Watches of Switzerland Group (WOSG.L) - Stock Pitch

If you have feedback/questions/comments on this pitch, please email [email protected] or DM me on Twitter/X @joinyellowbrick. I will pass along the feedback to the author and get responses.

Watches of Switzerland Group (WOSG.L) is a leading luxury watch and jewelry retailer operating in the UK, US, and Europe. The company specializes in selling high-end watches from prestigious brands, with Rolex being its most significant partner accounting for approximately 55% of revenue. WOSG has a strong market position, particularly in the UK where it holds about 40% market share in the luxury watch segment.

Key Points

1. Strong Partnership with Rolex:

   1. WOSG has a century-long relationship with Rolex, dating back to 1919.

   2. As an authorized Rolex retailer, WOSG benefits from a business model with limited inventory risk, no price competition, and no online threat.

   3. The Rolex partnership provides WOSG with superior economics compared to typical retailers, with estimated 33% gross margins on Rolex sales.

2. Expansion Opportunity in the US Market:

   1. The US luxury watch market is underpenetrated compared to the UK (CHF 12 per capita vs CHF 26 in the UK).

   2. WOSG has grown to become the largest retailer in the US with ~10% market share, growing at 30% annually over the past 5 years.

   3. Potential for significant growth as the fragmented US market consolidates and WOSG leverages its scale to invest in flagship stores.

3. Attractive Financial Profile:

   1. Revenue CAGR of 19.2% over the last 10 years.

   2. 5-year average ROIC of 14.1%.

   3. Strong cash flow generation with 50-60% FCF conversion of EBITDA on a normalized basis.

   4. Net debt/EBITDA of 0x pre-IFRS 16, indicating a strong balance sheet.

4. Experienced Management Team:

   1. CEO Brian Duffy has successfully implemented an elevation strategy since joining in 2014.

   2. Management has skin in the game, with Duffy owning 3.2% of the company.

   3. Track record of disciplined capital allocation, making accretive acquisitions at attractive multiples.

5. Valuation Opportunity:

   1. Trading at 9.4x P/E and 10-11x FCF (LTM), a significant discount to historical multiples of 20-25x.

   2. Potential for multiple expansion as near-term concerns abate and growth continues.

Risks and Concerns

1. Rolex Concentration:

   1. High dependence on Rolex (55% of revenue) creates concentration risk.

   2. Rolex's acquisition of Bucherer raised concerns about potential disintermediation, though this appears unlikely based on management commentary and industry dynamics.

2. Market Slowdown:

   1. Recent slowdown in UK and China luxury watch markets has impacted growth.

   2. Company issued a profit warning in January 2024, revising FY24 guidance downward.

3. Execution Risk in US Expansion:

   1. Higher costs and cultural differences in the US market may present challenges.

   2. Competition from established local retailers and potential resistance from mom-and-pop stores.

4. Cyclicality of Luxury Goods:

   1. Exposure to economic cycles and consumer sentiment, particularly in the aspirational segment.

Valuation

Based on management's plan to double sales and EBIT within 5 years, and considering the company's historical performance, we project:

• Revenue growth of 10-15% CAGR over the next 5 years

• Gradual EBIT margin expansion from 8.8% in FY24 to 10-11% by FY28

• FCF yield of 8-10% based on current market cap

Applying a target multiple of 15x FCF (midpoint between current 10x and historical 20x), we arrive at a potential 3-year price target of £7.50-£8.00 per share, representing 90-105% upside from the current price of £3.90.

If you have feedback/questions/comments on this pitch, please email [email protected] or DM me on Twitter/X @joinyellowbrick. I will pass along the feedback to the author and get responses.