TIF reported fiscal 4Q10 (ended Jan 31, 2011) earnings before the market opening in New York yesterday. Profits came in at $1.44 per diluted share, ex non-recurring items. This compared favorably with analysts’ estimates of $1.39.
Full year results were $2.93. That was better than the range of $2.83-$2.88 the company had guided to when it announced 2010 holiday sales in January. Actuals were also almost 20% ahead of the range of $2.45-$2.50, that TIF management’s initial guidance for fiscal 2010, issued a year ago.
company guidance for 2011
On the earnings call, the company gave its first indication of prospects for fiscal 2011, a year in which TIF again expects significant growth. Prior to the earthquake in Japan, a country that accounted for 18% of sales in 2010, TIF was planning to guide to eps of $3.35-$3.45 on sales growth of 15%-19%.
For the current quarter, 1Q11, the company had expected eps of $.62 per share, on flat sales in Japan. It is estimating that the negative effects of the earthquake on its business will mean a year on year decline of overall Japanese sales of 15% for the quarter–and a reduction of total corporate eps by $.05. Given that its stores in northern Japan were closed last week and only opened this past weekend, TIF has only very limited information to project from. As a result, it is, for the moment at least, retaining its pre-earthquake assumption of same store sales for the remainder of the year as being flat with 2010.
Analysts have penciled in $.55 for the April quarter. Estimates range from $3.10 to $3.43 (a stupidly over-precise number, in my view) for the full fiscal year.
For decades Japan was the El Dorado of luxury goods markets. Intense consumption of luxury goods by half the population and the willingness of buyers to pay prices 20%-40% higher than makers could change in their home markets are the reasons why. Sales suddenly stopped in their tracks as recession hit in 2008, however–and haven’t bounced back. Everyone has theories; no one knows for sure why. But this appears to be a permanent change in the market.
As a result, the game in Japan has changed for Western luxury goods manufacturers from one of aggressive expansion to one of maximizing profits and extracting capital if possible. In today’s Japanese market the negative effects of the earthquake may require a temporary change in emphasis but not a change in (a very defensive) strategy.
TIF’s business in Japan can be divided into general areas: Kanto (the Tokyo area) and points north; and the Kansai region around Osaka, farther south. The former, which accounts for maybe 60% of TIF’s Japanese business, has been affected by the earthquake; the latter has not.
How should we interpret TIF’s forecast of a 15% decline in Japanese sales for 1Q11? Let’s assume that the falloff comes completely from the north. TIF says that Japan had been comping positive during the quarter until the earthquake. Say that’s half the quarter. For sales to be down by 15% for the entire quarter, sales have got to be down 30% for the second half of the period. If that comes solely from Kanto and Tohoku, their sales must be down by 30%/.6 = 50%. This strikes me as an excessively gloomy estimate.
This drastic falloff clips $.05 per share from earnings, according to TIF. We’ll see whether down 15% is an accurate estimate or not. But no matter what, TIF understands its own internal profit dynamics much better than anyone on the outside. So the relationship: down 15% in sales = down $.05/share, is probably a very reliable one.
If conditions in Japan remain depressed for the remainder of fiscal 2011, TIF’s earnings will be $.35 lower than the company envisioned before the earthquake struck. It’s possible in a very faddish place like Japan that a sympathetic abstinence from luxury goods spending affects everyone in northern Japan–whether touched by the earthquake or not–and lasts for a year. (In the early 1990s, for example, it was chic to be poor. So bars that offered cow intestines (tripe) to eat sprouted up, enjoyed a year of success and just as quickly disappeared). Anywhere else, that would be much too pessimistic. I’d be tempted to have the sales figures fade back to normal (meaning same store sales growth of zero) in a linear fashion through yearend instead. If so, the hit to fiscal 2011 eps would be around $.20.
factoring Japan into the TIF price
Whether the right number is $.40 or $.20 or $.60, the more important question is how an investor should factor this into the TIF stock price. It seems to me that if the earnings loss from Japan is truly a one-time event, the proper way to account for it is to subtract $.40, or $.20, or $.60 from the stock price. Knocking $8 off the share quote, which is what the Wall Street reaction has been, is in effect assuming that TIF’s business in Japan is permanently impaired and the lower earnings level will be a fact of life from now on.
I think that’s just wrong.
the rest of TIF’s business is booming
Asia ex Japan and Europe, which together make up about 30% of TIF’s sales, will likely be up by 25% or so.
Sales to distributors for Russia and the Middle East will probably be higher than that.
The US, which in all likelihood will be less than half of the company’s total for the first time ever, will rise by 10% or so.
The only sign of weakness in the world ex Japan is in lower-priced (under $500) items in the US. For “macroeconomic” reasons, sales of silver jewelry are barely increasing. I think this means that affluent customers who had traded down to silver during the recession have traded back up to higher-priced items. (In fact, sales of diamonds–and especially TIF’s newly-introduced line of yellow diamonds–are very strong, as are fine and fashion gold.) Less affluent customers, in contrast, reined in their silver purchases during the downturn and have not yet resumed buying at their normal rate.
TIF management is guiding to earnings of around $3.40 for this year, ex the Japan earthquake effect. That’s probably too conservative. Let’s say that $3.75 is a more realistic guess. The negative effect of the Japan earthquake may have taken away that upside. But if the loss of Japanese business is indeed temporary, 2012 earnings per share growth is likely to be enormous–organic growth + Japan bounceback. EPS is likely to be in the $4.50 range.
If we apply a 20x multiple to the $3.40 number for 2011, we arrive at a target price of $68 for this year. If we apply 25x, which is arguably more appropriate for a global firm growing as quickly and steadily as TIF, we get $85. At the current price of around $60, the multiple the market is assigning is 17.5x.
If we were to look out a year, a 20x multiple on $4.50 would be $90.
What do these calculations mean? I interpret them as saying that in the current price the market is assuming the worst probable outcome for sales in Japan this year (the reality might be worse, but I don’t think the chances of that happening are high). The market seems to also be saying that TIF’s Japanese franchise is permanently impaired.
This says to me that TIF’s stock has limited downside. And, it’s possible that TIF could be trading as much as 50% higher a year from now, assuming a reasonable overall stock market and that business in Japan bounces back to its pre-earthquake level by 2012.