Short Review: Watches of Switzerland Group (WOSG)
A Quick Pitch for Watches of Switzerland Group (WOSG)
I’ve maintained my position in Watches of Switzerland Group (WOSG) since the initial publication of my portfolio. The stock price has risen by 18.2% in just 2.5 months, from 392.0p to 465.0p. My average cost is 347.8p, representing a 33.7% gain(I originally added WOSG to my portfolio before launching this Substack.)
Given this significant gain, it’s time to reassess the expected future returns from WOSG. Diversification is key in portfolio management, and redistributing gains might make sense if the stock’s prospects no longer justify its weight. This topic deserves a deeper dive—let me know if you’re interested in a detailed post.
For now, I’ve decided to hold my position before WOSG’s half-year earnings report on December 5th. This quick pitch highlights key points but isn’t a comprehensive review. I encourage you to explore the company’s investor relations page (WOSG Investors) for more details and share your post preferences via the poll at the end of this post.
Business Overview
Watches of Switzerland Group is a leading retailer of luxury watches and jewelry, primarily operating in the UK and US, with expanding operations in Europe. It boasts 223 showrooms, robust e-commerce platforms, and strong partnerships with premium brands like Rolex. Despite the perception that retailing has low barriers to entry, WOSG’s business relies heavily on expertise and supplier relationships—a crucial advantage in the supply-constrained luxury watch market.
The company has a 100-year history and is well-positioned in a resilient industry. Management’s Long-Range Plan targets more than doubling of sales and Adjusted EBIT (Earnings Before Interest and Taxes) by FY28, compared to FY23 levels, where Adjusted EBIT was £165M and revenue was £1.54B.
US Growth: The US, which accounts for almost half of revenue, is growing rapidly, despite having only a quarter of WOSG’s showrooms.
Jewelry Expansion: The company is also growing its jewelry business through acquisitions.
Revenue Growth: From FY16 to FY24, revenue has grown at 16% compound annual growth rate (CAGR), representing 237% cumulative growth.
Financial Metrics and Valuation
Adjusted EBIT is a key performance measure for the company. It excludes one-off items and treats lease payments as operational expenses, diverging from IFRS 16 accounting standards, which capitalize leases as assets and liabilities. For simplicity, I use Adjusted EBIT minus taxes (NOPAT) as a proxy for operational profitability.
Historical Performance: The 3-year average Adjusted EBIT is £143M.
FY25 Guidance (May 16, 2024): WOSG expects:
Revenue of £1.67–£1.73B (9%–12% growth).
EBIT margin expansion of +0.2–0.6 percentage points.
Assuming EBIT of £160M (low-end guidance - target range is 150M to 189M) and a 25% tax rate, a back of envelope calculation for Net Operating Profit After Tax(NOPAT) is
NOPAT = £120M + £5M tax shield from lease and debt payments = £125M.
With a market cap of £1.1B, the valuation implies reasonable upside, especially given management's target to double EBIT in five years. WOSG has delivered strong Return on Capital Employed (ROCE) of 19.5%–27.9% over the past four years, underscoring its efficient use of capital.
Leadership and Incentives
CEO Brian Duffy and CFO Anders Romberg have been with WOSG since 2014 (with a one-year gap for the CFO). They own 3.2% (£35.8M) and 0.5% (£5.6M) of the company, respectively. Both have compensation tied to challenging short- and long-term targets, aligning their interests with shareholders.
Missed Bonuses: While they missed short-term EBIT bonuses, they achieved long-term incentive plan (LTIP) payouts, reflecting strong performance over three years.
Future LTIP Targets (FY23–FY25):
Cumulative Adjusted EPS: 166.2p (Threshold) to 183.7p (Maximum).
ROCE: 26.4% (Threshold) to 29.2% (Maximum).
Future LTIP Targets (FY24–FY26):
Cumulative Adjusted EPS: 189.9p (Threshold) to 209.9p (Maximum).
ROCE: 23.7% (Threshold) to 26.2% (Maximum).
These aggressive targets show the leadership’s commitment to driving performance.
Final Thoughts
WOSG’s strong market position, efficient capital use, and ambitious growth targets justify holding the stock despite recent gains. The leadership’s "skin in the game" through equity ownership and challenging incentives further strengthens confidence.
Let me know your thoughts, and feel free to engage via comments or polls!
Important Disclaimer
The opinions expressed by the author, Moat Mind, are for informational and educational purposes only and should not be interpreted as financial or investment advice. The content presented does not constitute an investment recommendation and should not be relied upon to make investment decisions. The author is not acting in an investment adviser capacity and is not providing personalized financial advice. This content does not represent a comprehensive analysis of any company or security, and it is not a substitute for independent financial research. Investors should perform their own due diligence, which includes a thorough review of SEC filings and consultation with a qualified financial professional before making any investment decisions.The information presented is based on sources believed to be reliable but has not been independently verified. Therefore, the author does not guarantee its accuracy, completeness, or suitability for any specific purpose. Any views or opinions expressed are as of the date of publication and are subject to change without notice.
Disclosure: The author may hold positions in the companies or securities mentioned and may buy or sell these positions without further notice. The performance of the example portfolio shared on Moat Mind is not a promise of future returns. Past performance does not guarantee future results. This is not financial advice. You are solely responsible for your own investment decisions. Moat Mind disclaims any liability for losses incurred based on the information provided here. Always consult your own financial advisor before making any investment decisions.