Tiffany’s even more dazzling 2Q11

the results

TIF reported July quarter  results (like most retailers, the company’s fiscal year ends in January of the following calendar year) just prior to the opening bell on Wall Street last Friday.   The numbers were better than the stunningly good results of 1Q11.

Sales were up 30% year on year at $872.7 million.  Earnings per share, at $.69, were 33% higher than in 2Q10.  Remove non-recurring items–mostly the costs of moving the New York head office, however, and eps were up 58%, at $.86.  This compares with the brokerage house analyst consensus of $.70, with estimates ranging from $.64 to $.77.

TIF raised its full-year earnings guidance by $.20/share to $3.65-$3.75.  My interpretation of management’s (very brief) remarks about this lift is that, as the business looks now, TIF should easily surpass this figure.  The only possible sign of weakness comes from Europe, where comps were “only” up 12% on a constant exchange-rate basis.  But during a time of political and social turmoil, there’s no sense in their raising the guidance bar any further.

Makes sense to me.

stuff I think is worth noting

–TIF bought back 330,000 shares of stock during the quarter at an average price of $74.29.  Not necessarily the greatest trade ever, but it tells you management thinks the intrinsic value of the company is significantly higher than that.

–Comps (comparable store sales) were stronger in 2Q than in 1Q for all regions of the world except Europe.  High-end jewelry sold especially well.  Chinese customers outdid themselves.

–3Q-to-date is just as strong as 2Q.

–Dollar weakness played a role in boosting earnings from Japan and Europe.  There’s no easy way to figure out the exact number, but my back of the envelope guess is that eps would have been around $.08 less without a rise in the ¥ and the €.  I think the $ will be a secular weak currency and that’s part of the icing on the cake of the TIF story.  But I don’t think we’ll see a gain this big again soon.  We might even see some giveback in 3Q11.

–Capital spending plans remain unchanged at around $250 million, but TIF will open 17 new stores this year–one fewer in the US than previously planned, one in Europe.  Eight remain penciled in for Asia-Pacific.

–Thursday-Friday trading in TIF wasn’t what I would have expected.  Before the open on Thursday, jeweler SIG (every kiss begins with Kay; he went to Jared) reported stellar US results for 2Q11.  US comps were up about 12%.  Despite this hint that TIF’s results would be unusually good, TIF shares faded after an initial rise to close down about 1% for the day.  On Friday, post results, TIF was up by 9.3%.

Isn’t Wall Street supposed to discount information in advance?

details

US

US sales (51% of the business in 2Q) were up 25% year on year at $438.2 million.  Half that gain came from purchases by foreign tourists, led by Chinese visitors.  Comps in the Fifth Avenue flagship store, a mecca for foreigners, were up 41% vs 2Q10.

The biggest factor was higher price.  Statement jewelry at prices of at $20,00-$50,000 and $50,000+ were notably good sellers.  However, units were up for all categories selling for at least $250.  Only silver jewelry, at the lowest price points, didn’t come to the party.

Asia-Pacific

Sales were $173.2 million (20% of sales), up 55% year on year during 2Q in this region.  Comps were up 51%.  China and Korea were the strongest areas.

What can I say.  I thought the 31% growth in comps for 1Q were great.

Japan

Sales were up 21% to $142.5 million (17%).  Comps were +8%; the rest was currency.  Sales momentum was good throughout the island nation, and built as the quarter progressed.  Purchases by Japanese tourists in Hawaii and Guam, counted in US results, were also good.

Europe

For the first time, TIF is mentioning foreign tourists–China and Russia–as a factor in its fledgling European operations, although most purchases are still by locals.  At $101.3 million, sales were up by 32%.  Comps were up 11%; the rest was currency.  Unit volume increases were the biggest factor in growth.  The UK was good; the continent was better.

Other

TIF has an “other” business, which consists of wholesale sales to emerging markets where TIF has no stores plus trade in rough diamonds.  The total for 2Q11 was $17.4 million.  I haven’t included it in my percent-of-sales calculations.  It’s not big enough to move the needle.

the stock

Same idea as three months ago  …except my numbers have changed a little.

I think TIF can earn $4 a share in fiscal 2011.  My base case for fiscal 2011 is $4.75.  If we apply a 20x multiple to those figures, we get an $80 target based on this year’s results and $95 based on fiscal 2012.  In an uptrending market, the multiple would easily be 25x, implying a correspondingly higher stock price.

In contrast, in a bad market/economy, next year’s earnings might be flat at $4, or even down a bit.  Applying a 12x multiple gives you a price of $48 (at the absolute bottom in 2008-09, TIF traded at under 9x depressed earnings of $2).

At Friday’s close, then, the $25 of upside I think possible is almost exactly counterbalanced by $20 of downside if the economy goes mildly south.

As it turns out, even though I told myself (repeatedly) that I was going to let the force of the downtrend of the past month or so play out without my buying anything, I found myself replacing the TIF I sold at $76.50 earlier in the year at around $63.50 on the day the market hit 1106.  That tells you something about me; it also says I think the more bullish outcome is more likely.

To my mind, the key variable is not China, which I think will go from strength to strength, or the overall US economy, which I think will be a story of the differing fortunes of haves  have-nots (think Europe in the 1980s) that will aggregate into only modest progress.  The big issue I see is that US comps generated by US citizens have got to lose steam at some point.  As long as they don’t drop to zero, I think the stock will be ok.

The fact that TIF was a $58- stock just a handful of days ago suggests a certain level of anxiety on Wall Street’s part about retail names.  To me, this means that there may be a chance to add to the stock at lower prices than Friday’s.


One response

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: