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The following segment was excerpted from this fund letter.
Watches of Switzerland (OTCPK:WOSGF)
Watches of Switzerland is a retailer and partner to Rolex and other luxury watch brands. It trades on 10x this year’s FCF despite double digit growth and we think can return 32% p.a. for three years for a 130% total return.
We believe most of the company’s value lies in its relationship with Rolex, which only sells through authorized retailers like WOSG who act as gatekeepers to the Rolex universe. That relationship gives WOSG far superior economics to a typical retailer, and makes it closer to a subsidiary of Rolex. Almost every Rolex is sold off a customer waitlist and prices only go up over time, while stores strictly adhere to Rolex’s recommended retail prices. That means no price competition and no inventory risk. There is no online competition either, as that would prevent customers from being vetted and having the ‘Rolex experience’ in a store. Many sources told us that being selected as a Rolex retailer is like being given a license to print money.
WOSG’s management are competent, experienced, and well incentivized, with CEO Brian Duffy owning £32mm of stock. Duffy joined in 2014 and his strategy of investing in stores to elevate customer experiences has successfully grown WOSG’s share of Rolex sales in the UK from around 35% to 50%. This encouraged Rolex to entrust WOSG with replicating its strategy in the US, where WOSG is now the number one player with 10% share and has grown at 30% p.a. for the last five years.
The stock has fallen 75% since 2022 after Rolex acquired another retailer and the luxury watch bubble burst. Investors are concerned that WOSG’s relationship with Rolex is in danger, but our work suggests it is more likely getting stronger. The company’s scale is an advantage that allows it to invest significantly more in flagship stores than competitors can, particularly in a US market that is dominated by mom & pops. As Rolex continues to shrink its store base, we expect WOSG will continue to gain share as weaker competitors shutter.
WOSG is likely to grow at 10-15% p.a. for years given the large opportunity for growth in the US. It trades for just 10x our estimate of this year’s FCF despite its qualities and historically traded for 20x. We expect the stock will re-rate as short term concerns ease and the company continues to deploy capital at 20% returns.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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