and provides a unique point of difference in the way we run our stores.

Our merchandising capabilities utilise a customer-centric approach and best in class systems to optimise stock availability, enhance store productivity and allow for nationwide coverage. Our advanced market analysis is run on SAP software which enables extensive store profiling, productivity and trend analyses, and sales and inventory forecasting.

Retail operations

As an integral part of our multi-channel model, each of our stores is run to be profitable. This is achieved through maintaining a high level of accountability and performance management in running our retail network.

Our programme of continued investment has enabled us to further drive productivity in both the UK and the US platforms. In the UK we introduced Goldsmiths Luxury to two stores in the period, and completed a further three stores in this format after the period end. In the US, we are focused on generating high returns from refurbishing and upgrading the remaining stores in the Mayors network which have not yet been modernised.

The Group's store base is largely run via fixed rent agreements, having successfully renegotiated certain contracts and transitioned from turnover rent to fixed rent agreements in the prior year period. We have also renegotiated the contracts for our stores in Heathrow Airport on revised terms.

IT Systems

Our leading-edge IT systems have continued to be a fundamental competitive advantage for the Group.  Our systems comprise a single and shared SAP instance for ERP, ecommerce and business intelligence. This SAP core is supported by a specialist point-of-sale and CRM front-end, served on mobile tablets across all our stores. Our single IT template has been deployed across the Group and can support further expansion as required. Our retail payment partner Adyen equips us with a fully featured, mobile and international payment platform across all sales channels, and both stores and ecommerce benefit from a shared inventory, shared digital assets, and click and collect capabilities.

We continue to refresh and expand our in-store technology, ensuring store teams have the best technology to hand in support of every customer transaction.

We continue to work on further developing and enhancing CRM and sales support technology, with updates planned in coming months.

6) Expand multi-channel leadership

Our multi-channel business model is a key competitive advantage and underscores our ability to react with speed and agility to a rapidly evolving consumer environment whilst offering our customers an exceptional experience. We continue to invest in expanding and enhancing our platform, consisting of multi-brand stores, online, travel retail and mono-brand boutiques.

Multi-brand stores

Our multi-brand store network has nationwide scale in the UK and is continuing to build at pace in the US, where we have an established presence in Florida, Georgia, New York and Las Vegas and recently entered the new markets of Cincinnati, Minneapolis, Plano (Dallas), Vail, Aspen and Greenwich.

Our modern and welcoming store environments showcase a selection of the world's finest watches whilst inviting our customers to have an exceptional experience.  Our investment programme continues to focus on elevating and upgrading the existing network as well as opening in new, strategic locations.

Online

We continue to leverage our position as the authorised luxury watch and jewellery partner of choice, significantly building on the largest portfolio of luxury watch brands in the UK.  We have a competitive advantage in the volume of traffic generated via our technically advanced Artificial Intelligence (AI)-driven marketing approach and further expanded our always-on digital performance marketing campaigns with refreshed creative and further optimisation through automation.

Due to the continued changing retail landscape, we continue to focus on offering the widest array of shopping opportunities, allowing our customers to reach out to local store expertise remotely through video, voice or in-person utilising our 'By Personal Appointment' booking system, alongside our centralised Luxury Watch and Jewellery Virtual Boutique, which we have significantly expanded due to the continued customer demand of this channel.

Following our user experience audits with Baymard, Google and SAP we made several enhancements to our platform to improve both customer experience and improve conversion.

We expanded our payment options to offer more consumer choice and enhance the checkout process experience.

Our web-enabled store platform has been further improved and provides our customers access to shop the full online catalogue whilst in our stores.

Working collaboratively with key partners such as Google (digital marketing), Vee24 (video and text concierge) and DPD (direct delivery), we use the most efficient, cutting-edge digital marketing while offering a best in class, harmonised omni-channel shopping experience. We have dedicated inventory for our luxury watches across our websites, which allows us to offer a next day delivery service until 9pm seven days a week.

Our online business had an exceptional half year, with Group ecommerce sales +28.7% versus last year.

Mono-brand boutiques

We have further developed and enhanced our mono-brand boutique channel.  During the half year period, we opened four new mono-brand boutiques, bringing our global network to a total of 46 boutiques (UK: 32, US: 14) as at 31 October 2021.  

During the first half, our UK network saw the opening of six new mono-brand boutiques, including three in Plymouth, a new location for the Group. In the US we opened two enhanced Rolex boutiques, one in Mayors Aventura as Phase I of the store's refurbishment programme, and one in Wynn Resort, Las Vegas. We opened our first Bvlgari mono-brand boutique, also in Mayors Aventura, after the half year end.

We will continue to work closely with our brand partners to further develop and enhance our mono-brand boutique network with a strong pipeline of projects planned.

Travel retail

Travel retail has started to show encouraging signs of a post COVID-19 recovery, although passenger numbers and global travel remains below pre-pandemic levels. The Group does not expect the return of tourism and airport business to pre-pandemic levels during the year but believes the channel offers a significant medium and long-term growth opportunity for the business, with visibility in prominent locations providing access to the international customer base. Our network is well positioned for improved industry trends.

We renegotiated the contracts for our stores in Heathrow Airport on revised terms.

7) Continue to advance the ESG agenda

We have always prided ourselves on operating a responsible business and upholding our core value to 'do the right thing', which is reflected in our ESG programme.

As part of our commitment to continuous improvement, we have formalised our approach to ensure ESG priorities are governed at the highest level of our business.

We have appointed a Head of ESG and established an ESG Committee as a sub-Committee of our Board, which is Chaired by our Non-Executive Director, Rosa Monckton, MBE.

With the full support of our Board, we are in the process of developing a sustainability and social impact strategy, which puts positive social purpose at its core. This includes:

·   Rejuvenating our purpose, vision, values and culture to align with our commitment to help maintain a robust economy, protect our planet and support a stronger society 

·      Further enhancing stakeholder engagement to enable us to make highly informed decisions

·      Delivering on our pledge to achieve decarbonisation across our Group before 2040

·    Contributing to a more circular economy by striving to keep products, components and materials at their highest utilisation and value throughout their lifecycles

·   Pledging £3.0 million through our Watches of Switzerland Foundation to support a number of causes, with an emphasis on helping poor and vulnerable people out of poverty

We plan to continue to further enhance our ESG programme going forward, recognising the importance these areas have in the way we do business.

Chief Financial Officer's Review

The Group's Statutory Income Statement is shown below which includes IFRS 16 adjustments and exceptional items.

Management monitors and assesses the business performance on a pre-IFRS 16 and pre-exceptional items basis, which is shown below. This aligns to the reporting used to inform business decisions, investment appraisals, incentive schemes and debt covenants. A full reconciliation between the pre- and post-IFRS 16 results are shown in the Glossary. It should be noted that IFRS 16 is not material to profit before tax, the total adjustments increased profit before tax by £0.8 million in H1 FY22 (H1 FY21: reduced by £0.3 million).

We have also provided a comparison to FY20, which is more comparable due to the impact of COVID-19 during FY21.

Revenue

Group revenue increased by +41.5% to £586.2 million in the first half of the year, +44.6% in constant currency². The prior year was impacted by COVID-19 lockdowns, and on a two-year basis, revenue increased by +36.7%, +40.8% in constant currency.

The UK business was impacted more by COVID-19 lockdowns in the prior year than the US. UK stores were closed for a seven-week period from the start of the year until 15 June 2020. In the US, stores began to re-open in early May 2020, with Hudson Yards being the last store to open in September 2020. As disclosed during FY21, we estimate that the Group lost approximately £80.0 million of sales in H1 FY21 as a result of COVID-19. 

Group ecommerce sales, grew +28.7% on last year, despite stores having been fully opened in H1 FY22, showing the continuing strength of our online proposition.

Q1 and Q2 of FY22 were impacted by a number of factors which influenced the timing of sales. 

In Q1 FY22 the Group sold more supply-constrained product than intake, which increased sales but reduced stock levels.  This led to store displays being significantly depleted, particularly of Rolex product. In Q2 FY22, the Group agreed with Rolex to implement a minimal level of display stock within all stores in the UK and US. This allows the business to appropriately represent the Rolex range and provide customers with the ability to view product. This display product is not for sale and is displayed as 'For Exhibition Only' within the stores. As such, the Group went through a re-stocking process in Q2 FY22 which reduced possible sales within that quarter. The correct level of display stock is now in place, therefore the re-stocking can be considered a one-off event in Q2 FY22.

Revenue by category

We saw continued strong demand for luxury watches, for which sales grew by +40.5% in the first half of the year, making up 86.8% of the mix. We were particularly pleased with the performance of non-supply constrained brands during the period. Rolex sales grew by mid-teens, whilst the overall growth in luxury watches was +40.5%. Non-supply constrained brand sales more than doubled compared the prior year period and made up 28.2% of the total sales mix compared to 18.5% in H1 FY21. This demonstrates that revenue growth was transaction-led, rather than being driven by ASP. ASP increased by individual watch brand but reduced in total due to brand mix.

Jewellery has performed exceptionally well, increasing by +54.9%, ahead of the Group total sales increase.  Demand for bridal and diamond jewellery has been particularly strong, with the reintroduction of weddings post COVID-19 restrictions.

Other revenue consists of servicing, repairs and insurance services and the sale of fashion and classic watches and jewellery. Sales of fashion and classic watches and jewellery now make up 3.0% of Group sales.

Sales by region

The UK performance continues to be robust, with sales +42.3% vs H1 FY21 to £418.6 million. This has been delivered through a thriving domestic clientele.

The table below shows the proportion of airport and tourist sales compared to total Group sales.

The tourist customer demographic has been replaced with domestic clientele, with the domestic business in the UK doubling from H1 FY20. With the UK Government's decision to end the VAT-free shopping scheme for tourists, we do not expect tourist shopping to come back to FY20 levels. Four stores at Heathrow are now operating, whilst two stores at Terminal 4 remain closed. Passenger numbers within the airports are increasing, and during the first half of the year we renegotiated terms with Heathrow Airport.

The Group has continued to progress its mono-brand boutique strategy by opening seven mono-brand boutiques during the 26 week period.  The Group also completed the refurbishment of the ex-Fraser Hart stores at Stratford, Brent Cross and Kingston along with the commencement of the Goldsmith Luxury roll-out with Reading and Canterbury.

Strong momentum in the US has continued, with revenue of £167.6 million up by +39.5% on the prior year and +50.2% in constant currency. On a two-year basis sales were +50.9% and +66.7% in constant currency.

Q3 FY22 will see the annualisation of the US mono-brand boutiques opened last year, along with the opening of the Grand Seiko boutique in Manhattan, New York. We are pleased with the performance of these stores to date.

Profitability 

Net margin % increased by 130 bps as a result of product mix. The increase in mix of non-supply constrained brands in H1 FY22 improved the margin mix along with the higher proportion of jewellery sales. The net margin is now more in line with pre-COVID levels as can be seen in the table above.

Store costs increased by £28.1 million (+39.0%) from the prior year, to £100.2 million. £8.5m of the increase relates to COVID-19 one-offs recognised in the prior year. This included £3.5 million under the US Government's Paycheck Protection Program, £2.8 million from the UK Government's Furlough Scheme and incremental rates relief of £2.2 million.  In the second half of FY21 an accrual was made for the repayment of UK furlough funding received (and the payment subsequently made in H1 FY22). The further increase in store costs comes from variable costs and investment in new stores, performance marketing, and our newly launched Xenia project.  Despite the reduction in Government support in H1 FY22, the Group managed to leverage store costs further, with a decrease in store costs as a percentage of sales of 30 bps.

Overheads increased by £8.8 million (+36.5%) through the investment in marketing, people (including incentives) and a further commitment of £1.5 million accrued to the Watches of Switzerland Group Foundation. Overheads also benefited from £0.9 million of furlough/PPP funding in the prior year.

Store opening and closure costs

Store opening and closing costs include the cost of rent (pre-IFRS 16), rates and payroll, prior to the opening or closing of stores, normally during the period of fit out and includes periods of refurbishment. This cost will vary annually depending on the scale of expansion in the period.

Exceptional administrative items

Exceptional items are defined by the Group as those which are significant in magnitude and are linked to one-off, non-recurring events. These items are detailed in the table below and are shown post-IFRS 16.

The IPO costs of £1.5 million in the current year relate to IPO-linked share-based payments (H1 FY21: £2.1 million), these options vested in June 2021 and there will be no further expense in relation to these in future periods.

The acquisition costs relate to legal and professional expenses incurred on business acquisitions.

The prior year reversal of expected credit losses and impairment of right-of-use assets reflected the updated review of prior year COVID-19 related provisions.

Finance costs

Interest on borrowings reduced by £1.0 million due to the lower level of debt in the current year. Interest was limited to the non-current term loan, and the margin on that loan has reduced in line with the more favourable leverage of the Group.

Interest on IFRS 16 liabilities has reduced by £0.5m as a result of the average remaining life on leased assets reducing.

Taxation

The overall Effective Tax Rate (ETR) for the period was 20.7% after IFRS 16 adjustments and 20.3% before these adjustments. The ETR is higher than the UK rate of 19% as it incorporates a US ETR of 27.3% on US profits for the period.

The UK rate is 18.5%, which is lower than the standard UK rate of 19% largely due to the additional capital allowance deductions available in the period (the super deductions), which more than offset the permanent disallowances that usually drive the rate above 19%.

The US rate reflects the federal rate of 21% plus state taxes due in the region of 6.5%.

Earnings Per Share

Adjusted basic EPS from continuing operations increased by 9.2p to 21.8p in the current half year and has been calculated as follows:

Acquisitions

Two acquisitions for the trade and assets of two stores were completed at the end of Q2 FY22. One store opened to the public on 13 September 2021 at Mall of America in Minneapolis, Minnesota followed by one further on 25 October 2021 in Plano (Dallas), Texas.

On 1 December 2021, the Group completed the acquisition of three further stores in Greenwich, Connecticut, Vail and Aspen, Colorado.

The combined Last Twelve Months revenue for these stores was approximately US$100.0 million and we expect profitability to be in line with the US average.

Balance sheet

Goodwill and intangibles increased as a result of the two US acquisitions in the period.

Property, plant and equipment increased by £6.1 million in the period. Additions of £19.6 million were offset by depreciation of £13.1 million, loss on disposal of £1.0 million (following a store fire), and a favourable foreign exchange impact of £0.4 million.

Including software costs, which are disclosed as intangibles, total capital additions were £19.9 million (H1 FY21: £9.4 million) of which £19.1 million was expansionary (H1 FY21: £9.1 million). Expansionary capex relates to new stores, relocations or major refurbishments (defined as costing over £250,000).  In the period, the Group opened eight new stores, acquired two stores, expanded three, and refurbished five stores. Investment in our store portfolio is paramount to our strategy and the Group follows a disciplined payback policy when making capital investment decisions.

Lease right-of-use assets have increased since 2 May 2021 by £2.5 million to £256.2 million. Additions to the lease portfolio along with lease renewals or other lease changes have increased the balance by £21.0 million. This has been offset by depreciation of £19.4 million, and a favourable foreign exchange impact of £0.9 million.

Lease liabilities have increased by £1.7 million. The portfolio changes noted above increased the lease liability by £20.1 million. Interest charged on the lease liability also increased the balance by £5.8 million, in addition to a negative foreign exchange impact of £1.2 million. Lease payments have reduced the balance by £25.3 million, giving a lease liability balance of £303.1 million. This means that the net lease liability on 31 October 2021 was £46.9 million, compared to £47.7 million at the FY21 year end.

On an IFRS 16 basis our leases are generally recognised to the end of the lease term, regardless of whether a break clause is in place.  The average lease lengths were as follows:

Inventory levels increased by £14.4 million in the period to £240.8 million (H1 FY21: £221.9 million).  The increase is as a result of higher levels of Rolex to deliver optimal display capacity, along with deep purchasing of non-supply constrained brands ahead of Christmas trading. 

Trade and other receivables were £13.9 million (H1 FY21: £11.7 million), increasing by £3.5 million from 2 May 2021. The increase in the period reflects the higher trading activity, in addition to the timing of a number of prepaid balances.

Trade and other payables were £190.4 million (H1 FY21: £190.8 million), increasing by £38.6 million from 2 May 2021. The increase in the period is principally as a result of our increased stock intake.  This is partly offset by the £6.8 million repayment of the UK furlough monies which were accrued at the FY21 year end. Trade payables includes an accrual for the Foundation of £3.0 million.

The main components of 'Other' are taxation assets of £9.1 million (H1 FY21: £14.2 million), the defined benefit pension obligation of £2.2 million (H1 FY21: £4.9 million), and capitalised transaction costs. The taxation asset has reduced following utilisation of US tax losses in the period.

Net debt/cash and financing

At 31 October 2021, the Group was in a net cash position of £30.0 million.  Net debt reduced by £73.9 million in the six-month period driven by strong cash flow. Movements of £73.1 million are detailed in the cashflow below, in addition to a favourable foreign exchange impact of £0.8 million.

Year-end net debt is expected to be between £10.0 million and £20.0 million. The outlook includes the cash acquisition of the five US stores announced within the Q2 FY22 trading update. Capex and tax expenditure are also expected to be higher in the second half of the year.

At 31 October 2021, the Group had a total of £213.9 million of available committed facilities as follows:

At 31 October 2021, only the £120.0 million of the UK Term Loan was drawn down.  Liquidity headroom (defined as unrestricted cash plus undrawn available facilities) was £235.8 million.

The debt facility is subject to a six-monthly financial covenant test on leverage and fixed charge cover ratio. These tests are based on pre-IFRS 16 measures. On 18 June 2020, the covenant tests of the Group's facilities were replaced with a monthly minimum liquidity headroom covenant of £20.0 million for the period of June 2020 to September 2021. The Directors sought the replacement of covenants to provide further flexibility to deal with any unexpected circumstances during that period. Both sets of covenants were comfortably satisfied throughout the financial period.

Cash flow

The Group generated £102.3 million of free cash flow with a free cash flow conversion of 123.6% in H1 FY22. This strong result was driven by Adjusted EBITDA of £82.8 million in addition to favourable working capital movements. Due to the seasonality of the Group, working capital is generally positive in the first half before normalising in the second half of the year. The prior period comparison contained higher working capital benefits due to the impact of store closures on the timing of inventory payments, and other one off COVID-19 impacts including government grants received of £8.9 million relating to the UK furlough scheme and US PPP.

Interest payments have reduced by £1.3 million. As a result of the Group's strong cash position, borrowing has been limited to the non-current UK Term Loan. In the prior year, the Revolving Credit Facility and US Asset Backed Loan were fully drawn and held in cash to provide additional flexibility during the COVID-19 lockdown period.

Expansionary capex of £19.9 million (after taking into account the associated creditors movement) was higher than the prior year due to the timing of capital projects, both in relation to new stores and the refurbishment of existing stores.  In the prior year, several projects were delayed until FY22 due to COVID-19.

Return on Capital Employed (ROCE)²

ROCE, which is calculated on a Last Twelve Months (LTM) basis, has increased by 340 bps to 23.1% in the period demonstrating improved capital efficiency. This is as consequence of annualised Adjusted EBIT increasing by 33.5%, compared to the increase in average capital employed of 13.9%.

Risks and uncertainties

The Group is exposed to a number of risks and uncertainties in its business which could impact its ability to effectively execute its strategy over the remaining six months of the financial year and cause actual results to differ materially from expected and/or historical results.

The Board has considered the principal risks and uncertainties for the first half and the remaining half of the financial year and determined that the risks presented in the 2021 Annual Report and Accounts, described as follows, remain unchanged Business strategy execution and development; Key suppliers and supply chain; Customer experience and market risks; Colleague talent and capability; Business interruption and IT infrastructure;  Data protection and cyber security; Regulatory and compliance; Economic and political; Brand and reputational damage; and Financial and treasury.  These are detailed on pages 105 to 113 of the 2021 Annual Report, a copy of which is available on the Watches of Switzerland Group PLC (the 'Company') website at www.thewosgroupplc.com.