Tiffany's Extraordinary Quarter
This time, Tiffany was able to rise earnings fast – comfortably beating consensus estimates - and raised its full year forecast for the second consecutive quarter. Let's take a look and decide whether it makes sense to go long at the current price level.
Tiffany's great quarter.
According to Mark Aaron, who is Tiffany’s vice-president of investor relations “Our growth in the Asia-Pacific is both consistent and extremely broad-based, extending well beyond China to include Singapore, South Korea and Australia.” As a matter of fact, same store sales (probably the most relevant figure for retailers) in the Asia-Pacific region – Tiffany's second biggest market after the Americas – grew by 22% year-over-year (yoy). Meanwhile, in the US, same store sales grew by 1% yoy. The company's overall top line yoy figures were also extremely strong. Tiffany grew sales by 4% in the Americas, by 7% in Europe and by as much as 27% in the Asia-Pacific region. The only drag to sales was given by currency related issues in Japan - a weaker Yen. In Japan Tiffany's top line declined by 13%. That said, in constant currency terms, sales in Japan rose by 9% yoy.
Besides, given by the favorable commodity environment, gross margins were up by 2.55% to 57%, well ahead of consensus estimates. This was largely a result of the flow-through of lower commodity prices, which are expected to persist at least until the end of next year. On the cost side, there were also good news. Total SG&A expenses of $365.9 million were up by 5.4% yoy versus the company's 6.9% yoy overall top line growth. Thanks to all the aforementioned factors, Tiffany's Earnings Per Share (EPS) grew by an outstanding 48.5% yoy. This great quarter has made Tiffany's case even stronger than it used to be.
Valuation seems fair but not cheap.
As I always love to mention, “price is what you pay and value is what you get.” This means that there is a fair price even for great companies such as Tiffany. The American flagship Jeweler now sells for 2014 12.1 times EV/EBITDA and 23.3 times earnings. Even when I do not think that the company is over valued, I do think the jeweler is fully valued at the current market prices. Even if we take into account that Tiffany – with its zero net debt position and its $11.3 billion total market capitalization - could be a great M&A target for bigger luxury conglomerates such as the French giant LVMH Moet Hennessy Louis Vuitton (LVMUY). In fact, and just for comparison matters, LVMH now trades at 2014 9.6 times EV/EBITDA and 18 times earnings. I would go long on Tiffany's shares if, at some point in time, the company's EV/EBITDA multiple goes down to any figure below 9 times.