new CEO for Tiffany (TIF)

TIF has languished for a number of years, for several reasons:

–the waning of the important Japanese market

–the shift of Chinese jewelry buyers away from foreign firms and toward local creations

–the recession, which lowered spending on jewelry worldwide

–perhaps most important, a lack of success in providing new designs for regular customers.

The company’s greatest strength is its brand name.  It’s unique in being able simultaneously to appeal to ultra-wealthy customers spending $10,000+ a pop and to ordinary people looking for a $200 trinket to have wrapped in the iconic blue box.

Oddly, in the discussion of TIF’s merchandising as being “tired” that I’ve been reading, analysts and (especially) reporters have been referring to this ability to serve low-end customers while still retaining the aura of exclusiveness that attracts the wealthy as a weakness.  Hard to understand.

At the same time, what’s being missed is the hole that has long existed in the TIF merchandise lineup–items that appeal to customers wanting to spend $2,000-$10,000. This middle ground is dominated by firms like Bulgari, which coincidentally have little presence among TIF’s customers in either of its market segments.

That’s wha’s so intriguing about the appointment of Allessendro Bogliolo, a former Bulgari executive, as TIF’s new CEO–something no one’s mentioning.

the Bain luxury goods worldwide study, winter 2015

I haven’t owned Tiffany (TIF) for a long time, but the ticker is still on my screen.  Watching the stock slide on a weak earnings report yesterday prompted me to look for the latest Bain study of the luxury goods industry, which was published about a month ago.

Although structural change is not the main focus of the report, that’s what really jumps out to me from it.

exiting the twentieth century…

Fifteen years ago, the personal luxury goods market was perhaps 40% European purchasers, 35% American and 25% Asian, most of that being Japan.  Each purchased primarily in his own region.

Although the report doesn’t mention this, the pricing structure for identical items was/is 100 in Europe, 120 in the US and 140 in Asia.  This difference is partly a function of import tariffs outside Europe, partly a judgment about what the market would bear.  Asian sales were unusually lucrative because, in addition to the much higher selling prices, wholesale margins were significantly higher and most profits recognized in Hong Kong, where the corporate tax rate for international concerns is zero.

Virtually all sales were at full price.  European luxury goods makers had few retail stores;  their distribution was primarily wholesale.

…and now

 

Chinese consumers, who represented 1% of the market in 2000, accounted for about a third of all purchases in 2015.  Japanese consumers, who were about a quarter of the market at the turn of the century, now make up about 10%.

Today, sales in Europe and the US each make up about a third of the personal luxury goods market, with Japan and China dividing the rest about equally.  However, more than half the European sales are by extra-regional tourists.  About a third of US sales and 25% of Japanese are also by tourists.  Tourist sales in China are negligible.  I’m not sure why; high prices and counterfeiting are my guesses.

Looked an nationalities a different way, European customers buy 90% of their luxury goods in Europe in 2015.  Americans bought almost exclusively in the US, with a tiny fraction in Europe.  Japanese consumers made 40% of their purchases outside Japan, primarily in non-China Asia, with the US and Europe taking smaller slices.  Chinese consumers bought only 20% of their luxury goods domestically last year.   They made about 30% of their purchases in Europe, another 25% elsewhere in Asia and the rest in the US and Japan.

One of the factors driving the large tourist market is, of course, the much higher domestic prices for Asians.  A second is the significant currency depreciation of the yen and the euro, which have made not only foreign stays but also foreign luxury goods purchases much less expensive.

10% of the global market is now in off-price stores.  That’s double the percentage of three years ago.  Markdown sales, including off-price stores, accounted for about a third of the market last year.

7% of sales are online, most of that in the US.

an inflection point

Bain thinks–correctly, in my view–that much greater awareness of regional price differentials, significant recent currency fluctuations, the rise of markdown sales at a time of steady price increases by luxury goods manufacturers have all conspired to undermine the belief that branded luxury goods have enduring value.

I suspect there’s more at work as well–generational change and the rise of new high-end local brands with greater appeal to younger customers.

TIF

Back to TIF for a moment, the company’s announcement that it expects a 10% fall in earnings for fiscal 2015 and “minimal” earnings growth in 2016 limits its near-term appeal.  At some point, though, it could become attractive again, despite ructions in the overall luxury goods market.  …$50 a share?

 

Tiffany (TIF) reports so-so 4Q12 earnings

the results

Before the opening bell this morning on Wall Street, TIF reported 4Q12 (the company’s fiscal year ends in January) results.  Sales were up 4% year on year during the quarter, at $1.2 billion.  Net earnings were up 1% yoy, at $180 million.  That works out to eps of $1.40, vs. the $1.39 reported for 4Q11.  But it was $.04 above the brokerage house consensus of $1.36.

For the full year, sales were up 4% at $3.8 billion.  Net income was $416 million, down from $465 million in fiscal 2011.

In its earnings release, TIF also gave its first guidance for fiscal 2013.  It expects sales to be up by 6%-8% and eps to move roughly in line–but possibly with a touch of positive operating leverage evident later in the year.  1Q13 will be relatively weak (TIF fingers marketing costs and high raw material prices as the culprits), but earnings comparisons will likely improve from then on.

As I’m writing this, shortly after the open, TIF shares are up almost 3% in a market that’s up by about half a percent.

I don’t see why.

my take

TIF is an exceptionally well-managed company with a powerful brand name in the Americas and the Pacific, and in a business, luxury goods, that has strong long-term growth prospects.

This is the first time in five quarters that TIF results have exceeded the Wall Street consensus.  That’s a plus, although the “beat” is at least partly due to analysts’ low-balling their estimates after having whiffed four quarters in a row.

Management guidance of 6%-9% eps growth for fiscal 2013 is also a low-ball number, in my view.  I think +10% is easily attainable but believing in +15% would be a stretch.

my issue is valuation

I’ve owned the stock in the past but don’t now. Based on management guidance, the stock is trading at 20x year-ahead earnings, which is about as high as the PE has gotten over the past decade.

–Yes, there have been short periods when the multiple has spiked higher, but who wants to count on this happening again.

–Yes, there may be another, say, 5% to count on in the stock as earnings come in better than guidance.  But a professional investor should be looking for the potential +30%s and the +50%.  There’s just not enough upside here.

–Yes, there’s recurring speculation that some EU luxury conglomerate may buy TIF.  But, again, is this enough of an investment thesis?  In my view, no.  If the stock were trading at 15x earnings, however, it would be a different story.

what catches my eye in the release

TIF still doesn’t have its balance sheet completely back under control.  A while ago, when world economic prospects looked brighter, TIF decided to boost its inventories significantly.  That was so as not to lose sales for lack of stuff to sell, as well as to support a quickened store expansion plan.    …an aggressive, but very sensible strategy.

As global growth started to fade, TIF put on the manufacturing brakes.  But at 1/31/13, inventories were still $161 million higher than a year earlier.  And debt, net of cash, was up by $176 million.  That’s the reason, I think, why TIF bought back no stock during 4Q12, despite the fact the shares spent much of December in the mid-high $50s–vs. TIF’s full-year average buyback price of $66.54.

Comparable store sales in the Pacific, ex Japan and ex currency effects, were +6% for 4Q12.  I interpret this figure as saying sales there, which I view as the key factor that could make fiscal 2013 surprisingly good for TIF, have passed their low point.  TIF is penciling in a “mid-teens” total sales increase for the region–implying, I think, +10% for comparable store sales.  In a better Chinese economy and with clarification of the new government’s view on luxury goods consumption, that figure may be way too low.   If there’s one thing TIF bulls should monitor, this is it.  If there’s one thing that could change my mind about the stock, this is it.

Tiffany’s 2Q12: interesting stock market reaction

the report

Prior to the New York open on August 27th, TIF announced its 2Q12 (ended July 31st) results.  Earnings were up by 2%, year on year, at $92 million.  Eps were $.72/share, also up 2% yoy.  Ex non-recurring items, which depressed 2Q11 eps by $.16, the yoy earnings comparison was negative–down 17%.

Quarterly sales came in at $887 million, also a 2% yoy advance.   Negative currency effects–a 2% decline of Asia-Pacific currencies against the dollar, and a 9% fall of European, reduced that figure from what would have been a 3% constant currency gain.

EPS were a penny below the Wall Street consensus of $.73.

Although TIF said its 2Q12 performance met its expectations, it lowered full-year guidance for the seond time in two quarters.  The new full-year eps range is $3.55-$3.70 vs. guidance of $3.70-$3.80 announced with 1Q12 results.

The stock?  It rose by 7%+ on this news.

the details

the Americas 

Same store sales were down 5% yoy, and minus 9% in the flagship store in NYC.  All the weakness came from domestic customers.  Sales to foreign tourists were flat, with a falloff in EU buying offset by increases in Asian visitor purchases.

Florida, Texas, and Guam were notable areas of strength.

Asia-Pacific

Same store sales were down by 7%, two of those percentage points due to currency weakness.  Slight price increases, lower unit volume.

Japan

12% same store sales growth in local currency, offset somewhat by 2% yen weakness vs. the US dollar.  Continuing recovery from Fukushima-related weakness.

Europe

2% same store sales growth was more than erased by 9% currency weakness.  Continental Europe was stronger than the UK.  Foreign tourist buying made the figures look better than they would have been from local customers alone.

the balance sheet

It’s not something I’ve commented on before.  But the yoy change is remarkable.

During 2Q12, TIF raised $250 million in long-term debt, $60 million of which went to retire maturing borrowings.

Total debt now stands at $940 million, cash at $367 million.  A year ago, the figures were $694 million and $565 million.  Put another way, the company has gone from net debt of $129 million to net debt of $573 million, a $444 million negative swing, over the past twelve months.

The figure means TIF invested close to half a billion dollars in excess of funds generated by operations in business expansion.  Most seems to me to have been used to build inventories, with a modest amount for expanding the store network.

market reaction has been positive…

…even though there’s evidence of a continuing slowdown in high-end jewelry buying in both the US and China.  Nevetheless, TIF shares appear to have bottomed around $50 in June.  They’ve been rising steadily–and outperforming the overall market–since.

my take

TIF shares are up over 20% during July and August, despite the weak business outlook.  I hadn’t expected this.  I’d thought the stock would likely languish until there were clear signs of a pickup among either Asian or US customers.

Yes, the company is very well-managed.  The newly raised debt gives it a larger cash cushion, in case its business remains in the doldrums for an extended period.  It seems clear to me that TIF has, prudently, shifted out of rapid expansion mode and into a more defensive cash generation stance.  If this turns out to be the last downward earnings revision, the stock was inexpensive at $50.

Still, I think it’s interesting that the market is willing to pay for an anticipated recovery in TIF’s business so far in advance.  It conveys to me the suggestion of an underlying bullishness among market participants that contrasts sharply with bearish media sentiment.

As for TIF shares themselves, I’d prefer to wait either for a price in the mid-$50s or the 3Q12 earnings announcement rather than buy here/now.

trying to move downmarket is tough–Apple vs.Tiffany and Superscope (who?!?)

going downmarket:  the Superscope example

When I got my first job as a securities analyst, rookies were assigned coverage of companies no one else wanted.  So I got a bunch of firms with bad managements, poor operating procedures and/or failing strategic concepts.  I was happy to be employed, but otherwise I was less than thrilled.  But a comment by J.L. Austin turned out to be true.  I did learn a lot more about how business works by observing things going wrong than I ever would have by watching uniformly smooth sailing.

One of my first companies was called Superscope.  The company’s claim to fame was that it discovered Sony “operating out of a quonset hut” in Japan in the late 1950s.  It obtained from the then fledgling electronics giant an exclusive license to distribute Sony’s innovative line of tape recorders in the US.  The license made Superscope a fortune.

In the mid-1960s, Superscope bought Marantz which was then an ultra high-end maker of stereo systems.

In the 1970s, preparing for the reversion of the tape recorder license to Sony, Superscope decided it would replace the lost income by launching a line of inexpensive, mass-market consumer electronics devices.   It thought it would increase the odds of the line’s success by branding its offerings as “Superscope by Marantz,” thus grafting onto its boomboxes the Marantz brand qualities of exclusivity, high quality and dependability.

As the successor company website comments, “Naturally enough, the two brands became intertwined in consumers’ minds.”

Translating this marketing-speak into ordinary language, the move completely destroyed the Marantz brand.

The appearance of low-fidelity $150 stereo systems under the Marantz name shattered the image of high quality and exclusivity that had motivated audiophiles to pay many thousands of dollars for the original Marantz systems.   As I recall, it didn’t help either that the  boomboxes were very far from best-of-their-breed.

the Apple smartphone dilemma

Why this trip down memory lane?

It’s because Apple faces a somewhat similar problem with its smartphone business, which produces half the company’s profits.

As some Wall Street analysts have been point out for over a year, the market for $600+ smartphones in wealthy countries is approaching saturation.  The as yet untapped markets are in emerging nations like China or India, where older “feature” or “flip” phones still predominate.  But if your annual family income is, say, $5000, how many $600+ smartphones can you afford.  Answer:  zero.

That’s why many phone makers are collaborating with local wireless companies to develop and market smartphones that cost $100 or less.

How can Apple compete?  Should Apple try to compete in this market segment?  The risk is that it repeats the experience of Superscope.

going upmarket is easier

Oddly, experience says it’s much easier to go up-market, although often a company will create a new, upscale brand name.  That’s what the Japanese auto companies did, for example.  Nokia, too, with its Vertu brand–which consists of making ordinary phones into jewelry with precious metals and gems.

Tiffany magic

How does Tiffany come into the conversation?  It’s the only company I know that is able to be successful both at the high end of its market (jewelry at $10,000+) and the low end (key chains and trinkets for $100-).  I don’t know how the firm accomplishes it.  I offer the example only to say that the move downmarket can be done.