Description

Watches of Switzerland Group (WOSG) is a well-positioned UK-based luxury retailer of high-end Swiss watches with high net worth tailwinds trading at 20x FWD earnings (FY22, FY ends April 30th). They have executed phenomenally in Europe (hundred year relationship with some of the top brands) and now have an ability to take a ton of market share in the US by rolling up other authorized dealers (ADs).

(As a brief aside, ADs are the only places that can sell you a Swiss watch at retail prices / with the original manufacturer’s guarantee. This is unlike buying a second hand watch from a ‘grey market’ dealer. For the top brands you generally have to be one of the AD’s preferred customers in order to get the watches that are most desired as the average AD might only get a handful of them per year. As an example, you can check out the Rolex ADs near you here. Note that there are not that many. Your average downtown jeweler taking out ads selling used Rolexes is not an AD.)

Understanding what makes a true luxury business work (versus a fashion business) is difficult and often done incorrectly. Sorry to the value investors out there but Michael Kors and Coach are not a luxury business. Rolex, Hermes, and Patek Phillippe are. For a true luxury brand, increasing prices is not an option but a necessity. Luxury sells due to its rarity, and price increases are a requirement to maintain the rarity of a brand. This is why some of the most well-known luxury items have really not changed in style in 50-100 years (e.g., Cartier Tank or Love Bracelet, Hermes Birkin or Kelly bags). The fashion industry, meanwhile, changes styles at least 4 times a year and sells as many units as possible. The goal there is to sell what is in vogue, not what is timeless. This is why people pass down nice durable hard luxury items like Swiss watches for generations, but you don’t see people wearing their great great grandma’s Gucci flip flops...

This matters for WOSG because ~75% of its revs come from the top seven watch brands---the ones that really matter. This is the part of the luxury market that is enduring and the one that investors should want exposure to. Rolex specifically contributes ~60% of group revenues, which is great. The holy trinity of Swiss watchmaking includes Patek Philippe, Audemars Piguet, and Vacheron Constantin. Beyond that Rolex is slightly more mass market but still the dominant brand. Rolex is synonymous with Swiss watchmaking and especially Swiss sports watches which grow faster than dress watches. Do your own work but my diligence tells me there is a pretty big shortage of Rolex steel sports watches, most of which is being done on purpose to make sure secondary / grey market values of Rolex steel watches stay above MSRP. It’s a brilliant, legal racket.

3 Key Reasons This Is Defensive, Growth & Potential To Be Multi-Bagger:

• Defensive growth: Swiss watch exports to UK – 9 yr CAGR of 12.4% for watches above CHF 3k (which is where WOSG really plays); Swiss watch exports to US – 9 yr CAGR of 7.3% for watches above CHF 3k.

• Supply/Demand Balance: Controlled supply vs demand means waiting lists, limited/no discounting, ability to pass through price increases & premiums in second hand market. For context, Rolex produce 1.1m units/yr, Patek Philippe 60-65k/yr & Audemars Piguet c35k/yr. Rolex demand is price inelastic. If you look at prices on Chrono24 (https://www.chrono24.com/ - largest platform for second-hand luxury watches), you will see many watches are sold at premium in second-hand mkt. As the CEO of WOSG says, everyone wants a watch even non-watch people – “if you have 2 you want 4 & if you have 5 you want 15”.

• WOSG strategy: Combination of long-standing partnerships w/brands, investment in retail distribution (stores, online, social media) & US expansion.

Detailed Thesis

·         WOSG is leading multi-channel luxury watch (defined >£1k, but can go > £1m for Patek Philippe) & jewelry retailer in the UK & select regions (FL/GA/NYC) of the US through Watches of Switzerland, Goldsmiths, Mayors (US brand) and Mappin & Webb stores, mono-brand stores & online. Product split of revs: luxury watches 84%, jewelry 9%, other 7%. Geo split of revs: UK 72% & US 28%. Over time we believe the US will provide significantly more revenue contribution.

·         Key points: (1) WOSG has ~35% market share of UK luxury watch mkt by value (40% of UK online) and just 8% of US mkt; (2) top 7 brands = 74% of WOSG and Rolex is the dominant one at 60%. Patek Philippe & Audemars Piguet are 7% of revs and strategic partner brands (Cartier, OMEGA, Breitling, TAG Heuer) 15-16% of revs; (3) revs by other channel: mono-brand boutique stores 16% & travel retail channel 10.5%.

·         Strong brand relationships: WOSG’s relationship w/Rolex dates to 1919 (100 yrs old), Cartier (68 yrs old), Longines (62 yrs), Omega (65 yrs), Patek Philippe (52 yrs), Breitling (36 yrs), Hublot (35 yrs), Tag Heuer (35 yrs), Jaeger LeCoulture (29 yrs) and IWC (26 yrs). While the contracts w/brands are technically rolling 6 months, you can see from the duration of Rolex that it is not a real risk. Our discussions lead us to believe that the brands have little incentive to screw over WOSG given how dominant they are in the UK, which is arguably the most important city for Swiss watches outside of Europe (yes Hong Kong and Macau are important but Chinese tourists often shop for Swiss watches in Europe itself while on vacation).

·         Transformation: WOSG was owned by Icelandics & then Apollo bought in 2013 (they still own ~28%). CEO & CFO joined in 2014 (CEO prev President of Ralph Lauren in Europe/ME). New strategy was built on 5 points: mgmt/systems, channel diversification/store elevation, brand partnerships, marketing & US expansion. Practically this meant investing in stores (took 3-4 yrs in UK) so they were non-intimidating & modern (unlike other retailers). New systems (SAP) meant they could access inventory nationwide (optimise product availability). Invest in marketing w/more recent focus on digital/social media.

·         CRM/Marketing: CRM investments has helped post-Covid 19. Their CRM has 5mm clients on database. They use AI for bidding (online/social media) and have sensors in ceiling in store & can tell if you clicked on an ad. When customers transact, Google matches IP address w/your email. They are way ahead of most retailers (and all watch retailers) on this front. On marketing front, WOSG strategically engage w/brands to drive demand & coordinate product launches. Investments here really helped WOSG perform well in FY2020, which ended in April and includes ~1.5 month of widespread store closures:

·         Innovative marketing: Social media is very important/influential. They are very active on Instagram. Their scale gives them efficiencies on marketing spend that smaller/independents can’t match. They hosted a dinner w/rapper Naz (flagged on social media) & did an exhibition pairing watches w/hard to get sneakers (w/Stadium Goods https://www.stadiumgoods.com/ - these are sneakers that cost hundreds/thousands). They hosting a dinner recently w/50 Cent. The CEO seems to have a real grasp of how to remain contemporary and relevant. The net of all this is in FY20 they had 2.8b media impressions.

·         US: After failed/stalled talks w/Saks (at Saks invitation), WOSG saw that the US was a huge market, underdeveloped & very fragmented (90% of mkt in hands of small groups/independents, usually long-standing family owners). Importantly, brands were keen to have WOSG enter the US. In FY18, entered US w/acq of Mayors in Florida/Georgia, Wynn stores in Las Vegas & in FY19 opened 2 stores in NYC (Soho & Hudson Yards). Their strategy has shown they can open stores greenfield (NYC) & improve acquisitions by using UK template (Mayor’s). Mgmt cited example of a Mayor’s store in Merrick Mall in Miami where redesign of store + other improvements (cocktail area, etc) increased traffic +50%. Similarly, Soho store has a cocktail bar downstairs & a curated library (https://www.watchesofswitzerland.com/stores/soho-nyc ). Prompted awareness of WOSG in NY is 84% after only 2 yrs. They are looking at other M&A opportunities in US, but would only look to buy watch businesses (not the jewellery part). Competition for assets would appear to be low given the relationship required w/the brands.

·         Online: Online is used for researching (WOSG has 30m site visits) & also to book appointments post-Covid 19 (the outcome being more productive sales staff & high conversion). There is no direct online/Amazon-type threat. To be authorized to sell Rolex online, for example, you also need to have a store.

·         High quality retail distribution: Retail distribution has historically been a weakness for Swiss watch brands who are loathe to build out their own network in the most expensive parts of the most expensive cities globally, but WOSG is the answer to that problem for the brands. WOSG is also doing mono-brand stores which improves brand presentation while allowing for a shared backspace (basically a co-location strategy that improves the retail economics for both WOSG and underlying brands):