Rolex | Short the Rich

Takeaway: Rolex is evolving. We’re not so sure it should.

Editor's Note: This is a recent research note written by our Retail team. Email sales@hedgeye.com for more information.

 

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We always pick up on anecdotes of private brands, as do most retail analysts. But here’s our take on an interesting one as it relates to Rolex (private) that we think serves as a good brand study.

 

Rolex is evolving. We’re not so sure it should.

 

  1. We’re seeing a number of developments with the brand. Specifically, the styling is very updated, but starting to look very much unlike the traditional Rolex that is the mainstay for a $20,000 anniversary gift that is ultimately passed down through generations. 
  2. We’re not suggesting that Rolex is coming out with a ‘me too’ iWatch, but simply that a brand like this with such an amazing cache has to be careful about changing it up too quickly. Check out the images below. The first image looks more like a Tag-Heuer 1990s knockoff than a Rolex. 
  3. Oh any by the way, distribution is evolving too. These things are selling in the secondary market in flash sales on sites like ‘Touch of Modern’ (which is admittedly a wicked site for men who have cash to burn and like toys – like a desk Jellyfish aquarium or a tactical Damascus Blade knifes handcrafted in Brazil). 
  4. Brand evolutions are not all created equal. For example – Kohl’s and Nordstrom have failed to allocate capital in a manner that allowed them to evolve. Now they’re as close to perma shorts as you can find in retail – barring a big capital infusion to dig out of the hole. That in itself is a negative stock event. 
  5. But then on the high end, there’s validity to not changing up a design. The best parallel to Rolex, we think, is the BMW 3-series. Check out a 3.25i from 2006. Then check out a 3.25xi from 2016. The styling is remarkably similar to the extent that non-owners probably cant tell the difference from a distance, which boosts aftermarket value. The same goes for a car like the Lexus RH300/450. Slight evolution, but no sudden movements. If it ain’t broke, don’t fix it. 
  6. Maybe this is why the late-model Rolex designs are selling for a 50-70% discount in the secondary market. 

 

Short the rich.

 

The best play here is Tiffany – though that call goes far beyond this Brand Study (it’s only the 446th ranked keyword on Tiffany.com). Sales should still slow, as its traditional customer gradually shifts away from the brand, sales per square foot weakens, and margins compress as the inability to sell successfully online while maintaining brand cache plagues the long-term story. Numbers remain too high.

 

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