New Addition: Watches of Switzerland Group
Today I have bought luxury watch retailer Watches of Switzerland Group ($WOSG.L) for a purchase price of 390,00 GBX.
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Watches of Switzerland Group is a leading luxury watch retailer with strong presence in the UK and a growing footprint in the US and Europe. The company specializes in selling high-end watches from prestigious brands including Rolex, Audemars Piguet, Patek Philippe and many others.
The CEO of Watches of Switzerland Group (WOSG) is Brian Duffy. Duffy has been instrumental in transforming the company since taking over in 2014. Under his leadership the group has expanded its market presence and is pursuing an ambitious growth strategy.
The stock was doing well, till Rolex acquired competitor Bucherer. Fear entered the market about Rolex using Bucherer to sell their watches directly and replacing other companies like WOSG. This was followed by a profit warning in January 2024 because of challenging macroeconomic conditions in the whole luxury market. This resulted in a perfect storm and a stock price decline from 650 GBX towards 389 GBX today.
First of all the profit warning. WOSG lowered their guidance for fiscal year 2024. The new revenue forecast is between £1.53 billion and £1.55 billion, down from the previously reported range of £1.65 billion to £1.70 billion. Also the company now expects a lower EBIT margin, in the range of 8.7% to 8.9% Finally the revenue growth projections have been reduced from 8-11% to 2-3% (constant currencies).
The latter is at the low end, especially given the growth plan of management to double revenues by 2028. I expect it will be difficult for WOSG to reach this.
Then the Rolex and Bucherer story. Bucherer is roughly selling around 8% of total Rolex watches. There are concerns that Bucherer could gain preferential treatment from Rolex, potentially impacting competitors' access to highly sought-after Rolex watches. However, Rolex will still require companies like WOSG to sell their watches. If Rolex want to sell directly, they likely are willing to acquire other retail companies like WOSG. Rolex has stated clearly that "The fruitful collaboration between Rolex and the other official retailers in its sales network will remain unchanged.” The acquisition is seen more as a strategic move to secure prime retail locations by Rolex and gain direct contact with consumers, rather than to eliminate other retailers. So the stock markets, in my opinion, overreacted here.
Duffy has been doing great and revenue CAGR last 10 years have been 19.2%, while their 5 years average ROIC is at 14.1%. Forward P/E dropped to 9.33.
Valuation
For my valuation I have used a 3% increase for the first year and a 10% increase for the next 9 years, which is much lower versus management growth plan. For WOSG my desired return is 15% per year and the perpetuity growth rate is 2,5%. This results in an intrinsic value of 4,58 GBP, which is 17% above my purchase price of 3,90.
Given the historical revenue CAGR, the major expansion plans in US, the strategic acquisition of US Jeweller Roberto Coin and the significant growth potentialof luxury branded jewellery I think my growth forecast might be at the conservative side. Given all the negative news currently priced in and the low valuation I think the risk to lose is low. The high beta is high though: 2,16 and that is why it will be my smallest position, just below 5% of my portfolio.
A more detailed deep dive will be published end of next week.
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Disclaimer
The information in this article is provided for informational and educational purposes only.
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