The Hour Glass

[d.o.g.]

Management state that their reason for holding large amounts of inventory is that they expect the prices for Swiss watches to move higher over the coming years.

The management can say what they want, but what they have been doing is reducing inventory levels. Inventory days has been declining for 4 consecutive quarters. That suggests that they are not trying to hoard watches, but rather the opposite i.e. clear the shelves. They are making progress, but it is slow.

The watch business is tremendously capital-intensive because you need to show it to sell it, but you have to pay for it within 1 month while it takes 5-6 months (or more) to sell it. So the more you grow, the more capital you need. Very limited free cash flow in this business, unless you stop growing.

In the last 12 financial years, Hour Glass reported $297m of cumulative profits. But after changes in working capital, the cumulative free cash flow was just $67m.