Watches of Switzerland Investment Case

July 30, 2023
Watches of Switzerland store on high street with logo
Ticker: WOSG LN
Price: 720p
Mkt Cap: £1,7bn
EV: £1,7bn
While I don’t like luxury goods myself, I think being in the business of producing such goods can be pretty exhilarating. High prices and limited availability increase customer demand and willingness to pay. Pricing power is almost guaranteed. Capital requirements are small. Age strengthens brand attractiveness, unlike in many other sectors where products must remain fresh due to fast technological improvements.

Retail, on the other hand, is a highly competitive industry with high fixed costs and, consequently, slim and volatile profit margins. But a retail shop selling luxury goods has more attributes of the latter, in my view.

Keeping customers happy and maintaining the feeling of exclusivity is crucial for luxury brands. So if a new retailer offers a better deal to a brand (selling its goods with a lower markup), he will likely be rejected. The risk of something going wrong with this new retailer far outweighs the marginal financial gains he offers.

This is why Watches of Switzerland Group (WOSG) looks quite interesting to me.

The company was listed on the LSE in June 2014. It was formed in 2005 through a merger of three luxury retail chains: Mappin & Webb, Goldsmiths and Watches of Switzerland. Each of them has been in business for over 100 years. Mappin & Webb has undertaken commissions for and sold jewellery to an extensive list of illustrious clients since its inception in 1775 in Sheffield, UK. It has been a silversmith to all U.K. sovereigns since 1897 and has served five monarchs over a continuous period of 115 years.

Goldsmiths was founded in Newcastle, United Kingdom as a jeweller in 1778 and became the first authorised retailer of Rolex watches in the United Kingdom in 1919.

Watches of Switzerland was formed in the United Kingdom as a specialist watch retailer in 1924 and has been selling luxury watches ever since.

Since FY-14, WOSG has increased its revenue at a CAGR of 18%. One of the key drivers was the entry into the US market in 2017. The share of US sales has increased from 10% in 2017 to 42% in FY-23. Another factor has been the refurbishment of existing stores in the UK with a particular focus on customer experience.

Other luxury goods (non-watches) account for 8% of revenue (FY-23) and services for 6%. The share of those two segments has been marginally declining in the total revenue mix.

WOSG is the largest retailer of luxury watches in the UK and second-largest in the US.

The sector has relatively high barriers to entry since establishing relationships with luxury watch brands takes much time. Besides, large-scale operators like WOSG have the natural advantage of having a wider choice and availability of brands and being able to invest more in their showrooms and employees.

The company runs a portfolio of 146 stores in the UK and has a growing presence in the US, with 47 stores and 6 in Europe (as of 30 April 2023). It is the largest retailer of luxury goods in the UK with a market share of about 35%, which is more than the combined market share of independent stores (25%), other multi-store groups (18%), mono-brands (14%), and department stores such as Selfridges and Harrod’s (8%).

The US market remains highly fragmented, and as a result, the luxury watch category is much smaller compared to other categories. Despite the US being larger than the UK in population (4.9x bigger) and richer per capita (about 30%), its luxury watch market is only 1.9x bigger than the UK. The high share of small retailers and existing grey market have historically kept that segment below its potential.

Strong demand and a constant shortage of certain luxury watch brands result in customers being put on waiting lists. WOSG sells 20-30% of landmark watches like Rolex, Patek Philippe, and Audemars Piguet to its customers on those waiting lists.

Besides gaining scale, the company has materially improved its operating margin from less than 4% in FY-16 to 10.7% last year, with ROIC reaching 27.9% (based on the company’s calculations).

WOSG had a net cash of £16mn at the end of April 2023 compared to a net debt of £14mn a year before. The company does not pay dividends at this stage as it continues to expand its business.

The company was owned by a private equity firm, Apollo, before being listed in 2019. Currently, it doesn’t have any large non-financial investors.

Like the SDI Group, management has relatively low ownership of the business, mainly acquired through share bonuses rather than open-market transactions. The company’s CEO, Brian Duffy, has a 3.2% interest.

I opened a small position in the company (just under 1% of the total portfolio), which may increase once I do more research.
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