Fantastic write-up. The problem in the industry is that certain Rolex ADS have been pushing clients to buy lower-priced watches to qualify for Rolex and Patek waitlists. This is particularly common in Singapore and Hong Kong. WOSG doesn't do this to the same extent, and I think that's why its margins remained stable throughout the 2020-2022 COVID era watch bubble.
Great write-up, as always. My understanding is that luxury watches (esp Rolex) are in decline in cache. Instead there are multiple independent brands for collectors (FP Journe-now with a somewhat tarnished reputation-, Kari Voutilainen etc etc etc, but I'm not an expert.
Alex, How do you get to meet with management? I'm a private investor, but struggle to get past the 'Investor Relations' gate. In my experience, the IR people do then not know the business very well. I invest decent sized amounts, so you'd think management would want to engage with long-term holders.
I don't agree that luxury watches are in decline! What's your data source? I've got data on all mechanical Swiss watch exports by value and with ASP since 2004, which shows an impressively rising trend, right through until the final datapoint for 12 months to July 2024, where there is a small cyclical decline. I'm not sure if I can add pictures here in comments, but I have just posted it on Twitter.
On reaching out to companies for a meeting, I'm equally happy to speak to an executive or IR as an intro, and can then follow up as necessary. Many corporates recognise that it is of mutual interest to ensure that my write-ups are fully informed and able to reflect the company's story.
I totally accept your data-and I'm fully aware that mechanical watches have been under threat since digital watches in the 1970s. I don't have a date source, but I am a collector but not of Rolex, PP, or AP. As a suggestion, it would be good it you can source collectors vs 'non collectors', ex flippers for Rolex.
Thanks. I've never got past IR (and this is for similar sized companies to the ones you analyse), and then I've typically discovered a business weakness, so i exit. I may set-up a substack, which may help as you suggest.
Plus, I'm looking forward to your updates on CRDA & Webex (splitting>>potential opportunity for the good business). I'm also monitoring SPX, but I am concerned re peristaltic pumps (Ingersoll Rand), so thank you for that insight Alex.
A great summary. Maybe I'm more optimistic by nature, but my base case is close to £2.4bill YE28. Luxury watches are clearly in a very big drawdown, which I believe will recover (this year, three years, who knows but the history of these declines is a few years it seems). Once normalized and WOSG is at a bigger scale, I see adj EBITDA margins around 10.5%+
WOSG grew revenue strongly in the period before Covid pushed prices and demand up above trend. In my view it's over 90% likely they'll grow from YE23 to YE28 more than 6% a year only. Same store sales in Rolex/AP/PP price increases likely get to 2-4% alone, assuming volumes equal to YE23.
Rolex is planning a very large increase in volumes with new manufacturing facilities, so either current stores will get more stock or WOSG will hopefully be able to continue opening new Rolex stores.
10% rev growth YE23 to YE28 is my base case, more towards 2nd half of this period as watch prices stabilize and CapEx gets spent (Which still ends in a big miss to their 5 year target of only 2/3rds revenue target)
Angle 1- As per above report, Overall Luxury watch market grown in last decade at 4-5% CAGR overall. while USA market will grow 6%+, at the same time Rolex is expanding 60% production + WOSG is acquiring other USA dealers ... No Cals. needed
Angle 2 - Currently WOSG sells 1B from Rolex combined in USA and UK both, 60% Rolex increase will be like 1.6B for WOSG, 0.5B from USA luxury watches acquisitions + 0.5B from jewelry & other luxury watches = 2.5B, its an easy estimate. Only mess up firm can do is EBIT if capex cost is too much due to inflationary headwinds or lease prices uplifts or salary increases drastically etc+ too high premiums in acquisitions .... i guess cost part is where hurdle is.
Angle 3- USA luxury market is 3B and WOSG only sells 330M (12% market share), by 2030, this market would be 4.3B+, WOSG market share expands to 20%, then revenue would 860M from USA market only... i hope WOSG maintains its original 50% UK market share. plus Acquisitions WOSG do in USA would add 10-15% market share, so additional 500M. Alone USA would generate a revenue of about 1.3B from watches only. then add rolex manufacturing increase + other branded watches + jewelry etc.
Am i missing something here? your guidance would be appreciated.
Two questions spring to mind when reading this WOSG analysis and I welcome your views on both:
1/ Gen X and the Millennials are a materialistic bunch, many are nouveau riche, and they like a status symbol. Rolex boomed as a result. But Gen Z are different. They have only ever lived in a tech era and for them the Apple iWatch seems to be more coveted that a Rolex. A similar trend has been seen in diamond rings, Gen Z seem less enamored by them. If the tide is turning, and mechanical Swiss watches are becoming less fashionable, how much of a threat do you see this for WOSG?
2/ The group's long-standing relationship with Rolex is well-established, but it also creates a significant dependency on a single supplier. Rolex imposes strict standards on its retailers, which can present challenges. For instance, retailers cannot order specific models; they must accept whatever Rolex chooses to send them, making each shipment a bit of a gamble. They might be fortunate enough to receive a sought-after Daytona, or they could end up with a less popular model, with no say in the matter. Adding to the pressure, retailers are forbidden from discounting Rolex products (hence, Rolexes are never on sale). If caught offering a discount, the retailer risks losing their franchise. This means if they receive a model that’s hard to sell, they may be stuck with it for an extended period, which can negatively impact their return on invested capital (ROIC). On the upside, Rolex grants retailers exclusive rights to be the only official dealer in their area—a coveted status. Because of this, franchisees are careful not to violate Rolex's rules. However, this reliance poses a significant risk for the retailer. Imagine a rogue store manager offering secret discounts to boost sales. If Rolex finds out, the franchise is lost. Given these dynamics, do you not think this level of dependency represents a substantial concentration risk?
In short, I agree that both the long term health of the luxury watch category, and the various problems that could potentially crystallise as a result of the high Rolex concentration, are two key risk factors for the stock.
On the category prospects, every investor will have their own intuition and make up their own mind.
On concentration risk, I did include a section on this in my report. As I wrote, I am comfortable with it myself, but I acknowledge that some investors will pass for this reason, and a discount to fair value will prevail as a result.
Thx a lot for putting in so much efforts. I had a hard time finding comps but your writing helped a lot
1- Rolex manufacturing production will increase by 60% in next 5 years. Currently WOSG sells about 1 billion of Rolex as per plural investing report. Naturally it would be 1.6B by 2030 assuming WOSG keeps the share. Then through acquisition of other Rolex retailers in USA, there would be another possible 0.5B (2.8B overall USA market size and currently WOSG has only 330M sales). Add on sales from rest of luxury watch brands + new branded jewelry, of about another 0.5B sales.. I guess Base case revenue would be ~2.5B. ... Can you please guide what i am missing?
2- Sustaining Capex means maintenance capex to upkeep the store? Isn't it that once renovation is done, then store remain unchanged for 4-5 years and no capex for this specific store or still they change layout, carpets, lighting every year for every store to stimulate customers? Enlarging the store would be sustaining Capex or growth Capex?
3- I had a hard time understanding leasing or IFRS 16 Adjustment part, some reports says after lease, other says, before lease, other says capitalize, can you please help me in it? i read on google but confused i am. i thoughts its a lease rent, that is a part of yearly expense like mortgage or house rent, but when it comes to companies, it has separate treatment?
your guidance would be appreciated. I am just a student at university, learning investing universe. Thx.
Thank you for the insightful write up. You briefly touched upon their Roberto Coin acquisition in US and the Jewelry business strategy.
Do you think this brand can become a significant growth driver for them in 3-5 years? And will they be able to replicate the watches segment growth in Jewelry business in general?
Very comprehensive write up Alex, thanks for sharing. What are your thoughts on the progress of WOSG with their certified and non-certified secondary sales ? Noted that the FD told media recently that it was now the Co's 2nd biggest brand and the fastest growing part of the business.
Pre-owned is definitely a nice growth area, with the boost from the official RCPO scheme that only launched in July 2023. Credit to WOSG for having pre-positioned for this with the acquisition of Analog Shift in the US back in 2020.
The ambitious LRP target is for RCPO volume to reach 20% / 10% of new Rolex volume by FY28 in the US and UK respectively. With additional strong continued growth targets for non RCPO pre-owned business as well.
They have steadfastly refused to quantify pre-owned as a % of sales. You're right, the CFO said in May that "In terms of Pre-owned, obviously, we haven't disclosed a specific number, but I can share that it's now the second biggest brand within our portfolio". They have since walked back from that a bit.
The obvious point to make is that groupwide revenue trends slowed sharply throughout FY24, with the UK -6% across H2. So if we assume that pre-owned added as many as 5 percentage points of growth to group sales, then that's great but it also shows that the rest of the business was in even more dramatic underlying decline.
1- Pre-owned are sourced from secondary market at higher prices than retail prices? what is the sourcing point that they get cheap, polish, and then sell it ~ same price as Rolex new retail price?
2- Does Rolex allow them to set prices of these refurbished watches or Rolex refurbishes and then set prices for WOSG. WOSG has expertise to market and sell Rolex, but not to refurbish it, means watches would be sent to Rolex manufacturing facility and Rolex would charge for servicing, give it a tag condition (good, bad, normal condition) and then WOSG add their fixed 33% margins and that sets retail prices. ...or what other scheme we have for this program? any # that what are the margins we have for this line of business? This pre-owned program is only for Rolex or other brands as well?
3- I looked at all your writeups, must thank you from the core of my heart for putting in efforts for us. But i had a hard time figuring out, what is your portfolio right now?
Fantastic write-up. The problem in the industry is that certain Rolex ADS have been pushing clients to buy lower-priced watches to qualify for Rolex and Patek waitlists. This is particularly common in Singapore and Hong Kong. WOSG doesn't do this to the same extent, and I think that's why its margins remained stable throughout the 2020-2022 COVID era watch bubble.
Great write-up, as always. My understanding is that luxury watches (esp Rolex) are in decline in cache. Instead there are multiple independent brands for collectors (FP Journe-now with a somewhat tarnished reputation-, Kari Voutilainen etc etc etc, but I'm not an expert.
Alex, How do you get to meet with management? I'm a private investor, but struggle to get past the 'Investor Relations' gate. In my experience, the IR people do then not know the business very well. I invest decent sized amounts, so you'd think management would want to engage with long-term holders.
Hi Neil, thanks for your comment.
I don't agree that luxury watches are in decline! What's your data source? I've got data on all mechanical Swiss watch exports by value and with ASP since 2004, which shows an impressively rising trend, right through until the final datapoint for 12 months to July 2024, where there is a small cyclical decline. I'm not sure if I can add pictures here in comments, but I have just posted it on Twitter.
On reaching out to companies for a meeting, I'm equally happy to speak to an executive or IR as an intro, and can then follow up as necessary. Many corporates recognise that it is of mutual interest to ensure that my write-ups are fully informed and able to reflect the company's story.
I totally accept your data-and I'm fully aware that mechanical watches have been under threat since digital watches in the 1970s. I don't have a date source, but I am a collector but not of Rolex, PP, or AP. As a suggestion, it would be good it you can source collectors vs 'non collectors', ex flippers for Rolex.
Thanks. I've never got past IR (and this is for similar sized companies to the ones you analyse), and then I've typically discovered a business weakness, so i exit. I may set-up a substack, which may help as you suggest.
Plus, I'm looking forward to your updates on CRDA & Webex (splitting>>potential opportunity for the good business). I'm also monitoring SPX, but I am concerned re peristaltic pumps (Ingersoll Rand), so thank you for that insight Alex.
Great writeup as usual even if whatches are not in my circle of competence.
A great summary. Maybe I'm more optimistic by nature, but my base case is close to £2.4bill YE28. Luxury watches are clearly in a very big drawdown, which I believe will recover (this year, three years, who knows but the history of these declines is a few years it seems). Once normalized and WOSG is at a bigger scale, I see adj EBITDA margins around 10.5%+
WOSG grew revenue strongly in the period before Covid pushed prices and demand up above trend. In my view it's over 90% likely they'll grow from YE23 to YE28 more than 6% a year only. Same store sales in Rolex/AP/PP price increases likely get to 2-4% alone, assuming volumes equal to YE23.
Rolex is planning a very large increase in volumes with new manufacturing facilities, so either current stores will get more stock or WOSG will hopefully be able to continue opening new Rolex stores.
10% rev growth YE23 to YE28 is my base case, more towards 2nd half of this period as watch prices stabilize and CapEx gets spent (Which still ends in a big miss to their 5 year target of only 2/3rds revenue target)
https://europeanvalue.substack.com/p/watches-of-switzerland-group
Angle 1- As per above report, Overall Luxury watch market grown in last decade at 4-5% CAGR overall. while USA market will grow 6%+, at the same time Rolex is expanding 60% production + WOSG is acquiring other USA dealers ... No Cals. needed
Angle 2 - Currently WOSG sells 1B from Rolex combined in USA and UK both, 60% Rolex increase will be like 1.6B for WOSG, 0.5B from USA luxury watches acquisitions + 0.5B from jewelry & other luxury watches = 2.5B, its an easy estimate. Only mess up firm can do is EBIT if capex cost is too much due to inflationary headwinds or lease prices uplifts or salary increases drastically etc+ too high premiums in acquisitions .... i guess cost part is where hurdle is.
Angle 3- USA luxury market is 3B and WOSG only sells 330M (12% market share), by 2030, this market would be 4.3B+, WOSG market share expands to 20%, then revenue would 860M from USA market only... i hope WOSG maintains its original 50% UK market share. plus Acquisitions WOSG do in USA would add 10-15% market share, so additional 500M. Alone USA would generate a revenue of about 1.3B from watches only. then add rolex manufacturing increase + other branded watches + jewelry etc.
Am i missing something here? your guidance would be appreciated.
ROLEX and WOSG
Two questions spring to mind when reading this WOSG analysis and I welcome your views on both:
1/ Gen X and the Millennials are a materialistic bunch, many are nouveau riche, and they like a status symbol. Rolex boomed as a result. But Gen Z are different. They have only ever lived in a tech era and for them the Apple iWatch seems to be more coveted that a Rolex. A similar trend has been seen in diamond rings, Gen Z seem less enamored by them. If the tide is turning, and mechanical Swiss watches are becoming less fashionable, how much of a threat do you see this for WOSG?
2/ The group's long-standing relationship with Rolex is well-established, but it also creates a significant dependency on a single supplier. Rolex imposes strict standards on its retailers, which can present challenges. For instance, retailers cannot order specific models; they must accept whatever Rolex chooses to send them, making each shipment a bit of a gamble. They might be fortunate enough to receive a sought-after Daytona, or they could end up with a less popular model, with no say in the matter. Adding to the pressure, retailers are forbidden from discounting Rolex products (hence, Rolexes are never on sale). If caught offering a discount, the retailer risks losing their franchise. This means if they receive a model that’s hard to sell, they may be stuck with it for an extended period, which can negatively impact their return on invested capital (ROIC). On the upside, Rolex grants retailers exclusive rights to be the only official dealer in their area—a coveted status. Because of this, franchisees are careful not to violate Rolex's rules. However, this reliance poses a significant risk for the retailer. Imagine a rogue store manager offering secret discounts to boost sales. If Rolex finds out, the franchise is lost. Given these dynamics, do you not think this level of dependency represents a substantial concentration risk?
1. Commenting on Gen Z being different, its not true. I had same thought before but after looking at numbers, looks like Gen Z is no different when it comes to luxary watches: https://jewellerymonthly.co.uk/gen-zs-surging-interest-in-luxury-watches/
Hi James, thanks for your comment.
In short, I agree that both the long term health of the luxury watch category, and the various problems that could potentially crystallise as a result of the high Rolex concentration, are two key risk factors for the stock.
On the category prospects, every investor will have their own intuition and make up their own mind.
On concentration risk, I did include a section on this in my report. As I wrote, I am comfortable with it myself, but I acknowledge that some investors will pass for this reason, and a discount to fair value will prevail as a result.
A discount to fair value can be great, if they get a large scale and start returning capital to shareholders, this would be a good position to be in
Thx a lot for putting in so much efforts. I had a hard time finding comps but your writing helped a lot
1- Rolex manufacturing production will increase by 60% in next 5 years. Currently WOSG sells about 1 billion of Rolex as per plural investing report. Naturally it would be 1.6B by 2030 assuming WOSG keeps the share. Then through acquisition of other Rolex retailers in USA, there would be another possible 0.5B (2.8B overall USA market size and currently WOSG has only 330M sales). Add on sales from rest of luxury watch brands + new branded jewelry, of about another 0.5B sales.. I guess Base case revenue would be ~2.5B. ... Can you please guide what i am missing?
2- Sustaining Capex means maintenance capex to upkeep the store? Isn't it that once renovation is done, then store remain unchanged for 4-5 years and no capex for this specific store or still they change layout, carpets, lighting every year for every store to stimulate customers? Enlarging the store would be sustaining Capex or growth Capex?
3- I had a hard time understanding leasing or IFRS 16 Adjustment part, some reports says after lease, other says, before lease, other says capitalize, can you please help me in it? i read on google but confused i am. i thoughts its a lease rent, that is a part of yearly expense like mortgage or house rent, but when it comes to companies, it has separate treatment?
your guidance would be appreciated. I am just a student at university, learning investing universe. Thx.
Thank you for the insightful write up. You briefly touched upon their Roberto Coin acquisition in US and the Jewelry business strategy.
Do you think this brand can become a significant growth driver for them in 3-5 years? And will they be able to replicate the watches segment growth in Jewelry business in general?
Very comprehensive write up Alex, thanks for sharing. What are your thoughts on the progress of WOSG with their certified and non-certified secondary sales ? Noted that the FD told media recently that it was now the Co's 2nd biggest brand and the fastest growing part of the business.
Hi Nick, thanks for your question.
Pre-owned is definitely a nice growth area, with the boost from the official RCPO scheme that only launched in July 2023. Credit to WOSG for having pre-positioned for this with the acquisition of Analog Shift in the US back in 2020.
The ambitious LRP target is for RCPO volume to reach 20% / 10% of new Rolex volume by FY28 in the US and UK respectively. With additional strong continued growth targets for non RCPO pre-owned business as well.
They have steadfastly refused to quantify pre-owned as a % of sales. You're right, the CFO said in May that "In terms of Pre-owned, obviously, we haven't disclosed a specific number, but I can share that it's now the second biggest brand within our portfolio". They have since walked back from that a bit.
The obvious point to make is that groupwide revenue trends slowed sharply throughout FY24, with the UK -6% across H2. So if we assume that pre-owned added as many as 5 percentage points of growth to group sales, then that's great but it also shows that the rest of the business was in even more dramatic underlying decline.
1- Pre-owned are sourced from secondary market at higher prices than retail prices? what is the sourcing point that they get cheap, polish, and then sell it ~ same price as Rolex new retail price?
2- Does Rolex allow them to set prices of these refurbished watches or Rolex refurbishes and then set prices for WOSG. WOSG has expertise to market and sell Rolex, but not to refurbish it, means watches would be sent to Rolex manufacturing facility and Rolex would charge for servicing, give it a tag condition (good, bad, normal condition) and then WOSG add their fixed 33% margins and that sets retail prices. ...or what other scheme we have for this program? any # that what are the margins we have for this line of business? This pre-owned program is only for Rolex or other brands as well?
3- I looked at all your writeups, must thank you from the core of my heart for putting in efforts for us. But i had a hard time figuring out, what is your portfolio right now?