TIF’s 1Q12: surprising slowdown by US customers
the report
TIF reported 1Q12 (ended April 30th) results prior to the opening of equity trading in New York yesterday morning.
Revenues were up 8% year on year, at $819.2 million. The company earned $.64 a share for the three months, down a bit less than 5% from results–but substantially below the Wall Street consensus of $.69.
Tif also lowered its full-year guidance by $.25 a share, to a range of $3.70-$3.80. Worldwide sales are now expected to grow at a 7%-8% rate, down from the prior expectation of +10%. Eps comparisons will likely be negative in 2Q12 and 3Q12.
The stock dropped sharply on the news.
As I’m writing this on Friday morning, TIF shares are somewhat lower again, in a choppy but flattish market.
the details
sales
Americas up 3% at $386 million
Asia Pacific up 17% at $195 million
Japan up 15% at $142 million
Europe up 3% at $88 million.
Business was much better than I had expected in Japan. Analysis is complicated by the fact of the Fukushima nuclear disaster in mid-March 2011. Still, same store sales growth is up more than 10% from two years ago, in a land that had been turning decidedly cool toward luxury goods.
I think any gain in Europe, now the epicenter of world economic woes, is just short of miraculous.
Asia Pacific performed as expected–no better, no worse. The company says Chinese business has cooled a bit from the torrid pace of last year. I don’t consider this a worry. But it does suggest that Asia won’t be a source of significant upside surprise for a while.
It’s the Americas, and specifically the US, where the falloff versus expectations lies. Sales to foreign tourists are up, with weakness in European buying more than offset by a step-up in purchases by Asian visitors. So it looks like the problem is with sales in the US to Americans.
TIF pointed out in its conference call that the softness:
–occurred in April
–is not focussed in any one region of the country (so it isn’t just laid-off NY bankers), and
–is consistent with MasterCard data for high-end jewelry in general (so it isn’t a Tiffany-specific issue).
my thoughts
Some portion of the poor US performance may be attributed to a later date for Mother’s Day this year. But everyone who has access to a calendar already knew that. Certainly management had factored this into its earlier guidance.
The downward revision comes after TIF has seen Mother’s Day sales. I think this means that–unlike the case with more mass-market jewelers like Signet–Mother’s Day didn’t counteract April weakness for TIF. It confirmed the slowdown.
Elsa Peretti
TIF has an exclusive license to sell Elsa Peretti jewelry, which makes up about 10% of company revenues.
The company filed an 8-K with the SEC on May 23rd in which it says that Ms. Peretti, 72, wants to retire and to sell her brand name and designs. Negotiations between her and TIF are now in progress. The Peretti intellectual property should have more value to TIF than to anyone else, so in a completely rational world TIF would end up obtaining it. Earnings would be affected by, say, +/- 7%-8%, depending on whether negotiations result in purchase or not.
the stock
A short while ago, I sold the last of the TIF I held while I was doing a portfolio housecleaning. My position was small and–as I’ve written elsewhere–I think the stock market is moving toward playing recovery of the average American rather than the continuing prosperity of the affluent.
I don’t feel a huge urge to buy back the stock I sold.
On the other hand, the stock looks cheap to me at 15x earnings.
15x was the place where I became interested in the stock–which I had owned in my portfolios, off and on, for many years–during the bounceback from Great Recession lows. There’s always the possibility that the company could be acquired by a luxury goods conglomerate or a sovereign wealth fund. We also know TIF management, which should know the value of the firm better than anyone else, has been buying the stock at above $60 a share.
I guess I’d like to watch the price for a while-and possibly get a better understanding of the current dynamics of the US customer.
IPO arcana: underwriting vs. sales, and the over-allotment. Who knew?
As I mentioned in an earlier post about FB, it’s surprising to see how little the financial media understand about how IPOs work–whether it be newspaper reporters and their firms’ related blogs, or the talking heads on cable.
Two aspects:
the over-allotment
In the case of FB, it was 63.2 million shares (the number is on the front cover of FB’s registration statement). As noted in the sentence that gives the over-allotment number, this amount of stock is not included in the 421.3 million share figure listed in bold.
What is it, then?
The over-allotment is a kind of insurance or safety precaution that the company issuing stock and the underwriters build into the offering. The company agrees to sell a specified amount of extra stock to the underwriters at the IPO price if the underwriters ask for it. In the FB case, it was 62.3 million shares.
When the underwriters divide the stock up and sell it to clients, they distribute the larger amount. So the FB stock sold to the public amounted to a total of 483.6 million shares (421.3 + 62.3).
If the issue goes well and the stock stays at a price higher than the IPO level, the underwriters purchase the extra stock from the company and deliver it to clients. That’s the usual case. For FB, that would have meant an additional $2.4 billion from the IPO.
If, on the other hand, the issue goes badly, the underwriters can buy stock in the open market at the IPO price up to the amount of the over-allotment, without taking any financial risk themselves. Don’t ask me why, but underwriters are legally allowed to do this for a short period after the IPO is launched.
The underwriters did this kind of intervention with FB just before noon and again during the final hour of trading on its first day.
How do we know?
The underwriters make no attempt to hide their identity or their intentions. They want other traders to know they have a huge amount of buying power and intend to defend the IPO price.
How did I find out? I looked at a chart of FB on my cellphone. I saw the stock stopped its normal minute-to-minute gyrations just after 11:30 and flatlined–just like when someone dies on a TV medical drama. That’s not natural. Someone was making a statement about the $38 level.
In listening to hundreds and hundreds of IPO roadshows, I’ve never heard the over-allotment mentioned–ever. Professionals know it’s there. For the underwriters, it would be like a restaurant saying it had a great food poisoning doctor on call.
underwriting group vs. sales syndicate
This is really arcane. There’s no reason to read any further, except that this distinction may explain the bad treatment of some retail investors in the FB IPO.
The money that brokers charge in an IPO is for two slightly different functions.
–They have a percentage interest in an underwriting group. Although I use underwriter and broker as synonyms in everything I write, that’s not precisely correct. The underwriting group buys the stock from the company and then resells it. It’s paid a small amount for taking the “risk” the members will be unable to resell the stock. Remember, though that the brokerage companies have firm–though not legally binding–commitments to buy the stock from clients who know they’ll never see another IPO allocation if they renege (legally, any client can return the stock and get his money back up until shortly after the final prospectus is issued. Se my post on preliminary and final prospectuses).
–the underwriting group employs a selling syndicate to distribute the shares it buys from the company. It’s made up of the same firms that comprise the underwriting group, but possibly in different proportions, based on the size and strength of institutional and retail distribution networks. Normally, the selling commissions are much higher than the underwriting fees.
Why write about this? The accounts I’ve read mention only Morgan Stanley as a broker whose retail clients received much larger allocations of FB stock than they anticipated. My guess is that Morgan Stanley carved out for itself an especially large piece of the selling syndicate pie.
Facebook (FB), looking back after three days of ugly trading
a failed IPO
The long-awaited IPO of FB has come and gone.
The stock opened late, due to a NASDAQ computer snafu. It almost immediately gave up its initial gains. It closed a mere 25¢ a share above its $38 offering price–and that only due to “stabilization” (read: price-fixing) efforts by the underwriters in the final hour of trading.
It’s been falling since.
a successful offering??
One interesting aspect of the fiasco is that many commentators–as well as many retail participants in the offering, and apparently also the CFO of Facebook–are basically clueless about how the IPO process is supposed to work.
In particular, I’ve heard media proponents of the tooth-and-claw school of capital markets trying to burnish their Darwinian credentials by claiming that Morgan Stanley actually did a good job with the offering. Explicitly or implicitly, they point to the poor trading performance of FB as evidence that the bankers achieved the highest possible price for FB.
I think this is crazy talk. When FB conjures up in investors minds words like “overpriced,” “disaster,” and “huge losses,” that’s not good. Nor is it when retail investors feel they were tricked into buying more stock than they wanted …or when the lead underwriter is being investigated for disclosing negative opinions about FB only to a few customers. And, of course, none of the money from selas of extra shares went to FB itself.
An IPO is supposed to go up!
Not necessarily by 100%, but maybe 20% or so. Why?
Psychologically the company is associated with success when its stock rises. Retail investors, who will buy/use the company’s products and loyally support management, feel good about themselves and the stock they own. This positive association lays the groundwork for the market to absorb more stock when lockups expire and when employees want to cash in more of the stock that’s a key part of their compensation.
A failed IPO, in contrast, generates questions–well-founded or not–about the stability of the company and about the trustworthiness and competence of its management.
what went wrong?
As I see it, there were two separate problems:
1. The main one is that FB issued too much stock all at once. Up until a week ago, the plan had been to sell 388 million shares at a maximum price of $34 each. That’s $13.2 billion. Which is enough money to buy all of the stock of Sony or Omnicom or Applied Materials or Ralph Lauren or Limited Brands, at yesterday’s closing prices.
Last Wednesday the amount of stock was increased by 25% to 485 million shares and the offering price was upped to $38. So the total take from the IPO went up by 40% to $18.4 billion. That would be enough to buy Marathon Oil or Kellogg or Yahoo–or to pick up Whole Foods or Charles Schwab and have a couple of billion left over.
This decision had two negative effects:
–it took $5.2 billion out of investors’ pockets that might have gone into buying FB in the open market after the launch.
–worse, the underwriters were unable to find happy homes for all that extra stock.
In any “hot” IPO, institutions routinely place orders for many times the amount of stock they actually want, in the hope that this will influence the underwriters to give them larger allocations than they’d get otherwise. You want 250,000 shares so you ask for a million.
I don’t think this tactic works, since the parties know one another very well. But people do it anyway. Maybe it makes them feel good. Occasionally the move backfires and the institution gets more stock than it wants. Maybe it gets 500,000 shares.
When this happens, the message is clear–the issue is in trouble. The institution probably decides to stay on the sidelines rather than buy more. Or it turns into a seller.
Lots of retail investors seem to have been playing the same game with FB. Institutions have battle scars and regard being burned like this as a cost of doing business. But for a retail investor, finding 5,000 share of FB in you account last Friday when you expected 500 must have come as an incredible shock. That’s enough to turn you from a greedy buyer into a panicky seller.
2. NASDAQ had a computer meltdown. The details aren’t clear. My broker, Fidelity says it still doesn’t have complete execution information on buy and sell orders it placed for clients during the first few hours of FB trading last Friday. This doubtless raised the level of panic individuals have been feeling.
Just as important, I think the NASDAQ mess also had the effect of transferring some selling from last week into this–prolonging the period of trading turmoil.
who decided to up the offering size?
Normally it’s the underwriter, who, after all, is the one in continual contact with potential buyers. If so, Morgan Stanley and the others had exceptionally tin ears.
In this case, my reading of stray media comments says that the Facebook CFO made the final decision. At the very least, he seems to be the one being thrown under the bus. I’ve never seen comments like this before. My inclination is to say this means they’re true–and that the underwriters don’t like David Ebersman very much. Let me amend that–they don’t think they’ll need to be doing business with him again.
who benefits from the pricing decision?
The underwriters, of course, whose fees are determined by the size of the offering.
Company officers other than Mark Zuckerberg are still listed as making no sales. Mr. Zuckerberg remains as seller of 30 million chares, which he notes will go to pay taxes.
The largest chunk of extra stock, 54 million out of the 97 million added, is listed in a catch-all category of people who have given voting rights to Zuckerberg. Their sales go from 71 million shares to 125 million. The rest of the shares come from venture capital investors.
To me, this says the company FB had nothing to gain by raising the offering size.
what to do
This is still the same company, with the same prospects, as before. If you liked it at $38, you’ve got to like it more at $32. I don’t know the company well enough to have an investment opinion. The stock does seem to be starting to trade more normally today, though.
capital flight and brain drain (II): Greece
what would Greek exit from the Eurozone look like?
I mean what happens in general terms, not the nitty-gritty details of how a sovereign debt default and currency devaluation would be put into place.
Several things would occur, I think:
1. Greece would stop making principal and interest payments on its sovereign debt and open negotiations with creditors for new, more favorable, terms.
2. The country would force conversion of all cash held by Greek citizens or Greek companies into a new currency–call it the drachma.
3. Greece would prevent reconversion of drachmas into foreign currency. It might ban citizens from holding foreign currency outright, for example. It would certainly make it illegal for anyone to transport foreign currency in and (especially) out of the country.
4. It might institute a crawling peg (a specified daily weakening of the exchange rate) or some other mechanism for continuing devaluation of the drachma vs. the €.
how would Greek citizens react?
This default/devaluation path is well-defined. Look at Mexico in the early 1980s as an instance. Knowing the roadmap far in advance, what can Greek citizens do to defend themselves against loss of wealth? Again, the moves are pretty standard:
–move cash holdings to a bank outside of Greece
–raise cash locally–either by selling assets or by borrowing from a local bank (in the hope that your debt will subsequently be devalued)–and move that out of the country, too
–emigrate.
Businesses would presumably be thinking of similar measures. In addition, they would likely begin to drag their feet on paying for stuff bought from Greece, while accelerating payment deadlines for Greek customers.
what about investors?
They do pretty much the same. They extract cash. They stop making new investments. Yes, they study what they might like to buy once devaluation occurs, but otherwise they sit on their hands.
taking a very long time…
…makes the situation worse. While uncertainty remains high, an increasing number of citizens are likely to make and execute capital flight plans. And the flow of new investment in the country drops to a trickle. So the country sits in neutral and idles.
effects on the rest of the EU?
I perceive a sharp difference between the local reaction to debt problems in Italy and Spain, on the one hand, and Greece, on the other.
I think the former two have made it clear they accept responsibility for their weak economic situation and are taking action to fix their problems as quickly as they can. In contrast, Greece seems to me to believe that its sovereign debt is basically an EU problem. Its strategy appears to be to implement no reforms and instead bargain for ever better terms.
If that’s an accurate representation, one could argue that the contagion effects–the adverse impact on Spanish and Italian bond markets–of Greece leaving the Eurozone (and, presumably the EU) shouldn’t be severe.
In an investment world dominated by short-term chart-oriented traders, however, I don’t have a lot of confidence other investors will see things my way. I certainly wouldn’t want to bet the farm that I’m right.
