Tiffany’s excellent 3Q2010

the results

Tiffany reported surprisingly good results for 3Q2010 before the market opening on Wall Street Wednesday morning.  Earnings per share were $.46  vs. analysts’ consensus expectations of $.37.  Sales were up 14% year on year, again higher than anticipated.  Worldwide comparable store sales were up 7%.  In contrast to 2Q2010, when TIF reported strong results but saw its stock fall 6% on the news, the shares rose over 5% in Wednesday trading.

The company reported that results improved month over month through the quarter, and that 4Q2010 sales growth “is exceeding our expectations” so far.

Based on the strength of the third quarter, TIF is raising full-year guidance to a range of $2.72-$2.77, compared with the previous range of $2.60-$2.65.  In other words, the company is raising its fourth quarter guidance by $.03.  The content and tone of the company’s remarks, however, suggest that this is a really conservative number.

highlights

Generally speaking, TIF’s third quarter followed the overall pattern of the second (see my post), only business was stronger in almost all areas.

Sales outside the US were higher than domestic sales for the first time.  Given the much faster growth rate of the Pacific ex Japan and Europe for TIF, it may be a long time before US sales catch up, if they ever do.

Third quarter revenues break out as follows:

US     $331.8 million, up 9% year on year,  49.7% of total sales

Japan     $130.8 million, up 12%, 19.6%

Asia Pacific     $127.1 million, up 24%, 19.1%

Europe     $77.5 million, up 22%, 11.6%.

There were significant currency fluctuations during the quarter, with the yen rising and the euro falling.  On a constant currency basis, sales in Japan would have been up only 2% and those in Europe would have been up by 29%.

Comparable store sales were up as follows:

Worldwide     +9%, +7% on a constant currency basis

Americas     +6%, +5%

Asia Pacific     +15%, +11%

Japan     +8%, -2%

Europe     +16%, +24%

Let’s say that the current geographical growth rate continues at the same level for the next five years.  Unlikely (something unexpected always happens), but if so, the company’s geographical sales breakout would look like this:

US     39%

Asia Pacific     29%

Europe      21%

Japan     11%

In 2015, then, TIF would have about half its sales coming from Greater China and Europe, the US would remain a significant contributor, and Japan wold grow a little in absolute terms but shrink in relative size.  Not a radical transformation from where the company is today, but a more than subtle shift in the sources of earnings.

details of the quarter

Americas

Sales were driven by higher prices rather than more units.  Sales of items priced under $500, mostly silver ,were down year on year.  In contrast, sales of items price over $500 were up 10%.  Management said it sees this divergence as reflective of the shape of economic recovery in the US, not the effect of trading up.  I presume this isn’t a social/political opinion, but rather a statement of what its customer analysis software is telling it–that wealthier Americans are feeling more comfortable, but that the less affluent are not.

A greater proportion of sales is coming from foreign tourists.

Year on year sales growth was +1% in August, +6% in September, +10% in October.

Comp sales in the flagship Fifth Avenue store were down 3%, but that’s likely because the Annual Blue Book sales event at the store was held in October last year vs. in November this year.

TIF is “pleased” with the early reception of its new leather goods line (I don’t know the company well enough to understand whether “pleased” is good or bad).

Asia Pacific

Half the sales come from Greater China.  This half also has the highest growth.  As in the US, year on year comparisons strengthened as the quarter progressed.  Fine jewelry and engagement rings were especially strong.

Europe

Sales growth was driven both by increasing units sold and increasing prices.  the UK and Continental Europe were equally good. There was no trend to monthly sales.  Most business is done with local residents, but foreign tourist sales are beginning to increase as a percentage of the total.

Japan

Sales comparisons were increasingly favorable as the quarter progressed, with comps turning positive in October.  Relatively flat sales in yen were a product of decreased units and higher prices.

overall

Strength was in the higher end.  Silver was good only in Europe and Asia Pacific.

The company continues to rehire staff laid off during the recession.

It will accelerate new store openings in 2011.

TIF has bought $72.8 million of its own stock, year to date, at an average price around $43.  It has $329 million left to spend under the current board authorization, but will probably not spend the full amount this quarter (which says the company doesn’t see the stock at $60+ as a screaming buy).

The company will probably raise prices again early next fiscal year, to offset higher raw materials prices.  Platinum and silver are the most important, with gold not so key.  Labor costs are also under good control.

my thoughts

I should start by saying that I was struck when I wrote about TIF’s second quarter that it was as cheap as I’d ever seen it.  So I ended up buying some in September.

TIF seems to me to be in an unusually advantageous position.

–It appeals to Europeans trading down and to aspirational buyers in emerging Asian economies.

–Although its main market, the US, is mature, TIF is a dominant force.  The company benefits from consolidation of the industry, as well.  And recession has accelerated the withdrawal of mom and pop jewelers from the market.  I regard the introduction of leather as an important telltale that TIF thinks it needs new ways to spur growth domestically.  If there’s any slowdown in the growth pace, I think it will be here.

–For investors worried about weak domestic growth and 10% unemployment as investment (not social) issues, TIF offers non-US exposure plus a domestic focus that is far away from the areas of greatest concern.

For me, today, the main issue with TIF is price.  Let’s say TIF earns $2.85 this year and $3.40 (a stretch, I think) in 2011.  And let’s say it deserves a 20x multiple.  That would mean the stock could trade as high as $68 a share next spring.  A 10% gain is nothing to sneeze at, but I think there must be better values around.  As an owner, however, I have absolutely no reason to want to sell.


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