Yet Another Value Podcast - Plural Investing's Chris Waller on $WOSG.LN Rolex relationship and secondary luxury watch market

Episode Date: October 17, 2024

Chris Waller, Founder and CIO at Plural Investing, joins the podcast for the second time to discuss his thesis on The Watches of Switzerland Group (WOSG.LN), an international retailer of world leading luxury watch brands with a growing complement of luxury jewelry brands. For more information about Plural Invest, please visit: https://www.pluralinvesting.com/ Plural Investing write up on $WOSG: https://www.pluralinvesting.com/research Chapters: [0:00] Introduction + Episode sponsor: Tegus [2:26] What is The Watches of Switzerland Group and why is it so interesting? [5:52] What is Chris seeing that the market is missing about $WOSG opportunity? [8:25] Why is current valuation compelling? Retailer valuations [12:05] Rolex relationship [19:54] Margin and Rolex business model / other examples of symbiotic supplier-retailer relations where the retailer makes so much of the profit [28:29] Multi-brand stores, Rolex dictates where their brand is located in the store [31:57] Final thoughts on Rolex relationship [35:06] Why doesn't Rolex sell online [38:08] Concerns about Rolex brands because of greater production / does Rolex resonate with new generations, brand lasticity [43:28] How is Rolex advertised these days [45:28] How does Chris think about the growth algorithm for the company / bridging the gap between $WOSG opening new stores and most Rolex watches bought at mom-and-pops that are shutting down [50:14] Why shouldn't this be owned by PE [54:00] Capital allocation [57:15] Any additional risks / misconception about Chinese tourism with Rolex Episode sponsor: Tegus If you’ve been reading my newsletters, you know how often I rely on Tegus for my research. It’s truly revolutionized how I get up to speed on new industries and companies. Tegus has the largest transcript library in the world, with over 75% of private market transcripts. Whether you’re curious about AI, biotech, or any niche market, Tegus has the insights you need. What sets Tegus apart is its all-in-one platform. It’s packed with expert call transcripts, management checks, panel calls, and in-depth financial data. No more jumping between different services or piecing together fragmented data. With Tegus, everything is right at your fingertips. The best part? The insights you get are from the very people shaping the industries you’re interested in. You’ll find perspectives from insiders and executives that you simply can’t get anywhere else. To see Tegus in action and understand why it’s my go-to resource, visit Tegus.com/value – that’s T-E-G-U-S dot com slash value. Trust me, once you try Tegus, you’ll never look back.

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That's Tegas.com slash value. Trust me, once you've experienced Tegis, you won't go back to your old way of doing research. All right, hello, and welcome to the yet another value podcast. I'm your host, Andrew Walker. If you like this podcast, it always means a lot if you rate, subscribe, review, wherever you're watching or listening to it. With me today, I'm happy to have on for the second time, Chris Waller, from, Plural Investing. Chris, how's it going? I'm good. Thank you. Thanks for having me back.

Look, thanks for coming back. I mean, I'll do the disclosures and the disclaimers in a second. But, you know, the first stock you pitched, I was just looking. It was almost six months ago. Mid-March, it was Terravist. The stock was at 55. We're talking mid-October. The stock is going to be a triple-digit stock soon, it seems like. It's pushing on those doors. So almost a double inside of six and a half months. Congrats. Hopefully this one goes just as well, but just wanted to give you that hat tip. Segways perfectly into our first disclaimer. Remember, nothing on this podcast says investing advice. I guess we can add past performance as no indicator of future results. But look, always consults financial advisor, do your own work.

This isn't financial advice. Maybe particularly true today because we're talking about an international stock and international stocks for our domestic listeners, Kerry, you know, just a little bit elevated risks along all those sides. So, Chris, the company we're talking about today is watches of Switzerland. The ticker there is, is W-O-S-G and I'll just toss it over to you. What is watches in Switzerland? Why are they so interesting? Yeah, just to give everyone a quick overview of the company, so watches of Switzerland is listed in the UK. It has a market cap of about 1.1 billion pounds or 1.5 billion dollars. It trades on about 12 times its current free cash flow and I think is likely to earn to grow earnings at a double-digit rate in most years. So I think it's trading at about half of intrinsic value in three years time. The company is a retailer and partner to Rolex and

other luxury watch brands. I think most of the company's value lies in its relationship with Rolex, which doesn't sell watches themselves or online, but entirely through authorized retailers like Watches of Switzerland, which is one of Rolex's most trusted partners. And that means that watches of Switzerland's economics are very different to a typical retailer. You know, it benefits from long customer wait lists, no price competition with other retailers, no inventory risk, no online competition. And so its economics are more similar to a subsidiary of Rolex. It's also got a strong management team who have been key to the performance of the company

over the last decade. So the CEO, Brian Duffy, is well incentivized. He owns about £40 million of stock. He came into the company in 2014. and his strategy was really to invest to improve customer experiences. And that is exactly what Rolex wants with its retailers. And as a result, the company's share of Rolex sales in the UK has gone from about 35% to 50% over that time. And in the US, Rolex is now encouraging the company to basically roll out the same strategy.

So Watchers of Switzerland is the number one in the US today with about 10% market share. and has been growing at around 30% per annum for the last several years. Just in terms of why does this opportunity exist, I think two reasons have caused the stock to fall about 75% from its peak. It's recovered a bit of that in the last few weeks. But still down significantly. Rolex acquired another retailer called Bukera in late 2022. Sorry, late 2023.

And there's also some cyclicality. So the luxury watch market really was in a bubble post-COVID. That is reversed. And you're also seeing a general cyclical decline in luxury goods in China, for example, which watches of Switzerland does not sell into. So I think those are the two reasons. But as I'm sure we're going to talk about, I think both of those are misplaced concerns. No, look, that's a great overview.

And I will tell you, I had this idea kind of talked about to me before, and I was kind of dismissive, you know, I was just like, uh, luxury retailer, I don't care. And then I should mention to our listeners, you did a fantastic write-up, which really made my work on the podcast easier. Thank you. It's on your website. I'll include a link in the show notes, so people should go through that.

But I was reading, and I was like, oh, oh, my God, I really get it. You know, it's really interesting. Obviously, there's a couple glaring risks, which we're going to talk about. But we'll talk about all those. Let me just ask, you know, the market is a competitive place. I think you started to hit this, but I'd love to be. just fully fleshed out. Market's competitive place. What are you seeing that the market is kind of missing that you think makes this a opportunity to generate risk-adjusted alpha?

Yeah, I think the primary risk is around the Rolex relationship. Clearly, investors are very concerned that Rolex buying another retailer means that that is going to change their relationship with watches of Switzerland. That is actually very hard to diligence. So, Rolex and the company both put out a statement shortly after that acquisition, you know, clarifying the reasons for that and essentially saying that the relationship was not going to change. But of course, it's hard as an investor to know whether you should, you know, really take that at face value. And the Swiss watch industry is pretty opaque. You know, I spoke to quite a number of people in the industry, including former employees at Rolex. And they really validated

what Rolex put in that press release. But it required quite a bit of work to really get that first-hand experience from people who are knowledgeable about the situation. So I think that's the primary one. I think the other one is just with the secondary market and the prices of secondhand watches declining, there's a lot of fear that that is going to then impact

the primary market, which is what watches of Switzerland sells into. It could potentially result in Rolex cutting parts. production. And getting the data on what Rolex's historic production numbers have been is actually really difficult. They're not publicized. So it's difficult to get that. And I think the key data point to look at is actually what customer waiting lists are doing. So if those were rapidly declining, I think that would probably be the best signal that supply needs to tighten up. And again, that is not data that is easily available. There was a piece of work that I did essentially gathering about 3.5,000 Reddit comments that had enough detail to be useful and basically building up waiting lists by every model of Rolex watch.

And you can essentially see that although they have come down, they've come back down to a normal level and are effectively plateauing. So that's, again, not sort of easy to do. So I think those are the reasons why the information is actually quite hard to get. I want to dive into all of those, but let's start with a different angle. I mean, I think the Rolex discussion is actually the most important piece, but let me start with a different angle. You know, historically, when someone had pitched it to me, it wasn't even the Rolex angle that made me, it kind of dismiss it. I think what the first thing that jumped out to me is I'd say, hey, Chris, what do you think watches a switcher than trades out right now? Just choose a multiple, just give me a rough number.

It's about 12 times. 12 times earnings, right? I said, okay, cool. I can point you to any number of retailers that trade for eight to 12 times earnings, right? Cignet is probably the largest jewelry retailer. Actually, watch Switzerland, if I remember correctly, bought some stores in the UK from them recently, so there's a little bit of a connection there. It was a small-ish deal, so nobody needs to go crazy with it.

But, you know, Cignet, I think they trade for about seven times, EBITA, probably around 10 times. And that stock, you look at the chart, and I mean, for people, most of people listen on audio, I'm making a wave motion. It is off, it is down. Like, it's kind of cyclical. Probably the stock's a little more cyclical than the business. But, you know, it really cuts and swings. And I haven't looked at significant a while.

I think there's a financing component. There are other things. But I would just say, hey, Chris, cool. You found watches of Switzerland. It sounds great. Like, it's a retailer. It's at 12 times earnings. Like, isn't that kind of fine-ish?

Like, why is there money to be made there? You know, TerraVest doubled in six and a half months. maybe this is nice, but why are we generating real alpha with buying a retailer at 12X? Yeah, I think you're right. I mean, I think that's a really important question. I mean, in terms of if this had the economics of a retailer, I would not be interested. So I think that one of the things I talk about in the report and was quite an important insight for me was that you can really split this business into two. You've got Rolex and also Protect Philippe, which is about probably five to seven.

percent of sales, which has very similar characteristics of Rolex. And then there's a secondhand business for Rolex called certified pre-owned, which is fairly new. So if you put all those together, it's about 60 percent of revenues. That business has very different qualities to a traditional retailer. So some of the things we talked about in terms of customer wait lists and no inventory risk and so on. Then you've got the other 40 percent of revenues, which I think is very similar to typical retail. So you have competition with the brands themselves, some of which sell online.

You've got competition with other retailers because sometimes retailers do discounts. You've got inventory risk because those prices can decline and so on and so forth. So many of the typical characteristics of a retailer are in that side of the business. So I think if that was really the business

of watches of Switzerland, I wouldn't be interested. And frankly, you know, trading at a back 12 times, even for double-digit growth would not be a crazy valuation. So it's really the Rolex side that is interesting and probably why then the market is so focused on that risk. And I think also one thing I would say is that the company is deploying capital into both sides of the business. Its share of Rolex has increased over time. But if I was to have a suggestion to the company, it would actually be to not be afraid of the Rolex concentration

and actually focus capital in the areas that are really generating great returns. And, you know, don't try to necessarily diversify for diversification's sake. Chris, I completely agree with you. A, that was a great answer. The second part, I'll address first. I have the closing questions I was going to ask you was dewarcification. I don't understand why they've got this kind of. Modi, Rolex business. Yes, you've got customer dependency, but you're going and buying all

these other businesses that are, you know, significant. Like, you and I could start a watch company. It's probably not going to do well. We start a watch company, use watch whatever. We can't start a Rolex company. I don't understand why they're diversifying, diversifying whatever it is away from. But you mentioned, the reason this is at 12 times, this is interesting, is not because it's a retailer. It's because of that Rolex relationship. So I want to dive into the Rolex relationship. You and I were talking on the pot earlier. You know, some of my thoughts and questions, but you've already addressed it a little bit, but if you just want

to talk a little bit about the Rolex relationship, and then I'll jump in with some questions, and why the Rolex relationship is so special, maybe not your typical retailer supplier relationship. So just to give some kind of high-level background, Rolex was founded just over 100 years ago.

Watches of Switzerland was the first retailer that worked with Rolex, I think, about five years after Rolex was founded. Rolex does not sell watches themselves. So you can't buy a Rolex online. You cannot buy a Rolex from Rolex themselves. They, in fact, just have one store, which is at their headquarters in Geneva.

What they do is they allocate these watches out to authorized retailers. So to give you some context in the UK, which is about half of watches of Switzerland's revenues today, there are 90 authorized retailers, of which 41 are Watchers of Switzerland. So Watches of Switzerland, because they have higher revenues per store, it's about half the entire UK market. And what Rolex does over time, and has been doing for decades, is they reduce the number of these retailers. They've therefore kind of increasingly concentrating the supply of Rolexes into the best

retailers who can offer the best Rolex experience, who don't sell watches to people who are just looking to buy them and sell them on the secondhand market. So these retailers effectively act as a sort of guardian for Rolex, to the Rolex universe. And that is why it's such a special relationship. If you look in the US, there are about 280 Rolex stores to date. And watches of Switzerland has about 10% of the market. market, and that number will continue to decline. And what's interesting in the US is that it is actually a less developed market in terms of the retail base. So most of the stores are mom and

pops, generally families who may have been in the watch business for generations, who don't have the ability to invest $10 million in a store to ensure the absolute highest levels of service for a customer. And so, you know, this relationship is obviously critical to the company, and it really works in watches of Switzerland's favor because it is the biggest and the most trusted retailer. And over time, it just keeps gaining market share as the other retailers get shut down. That's great. So I think the main risk, you know, you mentioned it from, last November, November, I think, Rolex announced that they were buying a retailer who distributed their watches. And the stock gets hit, and a day or two later, the company puts out a

press release that says, hey, we talked to Rolex. This was about Rolex supporting their supplier. The guy who owned it, he was old. He died, he actually dies shortly after the transaction. His family has no interest in running a watch reseller. Rolex is just making sure this is brand protection for them. And Rolex watches the Switzerland has something that even says in there, hey, we ran this all by Rolex and they said we could put this press release out. That's really interesting, right? So I think that speaks to the relationship, but I guess my counter to that would be, hey, I'm quoting your report back. You talk to industry people who said, getting a license to sell Rolex is like getting a license to print money. That's one of the

quotes from there. My question would be, hey, if it's a license to print money, it's the Rolex brand that's the license to print money, not the watch is a Switzerland brand. There are many ways. Rolex could go direct. I'll talk about that. But why doesn't Rolex take more of the economics for themselves because, yes, Washington's supplying a nice service, but it's the Rolex brand that makes this so special. Yeah, I mean, so I think, first of all, Rolex is not a for-profit company. It's actually owned by a non-profit foundation. So all the cash that Rolex generates is either reinvested or gets donated primarily to the district of Geneva. So things like schools, buying sports teams, local theaters, and so on.

And actually, from the people I spoke to, they describe Rolex having the problem of having too much cash, given how restricted their mandates is. It's certainly a problem I would like to. I would not have that problem. You would be both. So I guess, and, you know, we could talk more in terms of the board is primarily from a non-profit background and some of the Swiss heritage that you already touched upon. So I guess that's the first kind of overview of who Rolex really are.

In terms of actually making more profits, keeping more of that profitability for themselves. So margins at Watchers of Switzerland and similar retailers are typically around 10 to 15% at an EBIT level on the Rolex side. So it's not a dramatic, it's not like they're making 20, 30% margins. that doesn't mean that Rolex wouldn't want to take some of that back, but they're not sort of over-earning in my view. If Rolex wanted to increase margins and take some of those economics, the easiest thing to do would be to simply increase prices. I mean, they could increase prices 20% tomorrow.

It would not impact their ability to sell at all because every Rolex is currently sold on a waiting list. So there are much easier ways for them to get more of the economics. And I think it's not necessarily that easy to just run a major retail network for a watch manufacturer. So it would involve quite a lot of work over a large number of years. They would also be shooting themselves in the foot in the meantime because, of course, all the other retailers would take notice. So I just think there are much easier ways for them to generate a higher level of profit. This episode is brought to you by Tegas, The Future of Investment Research.

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visit tigis.com slash value. That's T-E-G-U-S dot com slash value. Trust me, once you try T-G-S, you'll never look back. Let me ask some questions there. I try to earn my bones as a podcast. First, you mentioned margin, 10 to 15%. And you said, hey, this is not atypical from what a Rolex sales earns. And I hear you on that.

But I guess I would push back, you know, a role, what does an average Rolex kind of sell for? Like some of the high-end models will go for $600,000, 30,000, 40,000. Yeah, so 30,000, right? So if they're taking 10%, they're selling a watch and they're making $3,000 of profit, But I guess I would say that's pretty high because people are driving for that Rolex brand. And like when I think of something, maybe you've got Signette too much in my head, but, you know, jewelry and watch selling are kind of similar. Signette's margins are 5%ish. They're adjusted margins.

And I would argue Signet probably does more of the heavy lifting because, you know, people come in and I, David Yerman has a brand. There are some other, but I don't think they're brands like Rolex. So I would almost argue in a, you know, if you and I own Rolex, yes, there's. there are a lot of things we would probably do, but one of the first things we do is we'd probably say, hey, you guys are paying us more for the product, right? We're eating into your margin. You should be a 3% margin player. So I hear you on that.

I don't know if you want to comment there or if we'll just kind of. Well, I think the better way for Rolex to take more margin is actually to do what it has been doing for the last few decades. So as they shrink the store base, now production is going up, but the stores are going down. And what that means is each store is selling a larger and larger number of watches. And so those stores are getting increasingly greater operating leverage. And so all else equal, the margins of those stores goes up. And so what Rolex actually does every few years is they take back a little bit of gross profit. So currently gross profit on

a Rolex is about 33%. It has been higher in the past. And so they actually manage the level of EBIT to be, you know, roughly similar over time by taking back some of the gross margin. So that's something that is very easy for Rolex to do, doesn't involve, you know, building out any retail network and so on. And they're able to take back margin that way. So I think that's probably the better way to do it. I would also say that, you know, if we just suppose, let's say I was wrong in this analysis and Rolex did want to, you know, become the major retailer in the UK, for example, Watchers of Switzerland's home market. Watchers of Switzerland has half the market today.

So it would be incredibly difficult for Rolex to build out a network. Some of these stores are in very particular locations. So, for example, they are currently building a three-story, 8,000 square feet store on Bond Street in London. And, you know, some of these streets, if you move two streets over, it's a very different location. So these locations are not always that easy to get. And this is going to be probably Rolex's most impressive store in the world. So it's very hard to see how they could come in and just replace that. And realistically, the way they would have to do it is by acquiring watches of Switzerland.

That's something that whenever I spoke to people in the industry and said, let's just suppose for sake of argument Rolex did want to do this, what could they do? And the answer was always acquire watches of Switzerland. So, yeah, I think even if I was wrong on that, you know, it's not necessarily bad outcome if Rolex acquires. I agree, but I want to keep diving on this point because it is the main risk. You know, I was trying to think of what you have is you have a retail and a supplier, right? And here the supplier is a nonprofit and the retailer makes, the returns are not insane or something, but, you know, it's good returns, pretty stable, they've got a protected position.

I was trying to think of an example of, you can forget the nonprofit piece for a second, where a retailer and a supplier had a symbiotic relationship where, you know, personally I think the supplier has much, has pretty much all the brand power. You know, the only two that jumped to mind as even kind of similar would be Foot Locker and Nike. And for years, if you were a Foot Locker Bowl, for years, you would say Nike can never get rid of a Foot Locker, were too much of their sales. Well, as the world went more and more online, guess what? Nike didn't get rid of Foot Locker, but they way cut down.

They cut down all the high heat stuff. So they did, but that's two poor profits. I get that. But the only other one I could think of was car dealerships and car manufacturers. And there, I could be wrong, but if I remember clearly, A, the car dealership has to invest a lot of capital into taking this car and holding it. And B, I think most states have laws that say manufacturers cannot own dealership, so they have to be owned by someone kind of local or, you know, someone outside the thing.

So those are the only two places I could think of. So I just want to ask you, like, can you think of other examples with a symbiotic supplier-reteller relationship where the retailer makes so much of the profit? Well, I think if we use the car dealership analogy, you know, the two companies I would compare Rolex most to would be Ferrari and Hermes. You know, so Hermes, of course, owns a lot of their own stores. But Ferrari hasn't really, has not taken the same approach. So, you know, Nike.

It's funny you ask that because I was Googling trying to figure out how much of their stores Ferrari owned before that. Sorry, I cut you off. But that's what I was going to be right before. And like you say, you know, Nike, for example, is somewhere in the middle where they've done a bit of both. So I think that whilst many luxury brands have gone direct to consumer, not everyone has And in the watch industry, the brands that have opened their own stores, quite often those

stores are making quite poor returns and are essentially lost leaders. So, for example, they will have a store on Fifth Avenue and it loses money, but it improves the prestige of the brand and the marketing and so on by being on Fifth Avenue. So, and actually throughout the history of the watch industry, there has been this sort of ebb and flow between the brands wanting to do things themselves and wanting to outsource and not have to worry about this. I would also say that actually in the case of Foot Locker, pretty much all the risks that we worry about in terms of watches of Switzerland and Rolex have materialized between Nike and Foot Locker, you know, to your point. And yet it trades

that over the last few years has traded at about 14 times free cash flow. so a premium to where watches of Switzerland is today despite these things actually having materialized and Nike not being as great a brand as Rolex. So I think, but you know, to address the question

a bit more, I think, you know, why is it that these luxury brands want to go direct to consumer? I think a lot of it is about having control and ensuring that customers have a great experience and that the brands are well represented and so on. And I think that that is a

factor in the watch industry, particularly over the last few years, when there has been a shortage of supply and a lot of watch retailers have been selling watches to people who are not true watch collectors, you know, people who are looking to buy these watches and flip them for a profit. And the reason watches of Switzerland is such a trusted partner and has essentially been, you know, Rolex's sort of vehicle to roll up the US is because they have, you know, very high standards of customer service, and the strategy of the CEO when he came in in 2014 to today was to invest heavily in these stores and ensure that customer experience. So I actually think that this factor, if managed well, can actually help Watchers of Switzerland

be sort of Rolex's vehicle or subsidiary to ensure these standards are maintained. Let me ask the question a slightly different way, because I like that we've talked about foot locker because on the positive side, like with Nike, Dick's sporting good, if I remember correctly, hey, they're now a big piece of Nike, but they never get cut out of some of the high heat because Nike loves the focus and the attention to care. And, you know, Nike says, hey, we're not going to build a store in every city. And they love that. And I can see parallels with, hey, watches the Switzerland does such a good job maintaining the brand. Like, what Rolex really cares about is that. If that ever dropped, that's where you'd have to read.

but let me ask another question watch a solicitor, right? And there's stores that sell Rolexes, I can't remember I think it's like two-thirds of the sales and the stores come from Rolex. If you're Rolex, one of the reasons Nike for

with a foot locker and Academy Sports, one of the reasons they need to be there is when kids go, the parents oftentimes want to try on a bunch of different stuff, but you know, I could understand how Nike would be like, I don't have to them just be in a place where it's only our product. If you're Rolex, why aren't you going to watch social and say, hey,

you can be our distributor, but you've got to cut everyone else out, right? We want people coming to the stores and just seeing Rolex, and we don't want to kind of like brand Halo and have someone come in and want to buy a $40,000 Rolex and you say, hey, it's a three-month-weight and they say, okay, I'll buy that $10,000 non-Rolix watch over there, right? Like, why isn't Rolex kind of cracking the whip on them in that form? Because even along the lines of a nonprofit, I'm not asking them to take profit margins up. I'm just asking them to focus only on me and not let any brand kind of steal my brand halo.

Does that make sense? Yeah, it's an interesting question because I actually think that Rolex thinks about it a little differently. So Rolex has an incredible amount of control, first of all. So the short answer is that when you walk into a multi-brand store, the Rolex products and the Rolex shop within the shop is always in the best location. And so effectively it educates a potential newcomer to the market. I think it's also like kind of cordoned off, right? It's, you answer the, I think it's almost like a Rolex store. Like, it's not just, it seems separate if you don't kind of know.

Yes, exactly. So it's very obvious to anyone, you know, walking by or anyone who's maybe new to the watch industry, who the top brand is. And that's really what Rolex likes is it, it demonstrates to every customer that Rolex is the number one brand. And if Rolex wanted them to be Rolex only stores, it could do that. And Watches of Switzerland has, frankly, I think, I suspect they've asked for that in several cases. So to give you the idea of the level of control Rolex has, and partly why I don't think it would be necessary for them to go direct, they dictate the location of every Rolex stand, where the shop and shop is. They even dictate whether you can have a Rolex flag on the outside of the store. So if you, you know, one of the most sort of prestigious watches of Switzerland stores is in New York in Soho.

And if you, if you Google it, there is a flag of Rolex hanging, you know, right underneath the watches of Switzerland logo. There's a Rolex clock, you know, sticking out. Those sorts of things are only given to a retailer, you know, if they are, you know, essentially one of Rolex's favored retailers. There are other retailers who've requested that and been denied. So, yeah, basically, Rolex has all the control already, and it shows everyone that it's the number one brand. Perfect. By the way, I should just say that the other brands actually like it as well, because the shops with a Rolex in attract more customers. I'm sure the other brands love it.

But if I was Rolex, I'd kind of be like, you know, why am I letting any other brand kind of get into a NASCAR when the car gets behind the other car and gets into this lip stream or whatever? am I letting them slip stream off this was what is kind of good. I think we've done a pretty nice job talking about the Rolex relationship. I want to touch on some other other questions, other upsides, everything. But, you know, the Rolex relationship is kind of the end-all, be-all here. So if there's anything you think we missed, you did fantastic work. Again, I'd encourage you ready to go read the research report. There's anything you think we miss or anything you think you said, hit it now, we can hit it later. But I just want to open to the floor to you if you have anything else there. Yeah. You know, I was thinking about maybe just a couple

kind of odds and ends, I thought about, you know, one is after the acquisition of Bukura, the other retailer, and the impact on the share price. This is the Rolex acquisition, just because there are other acquisitions, just to confirm for everyone. Rolex buying a retailer. Yes, so that impacted Watchers of Switzerland's share price very significantly, and the management actually went to meet Rolex in Geneva after that, which they do on a quarterly basis anyway, but they then announced a long-range plan, which is essentially a five-year plan

to double revenues and profits. Now, that can only have happened because Rolex would have told them what their allocations were going to be in future. There is no way, you know, to give you an idea when watches of Switzerland acquires certain stores, which have a Rolex allocation, they will check with Rolex first, you know, if they're going to keep that allocation. You know, if they're going to keep that allocation, will it increase and so on? And there have been cases where Rolex have said, no, we're actually going, we're planning to pull the allocation from this store. So, you know, you can acquire it, but just FYI, we're going to pull it. So they work very closely together. And the fact that this long range plan to double earnings came out

afterwards, it can only have been because Rolex essentially, you know, not guaranteed, but told them, you know, we plan to increase, you know, your allocation. over time. But yeah, maybe the last thing I would say is, you know, I don't think there's going to be any material change in this relationship, but it would be naive if we didn't think any little details are going to change. So, you know, Rolex has acquired Bukhara. Bukhara did open a shop in Shanghai very recently.

It's the first time they've gone outside of Europe and the U.S., I believe. I would be very surprised if Rolex wasn't behind that. I would imagine Rolex wants to learn a bit more about the Chinese consumer. Asia is about half of sales for Rolex. So we should expect minor details to change. Like I say, I think it would be naive if we just thought absolutely nothing was going to change. But I don't think in terms of this materially, I don't think this will materially impact the UK or even the U.S. Wild Kit.

One more on Rolex, and I want to hit other stuff, but one of the reasons watch the Switzerland does so well is Rolex does not sell online, right? Like, even if you and I had an extra $40,000 slowing around and we're on the podcast and say, you know what, let's be crazy. Let's pull a YouTube influencer. Let's go buy a $40,000 watch live willingly. We couldn't, right? You have to go into a store to buy the thing.

I guess I would ask, I understand, look, Omni channels a thing. Having a store presence, building your brand through the stores, all of that is very real. But why doesn't Rolex sell anything online? Like it does seem like there are some fanatics who would just say, hey, I'm a fifth year at a private equity firm. I just got a six-figure bonus. I want to buy a Rolex. They just go online and press buy and have a chip to them. Why don't they do that?

Well, the main, the biggest worry Rolex has is with the secondary market. So, and it will be very difficult to verify whether a customer buying online. is actually buying this watch because they're a watch collector or because they're about to flip it for a profit. You know, it's not absolutely impossible, but it'd be very difficult online. I'd hear that, but the reason that people can flip watches for a profit is because you're underproducing and you're undercharging, right? So, and again, I understand it's a non-profit, it's a brand Ferrari, has very many of the

same characteristics, but, you know, my advice to them was, hey, if you're worried people are going to take a $40,000 watch and sit around and sell it for $60,000. the watch for 60,000 guys, and then you can sell it online. You can cut it, you can grab all that margin. It's really simple. But yeah, I guess, yeah. I mean, I think they should raise prices, frankly. What they will always say is that, you know, their prices only go up over time. And so they always leave a big margin. And, you know, frankly, I would agree with you. I think their prices should be higher. In terms of production, they're at capacity. So they produce 1.2 million watches. They are currently building a new facility.

that will come online in probably 2028 or 29, the capacity of that factory will be greater than the existing factory. So there's going to be a quite substantial increase in production. I don't think they'll go to max capacity immediately. But that's actually the other point is part of the reason why I think there's this long-range plan of doubling revenues is because Rolex is trying to produce a lot more watches to meet demand, to not damage the brand because customers are annoyed about the length of the wait time

and having to go to the secondary market. And so that's a lot of watches that need to be sold by retailers. And watches of Switzerland really should be in a prime position to benefit from that. You know, one of the things I was thinking when I read your report, you have a quote from somebody who is like a Rolex follower who says, hey, the next best thing, like buying watches Switzerland is the closest you can get to investing in a Rolex. And as I was reading it, as I read your report, I thought A, watch the sources and how fast a thing, but B, I was like, damn, I really wish Rolex was public because

if they go public, just tell me to buy the stock the first day. I think there's actually a quote from Buffett in one of the AGMs where he said, if, you know, Rolex ever decides they want to be, you know, go for sale, they know my number. Shoot, it was a very, but you know what? I bet Louis Vuitton would probably pay more or someone else, but Buffett would be a great Stewart for it. But let me ask, so moving on from the Rolex relationship anyways, right? Any investor is going to have to get comfortable with that to make this investment. Let's put that to the side. I do just want to talk about the Rolex brand itself, right?

Because if for some reason the Rolex brand was a complete dumpster fire, this business will not work, right? They do have the other brands, but again, Rolex is the driving force here. It's what makes this business special. So let's just quickly touch on that. I guess my first question would be, you just mentioned it building a new production facility online they okay the watches the switzerland forecast that called for a lot of growth and part of the reason it calls for a lot of growth is Rolex is going to make a heck of a lot of watches uh do you have any concerns about the rolex brands just i'll ask it in a few different ways but just as they go through this production kind of diluting the brand power and all of that yeah something i've thought about i wouldn't say

it's something that causes me concern i think you're right that if the Rolex brand was damaged in a significant way, that that would equally damage watches of Switzerland in a significant way. I think that part of the reason that they are not so profit focused is because their primary focus is maintaining the prestige, the heritage, the wonder of the Rolex watch. That is really their singular focus. So I would be very surprised if they got into a situation where they increased production so much that it started degrading the brand. I think they monitor very closely spreads from what the retail prices are versus secondary

prices. The waiting lists, I think, are really important. And I think they would absolutely manage that well. And that's something that they've always done well. And it sort of goes back to your question, you know, if you can buy a Rolex of $40,000 and sell up for $60,000, why don't they just raise prices? So I think that just shows you how adverse they are to, you know, getting to a balanced market in any sort of way. Another way on the brain, you know, your report leads off with the photo of Warren Buffett wearing a Rolex, and I think Ronald Reagan wearing a Rolex.

You know, Rolex has been a synonymous with power, luxury, cool. You know, it was, I think Sean Connery, when he was James Bond, I was kind of reading some classic others. Do you ask, when I think about the younger generation, I'm edging out of the youngest generation, you're still in there, but, you know, when I think about people who are 13, 15, 17, does Rolex resonate with them? Because I feel like my dad's generation, I mean, Rolex was the symbol of luxury. My generation, you know, amid 30s, I think we know Rolex's luxury, but I haven't had any my friends like get up, maybe I'm too young, maybe my friends are too poor.

I haven't had any of them get a big bonus and be like, Rolex, you know? And I do wonder, I'm holding my wrist up for people who listen to the pod. I have a whoop. And Apple, there's Apple Watch. There's all these. I'm just wondering, are having big, fancy watches, like, is that as cool? And, you know, 40 years ago, a watch was the only way you could tell time.

You had on your, today, I mean, I know a lot of pretty successful business people. They wear an Apple Watch or they wear the Garmin watch. Like, yes, a Rolex, it's nice and say something, but there is like a functional. So I guess just overall, I'm worried the brand is, watches are losing their pool. And even if the Rolex brand is great, you know, 10 years from now, we're like, oh, it's such a boomer thing to want to Rolex. So there's a lot out there again. Yeah, I mean, it's a good question.

I think if we were having this conversation a decade ago, we'd be saying what happens now that the Apple Watch has just come out. And, you know, do people even care about watches at all? You know, look at what the iPhone and, you know, iPad have done to other products. one of the things that has actually been surprising to me in this research process is that watches have been embraced by a younger generation. So the Apple Watch, it's the best selling watch today in terms of the number of products. And what that has done is it has made watches and the wrist relevant again. So a small portion of people who buy Apple watches

will at some point make a lot of money, and some of them will be interested to buy a, you know, a Rolex or a similar luxury watch. So the Apple Watch has actually been quite beneficial in the end for the industry. You know, I think, you know, the other thing in terms of prestige, you know, Rolex has managed this relationship for a very long time. And what's been interesting is that the customer demographic has, has shifted and actually added a younger generation.

So what happened after COVID was there were a significant amount of young people into crypto and sort of a bit bizarrely they... I was going to ask a question along this line, so I'm really laughing. They saw, you know, Bitcoin and crypto currencies as a hard asset with fixed supply that depreciated in value. And actually a lot of people ended up buying luxury watches and seeing it as a hard asset with a limited supply and appreciating value. So a bit bizarre, frankly, but yeah, something that I discovered. How does Rolex advertise these days? Because I always the classic

Rolex, you know, you can look, there's literally business books written about the classic Rolex, you know, high-end glossy magazine, a Rolex, they drop it and they take it 2,000 feet down the ocean and they say it works up to 2,000 feet, but it works pretty well on land as well or something, but how do they advertise these days that magazines are gone? It's not exactly something you're going to advertise on Facebook or Instagram, I don't think. Yeah, so a lot of their advertising is really around sports. You know, the higher-end sports that you would expect, you know, tennis, Formula One. In fact, they actually just came out of the Formula One deal, but historically, that would be one. One of the most, I would say, representative examples is

with James Cameron, who was the director for Titanic and Avatar. He's also a deep sea explorer himself. He took a submarine to the lowest point in the ocean, and he wore a Rolex doing it. So actually quite a lot of Rolex products are designed around a specific sport or marketing angle. So the Submariner, that's one of the most well-known Rolex models. That is paired very well with James Cameron and his deep sea exploration.

there will be other Rolex models that are paired around motorsport. So, you know, endurance racing, LeMond, for example, Rolex has a watch that goes with that. So a lot of the advertising is around, you know, that specific sport or activity. And the other one probably is, I suspect they send a Rolex to every president because a lot of presidents have worn Rolex. And there's actually a category of Rolex watches that are nicknamed the presidential day dates. No, that makes all sense.

Though, you know, some of those things are like, hey, if you're, what is it, Patrici Philippe or whatever, why don't you just start sending them to the president be like, we're ours instead of theirs? I don't know. Let's see. What else did I want to? Let's talk about the de-worsificate. Or actually, let's say that. Let's talk about growth, right?

You've got, if I'm just looking at it, this year, let's just round it, 1.5 billion pounds in and you've got them, and I believe this is about in line with the targets they put out, over 2 billion pounds of revenue by FY27. It comes at nice margins. That's 10% growth. It comes with nice margins, good returns on capital, I think so in that growth category,

right, you could say it's from two things. Hey, this is a restaurant concept that's successful in California and they're going nationwide, right? That's one way you can grow. Or you can say,

hey, this is a restaurant concept that's saturated, but it's taking huge shares. We've got the Chipoli, right? 10% same sort of growth every year and we're going to go that way. How do you think about the growth algorithm for this company? So from watches of Switzerland's perspective, it will be more the first type. So volume growth, so opening new stores. So, you know, I'm assuming kind of low double digit, 11, 12% growth

going forwards. Now, that might seem quite high at face value, but about 7 or 8% of that is store openings. So they have a pipeline of stores, you know, across all broad. brands, but in particular, Rolex, and they know how many watches that they are going to be allocated. And effectively, then, they know how many they will sell, because, you know, every Rolex is off a waitlist. Quite often when they're opening a store, it means someone else locally is shutting their store. So effectively, the watches, you can almost think of as being pre-sold. So they know what economics they're going to get on that. So that's about 7 to 8 percent, primarily in the U.S.

in fact, almost entirely in the US, where they're rolling up the mom and pops. In addition, they will do some acquisitions, you know, similar in the sense of maybe acquiring mom and pops. They made an acquisition in jewelry recently. That's going to add a couple percent. So in terms of same store sales, I'm really not assuming a lot here in that 11.5 percent. It's primarily store growth. We mentioned earlier having a Rolex, having a licensed sell Rolex.

is like having a license to print money. And you just said, hey, when they're opening a new store, a lot of times it's because the local mom and pop that is shutting down. Can you just bridge the gap between those two? Yeah. So in the UK 10 years ago, there were a lot of mom and pops,

and this current CEO, Brian Duffy, took the strategy of we're going to invest very heavily into each store to have the best customer experience. And that really paid off. and Rolex really liked that because it costs Rolex nothing, it ensures customers have a better experience.

And these mom and pops cannot invest to the same level. So I did some maths in the UK because the UK companies report at companies' house, so you can actually see their financials. I think the second biggest player invested £8 million in CAPEX last year,

not in one store, the entire company. Watchers of Switzerland is sometimes spending $8 million in just one store. and that's the number two. And if you go to the number three and four and so on, the numbers really decline rapidly. So what's happened is because of the success of Watchers of Switzerland, they've demonstrated what is possible.

And so Rolex has now effectively insisted that the other stores in the UK adhere to the same standards, which quite often they just simply don't have the capital to make that type of investment. And so Rolex essentially is quite ruthless about it. They will tell a retailer, if you do not invest this amount, we will pull your allocation from you and allocate it to someone else, typically Watchers of Switzerland. So that's how they got half the market. What was surprising for me about the US is that, you know, like we touched earlier, a lot of these stores are still mum and pops. And so Watchers of Switzerland went to Rolex and said, you know, we can do for you in the US. what we did in the UK. And, you know, Rolex has allowed that to happen, which is why I think

we should be thinking about the relationship in a positive way. But that's essentially why these transactions happen. Perfect. And correct me if I'm wrong just quickly. I believe the returns on the returns on capital for both building a new store and I think buying stores is four to four and a half year. So, you know, you can run the math on that. That works up to pretty solid returns on capital. Tell me if I'm wrong about anything of that. And I, and I, that's at a group level, and they won't split the difference between Rolex and everyone else, but I think it's a lot higher on the Rolex side of things. Just on the catalyst side, this was owned by Apollo previously. Apollo's long gone here, but why shouldn't this be owned by a private equity company?

You know, you've got a company that should have, despite being in luxury high-end watches, because of the Rolex brand and limiting, they should have pretty stable cash flows, growing pricing power. There's room to invest capital to build new stores, take share, improve the experience, you get good returns. Doesn't that belong in private equity's hands where it's kind of a mediumish growth, cash cow story, private equity, lever the heck out of this thing. This thing has almost no leverage, leverage it up, run it for cash flow, but keep the culture, but just really run it for cash flow. Well, I think Rolex would like it to be private. I don't think they would like it to be private equity just because Rolex likes the control

and one of the concerns they actually had with the Bukera acquisition was if Rolex didn't buy it, a private equity or a competitor could buy it and that private equity firm may not have the same interest. So Apollo, when they ran this initially, they wanted to cut costs significantly and that, as you can imagine, wasn't great for Rolex. So I think Rolex is quite sensitive. It doesn't mean it cannot be owned by private equity, but it would have to be a firm that was on board of the strategy. I hear you, but that is, A, that is a reason for, and I think you mentioned in your report, that would be a reason for Roles just buy them. So Rolus can control their own destiny. But B, if I'm the Rolex trust and I'm saying, hey, I'm thinking about this brand for 100 years, I really need to control my positioning.

And we've got this one supplier, our best, our biggest supplier, we've got a dependency on them. And we're worried a private equity firm might buy them and decide to cut costs. like it's just such an argument for them to start building their own stores and controlling their own destiny or something that that is kind of the well i think it would be a an argument to acquire watches of switzerland i mean i mean in the same way it's you know same thing happened over bucara and by the way if you the valuation multiples have never been disclosed for that buchera acquisition but um it is rumored there's a swiss financial analyst who who has said who's given a number for the valuation,

and it's about double the valuation that watches of Switzerland currently trades at. So, you know, it could happen, and if it does, I think that would be, you know, accretive to current shareholders. And probably accretive to Rolex, too, because as you said, they've got more money than they know what to do with.

The reason this business doesn't trade for 20, it trades for 12 is because people are worried that Rolex will buy them. So, you know, if Rolex buys them for 16, they kind of solve the will, sorry, It trades through 12 instead of 20 because people were worried Rolex will take their supply. Rolex 516. It's like, hey, don't have to worry about that anymore.

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Trust me, once you try Teegis, you'll never look back. Just want to talk quickly. We mentioned it earlier. I've been surprised by, you know, you've got this good nichey business, this partnership with Rolex. I've been surprised by some of the recent acquisitions. The one that specifically jumped out to me was I think it's Robert Coyne. Roberto coin, the jewelry brand.

And I just kind of looked at it. They're moving into luxury jewelry and I say, hey, that's a really competitive spot. I don't, I just don't understand it. I could maybe understand. I do think there might be more room from some cross-selling where you mentioned your report. You come in and you say, I'd like to buy a Rolex and the dealer says, ooh, there's a wait list. But maybe if you buy some other stuff, a thousand here, a thousand there, maybe they'll get you on the wait list or stuff. I could see how making that thousand here, a thousand there be a Roberto point.

I couldn't see that, but still seems like diversification. I'm surprised by it. So I remember. Yeah. Yeah. I would like to see them focus on their best brands, which are Rolex and Petek. And I would like them to, and I know they're trying, but it takes time, but to continue acquiring these mom and pops.

And, you know, if they are having to wait to do those acquisitions, well, another good use of cash would be to buy. buyback shares at the current price. So I would prefer for them to focus on that returns rather than the margins. I mean, jewelry is about 10% of revenues today. It will probably go up a little bit. I don't think it's going to go up dramatically. They did make this Roberto coin acquisition, which will bump it up currently, but I think they've said they don't expect similar jewelry acquisitions like this over the course of the five-year plan. They always sort of plan to do something. So, yes, I mean, and the valuation they bought it at was very attractive.

It was about six times free cash flow from what I can tell. You know, I don't expect them to be able to repeat that. So, yeah, I would like them to focus on the Rolex business. But I think those are the reasons they made the acquisition. Yeah. Well, I do hear all that. It's just, you know, you've got this nice, niche business. And it feels very much like empire ability in or, you know, you've got this profitable business.

and hey, we do luxury. Let's move to another. I mean, what they will say is that luxury jewelry is higher margin and it's also more stable. So right now, the watch market has been going through a downturn and the jewelry market being quite stable and they sort of like that. For me personally, I would prefer they focused on returns on capital. And yes, jewelry is higher margin, but you need to hold a lot of inventory. You know, typically like nine to 12 months of inventory with Rolex.

you get it and you sell it pretty much straight away. So, yes, I would like them to focus on our returns. I completely agree with you. It's like, oh, Amazon's a low margin business. They'll make it a bad business. Like, there's a lot of other stuff going on there. We hit most of my questions of kind of looking through it. I guess I just wanted, I would ask you look back five years from now and this didn't work out

what happened. I'd ask that, but it's so obvious the most likely risk of what happened. I don't even know if it's worth discussing. I don't know, you think anything else there? Yeah, I think it would clearly be something with Rolex. You know, I guess if I were to bring another risk in, it would be, you know, since 2008, we've been in a period of very low interest rates where financial assets have done very well, and that has benefited those who hold those assets.

And there's a group of wealthy consumers who may want to buy, you know, Birkin bags and Ferraris and Rolexes and what if we're now in an era of higher interest rates where maybe there isn't the same level of wealth generation and therefore structurally lower demand. I actually think that's the biggest risk and maybe it ties a little bit to what if society is not as interested in luxury products, you know, in China they've been cracking down a little bit on displaying luxury and, you know, I think that actually is a bigger or certainly a risk. I think the way I got comfortable with that is

you can actually look at watches of Switzerland and Bukra UK's margins pre-2008. The economics were not that different. So that it's sort of almost impossible to predict how that kind of structural trend

will play out, but that's what got me comfortable with that risk. You mentioned China a few times here, right? And obviously, if you're a maze or something and you're selling, that is and what a big market. If you're Rolex, I'm sure it's a big market. But for Washington, they don't have any China stuff, right? It's correct. All U.S., UK, and a little bit of Europe. So how does, you've mentioned a few times, so clear you're thinking about it. So I guess I just wanted

to connect to. Why do you talk about China so much here? I think it's a real misconception because you know, the two pushbacks that I get typically when I talk about Watch of Switzerland to people who are new to it one is the Rolex relationship and the other is well China decline Chinese tourism is declining

maybe they sell the UK and US but there are Chinese tourists who buy this and even if you look at the share price over the last few weeks the stock has done quite well as other luxury companies

have done well with China stimulus and the reason I think this is such a misplaced link is like you say they don't sell in China and actually in the UK, because VAT free shopping was eliminated a few years ago, sales to Chinese tourists in the UK is less than 5% of the business. So it is no longer material if the tourists have gone to Paris and Milan and so on.

So there really isn't a link. And in fact, you could even take it further and say that if Rolex is no longer, if Rolex is allocating fewer watches to China, well, where do those? Where do those while they get reallocated to other markets, like, for example, the U.S., where Watchers of Switzerland is? So there's almost an inverse relationship. But the reason I keep mentioning it is because it is something that people talk about. It's great. And as you say that, you know, you think about a Rolex, you strap $50,000 on your wrist, and it's historically and hopefully because Rolex keeps the supply limited and appreciating an asset.

Like, that is a great asset if you live under one of these regimes where you're like, I don't know if I'll be able to get my assets out. I don't know. That is $50,000 is a lot of money. You strapped your wrist and you leave, you're gone. You've got $50,000 kind of in your pocket. Maybe you've got one on both wrists and then you got a lot of dollars. Yeah.

Chris, this has been fantastic. I think we can probably wrap it up there. We had everything I kind of wanted to see. I mean, I can't encourage you guys enough. TerraVess was interesting and you did great work there. It's just very hard for me to wrap my head around some of these niche. industrial market, but you can wrap your head around this. The research report is fantastic. There's going to be a link in the show notes. People should go check that out.

Chris, thanks for coming back on again. Looking forward to having you on for a third time. Looking forward, we might have to go to the 10 building and have a meal there and check out what's going on down there. But this has been great. Thanks so much for coming on and looking for it's third time. Thank you. Thanks, Andrew. Thanks for having me. A quick disclaimer, nothing on this podcast should be considered an investment advice. Guests or the host may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.