Stock Pitch - Watches Of Switzerland Group (LON:WOSG)

21st Apr '21 by Jack Brumby

24 comments 7484 reads

Rolex, Patek Phillipe, Omega… Watches Of Switzerland (LON:WOSG) is associated with some powerhouse Swiss Luxury Watch brands. It is the leading luxury watch retailer in the UK but can this group create enduring value in the manner of these stalwart brands, or will it forever answer to their beck and call?

That’s a big question for prospective shareholders to answer. WOSG can trace its lineage back to the 18th century, but that doesn’t change the fact that watch sellers don’t hold the power here. Brand owners do.

They set the prices, and it is up to Watches of Switzerland to market and sell the product.

But these brand owners need routes to market and in this regard, WOSG has been a faithful servant to them over many decades. That counts for something. It has been a partner of Rolex for a century and it hasn’t lost a partner in over ten years. You can find the rest of the group’s brand partners here.

The luxury watch market is underpinned by strong long term fundamentals and is well positioned for continued growth. It is supply constrained with customer demand remaining significantly higher than availability. The brands have the power, for sure, but can Watches use its scale and sense of history to carve out a similarly significant position in the market?

And shares, since listing in 2019, have nearly doubled - not bad given the group has had to navigate a global pandemic early on in public life.

WOSG was pitched to the Stockopedia Investment Club on the 23rd of March at 658p per share.

Summary

Bull points: UK market leader expanding into larger US market; high QM stock with double-digit revenue and operating profit CAGRs; cash-generative operations with global top decile return on equity; strong partnerships with supply-driven iconic watch brands (has not lost a partner in 10 years).

Bear points: investment case relies on successful US expansion; lack of bargaining power with premium watch suppliers; tough competition, grey market selling, and newer online operators could threaten business model; recent insider sales.

Profile

Watches of Switzerland Group is a Specialty Retailer in the Consumer Cyclicals sector. It is the UK’s leading luxury watch specialist, with over 35% market share (including nearly 50% of the online market) and accounts for half of Rolex’s sales in…

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Logical David

21st Apr '21

Good analysis of Watches Of Switzerland (LON:WOSG) and it was good to see the Investment Club voted to reject the share on similar grounds to myself.

Watches Of Switzerland (LON:WOSG) appeared on my filtering radar many months ago. However, what prevented me from buying the share was Net Gearing at 146%. I sell shares when Net Gearing reaches 100% because in my opinion this is a sign that the company is carrying too much debt.

Another metric which put me off from buying the company was Net Debt is £331m when the Book Value is only £226m. Once Net Debt exceeds the Book Value, I sell before the debt starts to sink a company.

Lastly, the directors have sold almost 14,000,000 shares in the last month but only bought around 26,000 shares. This is another big put off for me. In my opinion, the directors must know something which I don't.

HHR

Reading balance sheets is not my strong point so please shoot me down if I'm wrong here but I think net debt is actually falling rapidly :-

FY 2018/19 £240m

FY 2019/20 £130m (assisted by proceeds from IPO)

H1 2020/21 £22.7m with FY guidance of £60m - £80m

I think the reason the stocko debt figures look bad are lease liabilities for ifrs16.

GloucesterBob

22nd Apr '21

My main concern would be, are people still buying watches like they used to?

Though not in the same market as these, my watch is a very nice 400 pound paper weight, accept for weddings and funerals I never wear it anymore.

With the arrival of mobile phones, are they just fashion accessories rather than must haves, Years ago I wanted a Rolex but now I would prefer a iPhone which does the same and more, I own neither.

With the recent rise, maybe your timing was just out, one for the watch list.

Ill get me coat.

Pangit

Hi GloucesterBob. I think that the part of the watch market that is under threat are the sub £1000 watches where people just use an apple watch or their iPhone. Watches above that price point are now much more of an emotional purchase rather than a functional one.

bryans1311

I think watches as a collectible, rather than a fashion accessory is more the norm now. I'm considering purchasing a Patek Phillipe for some diversification. I may wear it occasionally when trying to dress to impress!

Michael_P

Thanks for this write-up. Is the voting solely based on the stock being pitched, or does it reflect sentiment about the market as a whole? To put it another way, is there an earlier, separate decision on whether this is a good time to put additional money into the market? If there is an earlier decision that yes, this is a good time to invest more funds, then the only decision after the pitch is whether to invest in the stock being pitched.

sammyboy999

23rd Apr '21

The high end watch market has never been hotter. Demand far outstrips supply. I was in WOS Knightsbridge at the weekend and there was no chance of getting any popular Rolex or Patek models. Customers have to spend 10s if not 100s of thousands on less desirable pieces before being considered worthy of buying a popular model.

Jack Brumby

Hi FMH,

We review the Club's processes on an ongoing basis but at the moment there is no separate decision on whether this is a good time to put additional money into the market. Somebody just pitches a stock, and the Club votes on whether to Buy or Reject the stock.

We do have more wide-ranging, informal discussions on market conditions, portfolio composition and strategy, and other investment topics on an ad hoc basis.

Individual members may consider market sentiment and conditions as they weigh up how to vote on the stock in question, but the pitch and voting are more focused around the individual merits of the company itself.

Thanks John! Your portfolio posts are always a good read so I hope you keep them coming.

It's interesting to hear your comment on companies getting waved through. I did some work into this and the results are worth sharing: we started the Club in February of 2020 but only started the Investment Club Blog in September of 2020.

At that point, we made the editorial decision to only focus on historic 'Buy' pitches from February to September in order to catch the blog fully up to the present day. That period actually had quite a few 'Reject' pitches. In fact, I'll list them now:

Sopheon (LON:SPE) , Astrazeneca (LON:AZN) , Fevertree Drinks (LON:FEVR) , Plus500 (LON:PLUS) , Persimmon (LON:PSN) , Domino's Pizza (LON:DOM) , Go-ahead (LON:GOG) , Ig Design (LON:IGR)

We're close to fully invested at this point as we have a Club max of 16 positions. From there, things could get a lot tougher for pitches as they will need to displace existing holdings.

All the best.

Thanks, Jack. Like the earlier comment, I also noticed that we had seen lots of stocks voted through, and this was the first rejected, so I was partly wondering if it was totally stock specific. Your comments that it was an editorial decision to focus on the buys helped to clarify that.

Personally speaking, I am interested in the processes for the Club. In a way, the Club seems like a Superforecasting team. Combined with the Stockopedia analytics themselves, it seems that the Club has the potential to perform very well. Your first-year results bear that out. The CyNAPS portfolio also seems like a slightly different take on the same wisdom of the crowd / analytics / process idea. Anything further you can share on the Club processes would be of interest. Anyway, keep up the good work and content.

nemo

To buy these shares do you not need to believe that there is a future for companies such as this selling a product that is relatively so unnecessary?

SAC100

24th Apr '21

Surprised with the negativity about this stock - Yes people are buying watches (status symbol). I bought this stock in Nov 20 @ 485.90 and see a value of 1170. Time will tell to see if I'm right!

Albertos

Strange - a watch has virtually no utility anymore - haven't worn one in more than a decade since the advent of smart phones.

Wonder how many people have spent tens of thousands on a watch but question cryptocurrencies ? If cryptocurrencies are a Ponzi scheme - then surely the luxury goods market is one as well.

I hold neither.

MissMillicent

27th Apr '21

Great write up. I treated myself at WOS to a lovely new Omega last May to cheer myself up at the end of the first period of house arrest and also because i wanted to be part of the solution to the economic recovery and not part of the problem. I had money to spare and a big purchase like this was a short term boost to ones ego. I figured if i was doing this then so must other people of my age and disposable income. Money is to be enjoyed as well as invested. As a result of this entirely emotional thought process i invested in WOS at 375p and currently sitting on an 88 percent return. As Lockdowns have returned twice since i further invested in a lovely Longines last October also from WOS via Goldsmiths and an online impulse buy. I've spent more on watches than i'll make out of my retail shares investment but nevertheless following my own gut has proven profitable. I refurbished my bathroom and spotting how busy Topps Tiles was also took a position in them which is also on it's way to doubling. I'm a total novice at shares and Stockopedia is an awesome service with all the fundamentals it provides. But you can't beat being in touch with the real world to spot trends. More watches will be bought soon. Keep up the great work!

Rusty2

3rd Dec '21

Certainly this one got away, pitched on 23rd March, 2021 at 658p and now it’s 1451p. It looked expensive back in March but still has more than doubled in share price since.

slopsjon

Robbie Burns bought this a while back as well.

Liquidium

rejected by the club too

Greenblobby

6th Dec '22

could argue the same with respect to gold. It sits in a vault doing nothing and yet its value keeps pace, at least with inflation. Human beings are crazy

14th Dec '22

Could argue the same about gold i suppose but it continues to be a store value. Luxury watches appear to do the same thing. Its not about its functionality , but the brand. Is crypto branded, bitcoin as opposed to ethereum. I dont know but luxury watches do seem to appreciate. Certainly cant be valued via DCF so maybe its all speculative. However the rich will always invest in alternative assets. Expensive watches appear to be just that . I'll pass as too may questions unanswere

epo001

16th Dec '22

Strange - a painting has virtually no utility anymore, you can look at a gif on your mobile phone. Yet the art market persists. One striking resemblance is that people who buy luxury watches have money to burn, whereas people who acquire cryptocurrencies have money they want to burn.

Stock Pitch - Watches of Switzerland Group (LON:WOSG)

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Jack Brumby

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