Watches of Switzerland
LSE: WOSG
Watches of Switzerland (WoS) is the world’s largest authorized dealer (AD) of luxury watches, operating in the UK, US, and – as of FY23 – in Sweden, Germany, Denmark, and Ireland. In the UK it trades under the names Watches of Switzerland, Mappin & Webb, and Goldsmiths, which collectively make up over 40% of the UK independents market. In the US its brands are Watches of Switzerland, Mayors, and Betteridge, which make up just under 10% of the overall market. Mayors commands almost half of its local Florida market. These 4 brands are complemented by a network of monobrand boutiques (monos) where WoS partners with the manufacturer (Rolex, Breitling, etc.) and shares the economics. With a network of 193 showrooms, WoS generated GBP 1.5b in revenue in FY2023 and over GBP 160mm in EBIT. Its aim is to have the best locations with the widest range and the best customer service. It is virtually unmatched in all 3.
On a pre-16 FY23 basis, WoS trades at ~10x EV/EBIT, ~8.5x EV/EBITDA, ~14.5x earnings, and a ~ 6.5% normalized FCF yield.
1. The watch industry is concentrated in a handful of key players, with Rolex controlling almost half of the US market. WoS has a relationship with Rolex that spans for over a century, beginning with the first ever UK agency in 1919. Its best-in-class stores and store CX provide it with an allocation from these top brands that no other AD receives. Because this is so, no retailer is able to match WoS’s range. Industry execs all underline the strength of WoS’s relationship with the best brands, and complain about how WoS receives unfair allocation. 16,000+ reviews on Google give WoS’s US stores a rating of 4.9/5. Bucherer, WoS’s main competitor, averages 4.2, and with much less consistency.
2. Brands are shifting toward having fewer A+ dealers which provide them with the proper brand presentation and communication to buyers. WoS does extensive training, completing over 45,000 hours in FY22 alone. Its stores offer an experiential, customer-focused service that no AD can match other than perhaps Bucherer and to a lesser extent BRK’s Ben Bridge. NPS is over 80%.
Brands control agencies through tight agreements and de facto determine market share of their retailers. WoS is their go-to operator. The recent shift to mono boutiques by brands underlines the strength of WoS’s retailing capabilities. WoS has 23 monos in the US. Bucherer has around 15.
As a result of the ongoing distribution network consolidation, WoS is able to secure more agencies and hence greater market share. TAG had over 3,200 dealers in 2020, today it has under 2,500. Rolex had over 1,700 – now under 1,400. Breitling’s dealer count decreased from over 1,600 to around 800.
3. CEO Brian Duffy and his team are in a league of their own. Since taking over in 2014, WoS has grown its top line by over 18%, improved operating margins from 5% to 12%, and increased ROE from close to zero to over 25%. In 2019 Duffy received the WatchPro award where he was voted as the winner by an overwhelming 43% of the watch brand execs.
4. Since entering the US in 2017, WoS has grown this segment by 47%. Despite such growth, the US AD market is still incredibly fragmented, with 70% attributable to small, family-owned independents. WoS already has the largest number of Rolex agencies in the US and is aggressively pursuing further gains in market share. Out of the over 160 ADs, only 10 dealers have more than 3 Rolex agencies. WoS has over 20. In the UK, WoS is larger than all the other independents combined.
WoS is laser-focused on proving the best possible in-store experience. This unlocks the ability to capture more allocation from brands thanks to superior presentation, and expand their portfolio of agencies in the process. As they gain scale, they will have more funds to deploy into store refurbishments, marketing, acquisitions, and employee training. Brands are going to continuously respond to these investments by increasing their allocation to WoS, which in turn enhances the attractiveness of its stores, producing a cycle of systematic deployment of capital at value-accretive returns. Management has a hurdle rate of 2.5 years on its stores and 3 years on its flagships. Payback on CAPEX + NWC in 2019 was 2.2, and has likely improved since. In 2011, WoS had 165 stores in the UK, most of which were larger multibrands, and generated GBP 281mm in sales. In FY22, WoS finished with 131 UK stores (137 in 1H23), of which 38 were smaller monos, yet generated 809mm, or 2.8x, in revenue.
WoS is a 3.7% position in the partnership.
