Shares of Watches of Switzerland Group Plc (LSE) dropped more than 3% on Friday after Jefferies lowered its recommendation on the luxury watch retailer to “hold” from “buy,” arguing that the scope for further valuation expansion has become more limited. At the same time, the broker increased its price target to 740 pence from 440 pence.
“Our downgrade to Hold reflects a reducing runway for valuation expansion (with today’s 13.1x cal 2027 PE comparing to a post COVID range of 7x to 14x) at a time when the US outlook will likely provide a reducing source of positive surprises,” Jefferies said.
North America Remains Strong, but Valuation Appeal Weakens
Jefferies expects the company’s full-year results, due on 14 July, to “confirm North American demand buoyancy,” although it believes “reducing valuation attractions and inflation tailwinds” justify a more cautious stance.
The broker said its revised target price reflects “the dichotomy of UK maturity (on c.10x) and US potential (on c.16x), the latter sense-checked by the correlation to volatile equity markets.”
Jefferies has also adopted a sum-of-the-parts valuation approach. Its previous target was based on a calendar 2026 price-to-earnings multiple of 10.3x, whereas the updated valuation rolls forward to 2027 earnings using a group multiple of 13.1x.
The revised methodology applies a 10x multiple to the UK business, which the broker said is “aligned with the average for FTSE250 retailers,” while assigning a 16x multiple to the U.S. operations.
U.S. Growth Expected to Moderate
Commenting on the American business, Jefferies described it as delivering “an impressive US re-acceleration, but an unclear outlook.” The broker highlighted fiscal 2025/26 U.S. revenue growth excluding foreign exchange effects of 22.7% before the impact of the 53rd week, supported by approximately 20% growth at Coin and a 2.4% contribution from the four-month consolidation of D&D.
Jefferies believes current market forecasts for U.S. revenue growth of around 14% in fiscal 2026/27 and 8.5% in fiscal 2027/28 “seems fair rather than too conservative,” compared with its own projections of 14.5% and 8%.
The broker also noted that “now started lapping the heightened US price hikes pushed since Liberation Day by major brands,” with cumulative price increases of 12.6% across Patek Philippe, Rolex, Cartier and Omega. It added that pricing support “has started moderating since Sep 2025,” highlighting that Patek Philippe reduced prices by a high-single-digit percentage in February.
UK Outlook Remains Challenging
Turning to the UK market, Jefferies said “despite extensive industry lobbying, no evidence has emerged of a potential reintroduction of duty-free shopping,” adding that recent political developments suggest such an outcome “is a very remote one within this Parliament.”
As a result, the broker believes the company remains exposed to “a mixed domestic demand outlook,” with the UK business expected to account for around 45% of group revenue by fiscal 2027/28, leaving it “vulnerable to a more pressured consumer.”
Jefferies forecasts revenue of £1.80 billion in fiscal 2025/26, rising to £1.97 billion in fiscal 2026/27 and £2.10 billion in fiscal 2027/28, compared with £1.65 billion in fiscal 2024/25. It expects earnings per share to increase from 41.6 pence in fiscal 2024/25 to 43.0 pence, 53.6 pence and 58.3 pence over the following three financial years.
According to the broker, risks to its valuation include lower product allocations from luxury watch brands, increased competition for acquisitions, the possibility of new U.S. tariffs and a shift in consumer spending away from the hard luxury segment.
