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Is Tiffany a Buy?

December 16, 2013 | About:
The world’s second leading jewelry retailer Tiffany & Co. (TIF) has recently released its quarterly results in which it managed to beat analysts’ expectations on the back of higher Jewelry prices and a drop in input costs. This was due to the higher confidence among wealthy Americans who purchase expensive products, which was driven by the strong performance of the stock markets this year. This is evident in the dozens of records that the S&P 500 (SPY) has broken in 2013.

With a healthier business environment, Tiffany is looking more confident and has raised its full-year earnings guidance. For the quarter ending October 2013, Tiffany posted a huge increase in net earnings of 49.7% to $94.61 million, or $0.73 per share, from $63.18 million, or $0.49 per share, in the same quarter last year. The current results were considerably above analysts’ profit estimates of $0.58 per share. Meanwhile, Tiffany’s revenues rose 6.9% to $911.48 million from $852.74 million in prior year. These solid results were from higher growth in global sales. The business is already an above-average performer, in terms of profit margins, and is expecting further improvements in the future. Moreover, Tiffany has a strong balance sheet with reasonable levels of debt.

Does this make Tiffany a buy? To get this answer, we'll have to look deeper into the company's operations.

Regional Performance

Tiffany’s sales growth in all the regions was mainly due to the increase in the average price of jewelry. Moreover, in Asia Pacific and Europe, significantly higher units were sold as compared to the U.S. In the U.S., the company’s flagship store in New York reported strong numbers due to higher buying from foreign tourists from China and Europe.

Tiffany’s change in net sales and same store sales in different regions is shown in the table below. The company witnessed growth in all markets, except Japan where its sales suffered due to the weak yen which fell by more than 20% against the U.S. dollar in the past 12 months. However, in constant currency terms, even Japan witnessed a 9% growth in net sales and 5% growth in same store sales. In Europe, the company’s growth was led by the UK.

Regions Net Sales % Change Same Store Sales % Change
America +4% +1%
Asia Pacific +27% +20%
Japan -13% -16%
Europe +7% +4%
Other +14% +1%

Healthy Margins

In the last quarter, Tiffany’s gross margin rose 2.6 points from the same quarter last year to a healthy 57%. This was due to the reduction in product cost as well as the increase in prices of jewelry. Similarly, the jewelry retailer Zale Corporation (ZLC) has also reported an improvement in margins by 20 basis points to 53.4%. Zale has been reporting earnings growth for the last two years. However, the business suffers from high levels of debt and has a long-term debt-to-equity ratio of 330%, which is 10 times bigger than the industry’s average of 27%. In Zale’s quarterly results, the company’s revenue rose 1.4% from last year to $362.62 million while its net loss narrowed by 3.4% to $27.31 million, or $0.83 per share.

In terms of margins, Tiffany is clearly ahead of Zale and the rest of the industry. Moreover, its gross margin is also ahead of analysts’ expectations of 55.1%. However, Tiffany has relatively long lead times and modest inventory turnover. As a result, the anticipated changes in gross margins occur rather slowly. The business should, however, continue to benefit from the drop in product costs.

Balance Sheet

On the balance sheet side, Tiffany’s cash reserves rose from $345 million a year ago to $521 million. Moreover, the business expects that, in 2013, it will generate free cash flow of $300 million, as opposed to $109 million in 2012.

Unlike Zale, Tiffany’s has maintained a healthy balance sheet with a long term debt to equity ratio of 26.9%, which is slightly below the industry’s average.

Store Count

Tiffany’s store count now stands at 283, from 272 last year. In America, the company opened four new stores in the last quarter taking its total tally to 120 stores. In Asia Pacific, Tiffany operates 68 stores, including 24 stores in China. In the previous quarter, Tiffany opened one store in Jinan, China, while in the current quarter, the retailer plans to open two more stores in China and one more store in Taiwan. The company recently opened a new store in Taiwan about three weeks ago. In Japan Tiffany has 54 stores and in Europe it has 36 stores. Overall, Tiffany has shown impressive expansion in the current year and will open a net of 14 new stores in 2013.

Future Outlook

For fiscal 2013, Tiffany is anticipating higher net earnings in the range of $3.65 to $3.75 per share, as opposed to the previous guidance of between $3.50 and $3.60 per share. The better-than-expected earnings growth is due to the increase in gross profit margin and better SG&A expense ratio. For the full year, Tiffany’s gross margin will be better than last year’s 57%.

Conclusion: Should You Buy?

Overall, Tiffany has delivered a solid quarterly result and is eyeing considerable improvements in the future. The business has a solid balance sheet and is already more profitable than most of its competitors. Its shares have risen by nearly 56% this year, easily outperforming the S&P 500 that has been up 25% in the corresponding period. However, Tiffany is trading just 25 times its trailing earnings, which is not expensive in this industry, especially for Tiffany, which boasts a powerful brand with 176-year history and is the second largest player in this global industry. Moreover, it also gives a healthy yield of 1.5%. Therefore, I believe that at these price levels, Tiffany can be a healthy addition to your portfolio.


Tiffany & Co. Q3 2013 Results - Earnings Call Transcript

Tiffany Reports Third Quarter Results

Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Gohar Yousuf, research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan, nor Gohar Yousuf have any positions in the stock(s) mentioned in this article.

About the author:

Sarfaraz A. Khan
Sarfaraz A. Khan is a capital market analyst and finance writer. His specialty lies in energy stocks. He also covers consumer goods, services sector, technology stocks, emerging markets and ETFs. His work appears on TheStreet, Seeking Alpha, Motley Fool and GuruFocus.

Visit Sarfaraz A. Khan's Website

Rating: 4.0/5 (2 votes)


Vgm - 4 months ago
Recent comments from Charlie Bobrinskoy at Ariel Investments who reckons TIF is expensive now, after a great run from $20, and is not a buy at today's prices:

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