TIF’s 4Q11 earnings misstep

background

When TIF reported 3Q11 earnings (Tiffany’s fiscal year, like that of most retailers, ends in January), it lowered its 4Q profit guidance (see my post).

By then, the company had seen sales for virtually the entire month of November and had detected weakness in spending by residents of the Northeast and Mid-Atlantic regions of the US.  At that time, it still expected a “low-teens percentage increase” in worldwide sales during 4Q11.  But it effectively clipped $.10 from its estimate of per share profits for the year’s final three months, saying it expected to earn $1.48 – $1.58 per share during the period.  That would be 6.3% more than the $1.44 it earned in the comparable period of fiscal 2010.

the weakening holiday selling season

Last week, TIF reported the results of its worldwide sales for November plus December.

The news wasn’t good–especially in the US and Europe.

Rather than the low-teens increase in sales the company had been anticipating, revenues were only up by 7%.

By region, they broke out as follows:

Americas    total sales = +4%,     comp store sales = +2%  (3Q11 comps = +15%)     ←

Asia-Pacific (ex Japan)     +19%, +12%, (+36%)      ←

Japan     +13%, +6%, (+4%)

Europe     +1%, -4%, (+6%).

In the US, sales to residents were down year on year.  Buying by foreign tourists pushed results into the plus column.

In its press release, TIF reduced its eps forecast for 4Q11 by another $.10-$.15.  It now expects to earn $3.60 – $3.65 for the full year.

The stock fell 10% on the news.  Unlike other stocks with negative earnings surprises, TIF hasn’t rebounded.

my thoughts

December must have been a particularly disappointing month for TIF, since management had already revised down its expectations  based on November weakness.

Recent macroeconomic reports are almost universally signalling that the US economy is improving.  In the jewelry industry in particular, Signet reported on the same day as TIF that its same store sales in its Kay business were up +9.8% and in Jared, +10.0%.  Similarly, Zale reported that its non-kiosk US jewelry business had same store sales growth of +9.0%.  Neither is showing anything like the weakness in TIF’s business.

TIF is much farther up-market than either Signet or Zale.  Presumably, that’s the source of the difference.  It looks like TIF’s high-end US customers left their credit cards at home last month.  My guess is that the problem resides in the waning fortunes of executives in financial services and the industries, like legal, which support it.

Look at the Asia-Pacific figures above, as well.  TIF didn’t highlight this area.  Same store sales are still high at +12%. But three months ago they were growing at a +36% pace, or 3x the current rate.

what to do

At last Friday’s price of $59 or so, TIF is trading at 16x fiscal 1011 eps and yielding 2%. That looks cheap to me.

On the other hand, we have only guesses as to what’s causing the current deceleration in company sales.  They’re probably good guesses, but still…

For investors, the more pertinent question is probably when earnings comparisons will begin to pick up again.  My tentative answer is–not soon.  In fact, earnings comparisons could be negative or flat until late in 2012.

So my thoughts remain unchanged from late November.  I don’t feel any need to sell the stock I own, but I don’t think I have to hurry to buy more.  If I didn’t own any I might buy a small part of a position now, but no more than that.

 

Tiffany(TIF): strong 3Q11 + weak guidance = 8.7% stock drop

the results

TIF reported its 3Q11 (ended October 31st) earnings results before the start of New York trading yesterday morning.  For the three months, the company took in revenue of $821.8 million.  It earned $89.7 million, or $.70 per share.  This represents a 52% increase over the $.46 a share the company earned in 3Q10.  The 3Q11 figure handily beat the Wall Street consensus of $.60 a share, even exceeding the most optimistic estimate, which was $.67.

TIF also continues to buy back stock at around the $65-$66 level.

the guidance

TIF says it expects 4Q11 earnings to come in between $1.48-$1.58 per share.  This represents a (mere) 6.3% increase over the $1.44 per share the company posted for 4Q10.  This guidance falls near the bottom of the 4Q Wall Street analysts’ estimate range of $1.51 – $1.69.  The median estimate, which  may be revised down, has been $1.64.

Just for reference, a year ago TIF guided to eps of $1.29 and reported $1.44.  If we adjust management guidance for possible lowballing of the same magnitude, we arrive at a figure around $1.65.  That would be a year on year gain of 15% or so.

the details

3Q11 business was stellar.  By areas:

–the Americas, 47.9% of TIF’s sales (49.7% a year ago), rose by 17% yoy.

–Asia Pacific, 22.6% (19.6%), was up by 44%

–Japan, 18.1% (19.1), rose by 12%

–Europe, 11.4% (11.6%), was up by 19%.

Strength was in high-end merchandise.

Where’s the problem?

In its guidance, TIF alluded to “recent sales weaknesses” it has noticed in Europe (no surprise there–and it’s still a tiny part of TIF’s overall business) and in the eastern US.  In its conference call, the company said the western US remains strong and buying by foreign tourists continues to be a significant positive.  But it has noticed a slowdown in purchases by domestic customers in the Northeast and Mid-Atlantic states.  That’s the reason for its relative caution.

my thoughts

On the surface, the Boston-Washington corridor slowdown seems odd.  The just-released National Retail Federation survey (see my post) highlights the Northeast as an area where holiday spending is surging.  However, I’d already heard the same story as TIF’s from another (privately held) luxury retailer doing business along the East Coast.  I’d attributed that to company-specific problems, but it’s sounding like I’m wrong.

What could be the cause?  …pent-up demand from the recession being satisfied over the past year?  …lower bonuses on Wall Street?  …Newt Gingrich taking a lower spending profile (a joke)?

TIF is still projecting sales in the Americas to be up by 15%-20% yoy in 4Q11, but is now expecting the lion’s share of the sales growth to come from buying by foreign tourists.  This contrasts with the 50-50 split the company has seen in sales growth  between locals and foreigners during recent quarters.

TIF is currently earning at a $4 per share annual rate.  This means it’s now trading at a bit over 15x earnings.  That’s an unusually low multiple by historic standards.  It’s also where the TIF management sees considerable value, as evidenced by its stock buybacks.  In addition, Asia Pacific sales probably amount to about a third of revenues, if we factor in sales to tourists in the US and Europe.  Those sales alone seem to me to be enough to grow the entire company’s profits by at least 10% per year.

On the other hand, if US sales of luxury goods to domestic buyers are beginning to flatten out after an extraordinary burst of buying over the past year–and continue flat for a while–then earnings comparisons for TIF over the next few quarters will likely be lackluster.  Any potential bids from European luxury goods firms (I’ve regarded this possibility as very small, in any event) will likely stay on the shelf until the EU’s economic future is less cloudy.

All in all, I’m content myself to wait before adding to my holding.  If I owned no TIF at all, however, I’d be tempted to buy a small amount now and await further developments.

 


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.


bottom-up investing in a world turning top-down

the old days

Europe…

I started looking seriously at non-North American stock markets in 1984, after six years researching a number of sectors in the US market.  At that time, UK and continental European investors used almost exclusively a top-down style.  That is, they used macroeconomic analysis to select the countries they were interested in.  They then either bought banks, on the idea that the loan portfolios mirrored the economic structure of the countries; or they ventured into other sectors based on their economists’ view on what would be the areas of greatest economic strength.

…vs. the US

This process stood in stark contrast to what American investors did–which was to select individual stocks, mostly based on firm-specific factors, but with a little industry or sector guesswork also thrown in.  In fact, Peter Lynch of Fidelity Magellan, the most successful investor of that generation, wrote in his first book that he really didn’t pay much attention to macroeconomics.  He just picked good companies.

continental Europe?

When I began to manage a global portfolio at a small firm in 1986, I was faced with the problem of continental Europe.  I had limited resources.  There were lots of countries, all with different customs, different politics and different attitudes toward investing.  But together they only made up 10% or so of my benchmark index.   I’d spend all my time looking at just them if I adopted the European approach.  So I decided to do what Americans do, just pick stocks, on a pan-European basis and hope I didn’t get hurt too badly.

Ten years of European integration–and stellar portfolio performance along the way–later, my “accidental” approach had become the new norm.  It has stayed that way since.

…or so I thought.

macro-driven analysis

I’ve been surprised over the past couple of weeks to be seeing reports that harken back to an earlier day when analysts drew conclusions about individual stocks from general economic analysis, and nothing much else.

Two stick out.

1.  According to press reports, Goldman cut its price target on TIF a few days ago by 13%, from $77 to $67.  2013 eps were clipped by 4%, from $4.60 to $4.40.  Why?  Slowdown in the overall US economy.  That’s it.  Macroeconomic weakness will translate into lower jewelry purchases.

We’ll get some new evidence when TIF reports a little later this morning.   But judging from last night’s results from more down-market jewelry company SIG (which you’d expect to be hurt more severely than TIF if consumers were pulling in their horns),  however, there’s no sign of slowdown yet.  SIG said same store sales in the US were up 12% year on year in each month of the July quarter, and up 12% as well for the first three weeks of August.

I’m not saying GS is particularly insightful about TIF, nor that what I’ve read (I haven’t seen the actual report) is internally consistent.  What strikes me is the methodology–that there’s no apparent attempt to find a metric more subtle than that GDP growth is slowing.

2.  Deutsche Bank recently declared that the growth days for the casino gambling market in Macau are over.  Why?  Imports of German luxury cars into China, which had been growing at close to a 50% annual clip in the first half of 2011, slowed to +22% in July.  Deutsche believes this means wealthy Chinese citizens are seeing their income squeezed by global slowdown and are cutting back on spending (again, I haven’t seen the actual report, but it has been widely covered by the Asian press).

But July was a blowout month for the Macau gaming market.

According to Deutsche, that doesn’t matter.  We’re already seeing now is a reduction in high-roller participation in the market, but it’s being disguised for now by a boost in visits by less affluent Chinese gamblers.  By yearend, Deutsche thinks the Macau market will only be growing by 20%.  Growth of a mere 10% is possible for next year.  Evidence for any of this??

That’s an awful lot of inference from a one-month dropoff in sales of imported automobiles.   Who knows?  …maybe this year’s models are ugly.  …or customers have run out of garage space and will pick up the spending pace when their new garage additions are finished.

This report really struck a nerve in Hong Kong, however.  The entire gambling sector fell, with some stocks off as much as 10%.  It hasn’t recovered to date.

premises and conclusions

It’s always possible that your conclusions end up being correct even though your reasons are crazy–or non-existent. I happen to think that both reports will end up being too negative.  But that’s not my point.

In my experience, good analysts visit stores, interview/survey customers, talk with suppliers and with competitors to build a bottom-up model of a company or an industry.  They have detailed factual knowledge of a set of companies that they then integrate into an industry view.  Then maybe they knock on the door of their firm’s economist to give empirical feedback about the house macroeconomic view.

In these cases, the flow seems to have been reversed.  An economist who deals at the highest level of abstraction seems to be dictating what analysts are “supposed” to be seeing.  There’s a risk that the house macroeconomic view acts as a set of blinders that certainly make the analyst’s job easier, but makes the results less valuable at the same time.  I hope this isn’t the start of a trend.

We’ll know more about TIF later on today.  And Macau gambling numbers for August will be out in a week or so.

 

 

Tiffany’s dazzling 1Q11

the results

TIF reported results for its 1Q11 (TIF’s fiscal year ends on January 31st of the following calendar year) before the New York market opened on Thursday, May 26th.  The company posted earnings of $.63 per share on revenues of $761 million.  This compares with per share profits of $.50 in the year-ago quarter on sales of $633.6 million.  The Wall Street consensus was $.57.

The report represents a 26% gain in earnings on a 20% advance in sales.  TIF’s performance for the quarter was considerably better than these strong comparisons suggest, however.  TIF posted a one-time tax benefit worth $.02 a share in last year’s first quarter; this year’s income statement had in it $.04 in non-recurring costs for moving TIF’s headquarters.  Ex these items, earnings were up 39% year on year.

In its conference call, TIF raised its full year guidance by $.10 a share, to $3.45-$3.55 (excluding $.19 in non-recurring moving charges).  A few days before the report, the company upped its quarterly dividend by 16%, from $.25 a share to $.29.

The stock made an odd little rally in the closing hour of trading on Wednesday.  It gained another 8.6% on Thursday.

the details

Yes, analysts had penciled in $.57 a share in earnings, based, I think, mostly on company guidance.  But I can’t imagine anyone was super-comfortable with the number.  The two big imponderables:

1.  How would Japan perform in the aftermath of the earthquake and tsunamis that occurred on March 11th north of Tokyo?  How many stores would be damaged by the resulting power shortages, and for how long?  Would TIF’s sales be hurt by an attitude of “self-restraint” (jishuku), i.e., postponement of consumption, in sympathy with earthquake victims?  If so, would that be contained to the Tokyo area or would it spread to the rest of the country?

When TIF reported 4Q10 results on March 21st, the company said it expected Japanese sales to be down by 15% year on year in 1Q11, reducing total company eps by about $.05.  …but who knew?   …and the company had already booked half a quarter of “normal” sales–would 2Q11 be worse?

2.  Would the US business slow?  After all, the prevailing sentiment on Wall Street has been that domestic unemployment is still high, job growth is lackluster and the overall economy is being hurt, possibly more seriously than expected, by high gasoline prices.  Maybe economic doldrums would have an adverse effect on TIF customers–not only aspirational buyers but the wealthy as well.

Japanese results were unexpectedly good

Instead of down 15%, Japanese sales (which accounted for 17% of total company sales in the quarter) were up by 7%.  This was due completely to a 10% gain of the yen vs. the dollar during the quarter.  Nevertheless, same store sales were only down by 3%.  The Osaka area was relatively unaffected.  Nationwide comps were +3% in February, -16% in March (implying to me that Tokyo-area sales fell by about a third during the month), +6% in April.  Jishuku may have also had some unusual effects:  sales in Guam and Hawaii, traditional Japanese tourist destinations, were up 30% year on year for the quarter.

TIF now thinks that, while Japan won’t be a source of strength this year, it won’t be a significant drag on the rest of the company, eitherSounds reasonable.

to me, the US was a bigger positive surprise

I know sales of luxury goods are going very well, and I expected that TIF’s sales in the Americas ( 48% of the company) would easily be up in double digits.  But the 19% gain TIF achieved was considerably higher than I expected. Comparable store sales at the flagship store in NYC were up 23%, year on year; comps in the rest of the US were up by 15%.  High-end jewelry did the best, as has been the case for some time.  However, there was even some strength in the silver jewelry that TIF’s less affluent clients favor.  US sales growth was “solid from coast to coast.”  Comps got better as the quarter progressed.

the rest of the world continues to show amazing gains

Sales were up by 37% year on year in Asia-Pacific (23% of TIF’s total) thanks mostly to Greater China.  Currency accounted for 6% of that, and new stores another 5%.  But comps were up 26%, after a 21% year on year gain in 2010.  Wow!

Sales in Europe (12%) were up 25%.  Currency gains made up 6% of the increase, and new stores 4%.  But comps were up 15%, due mostly to strength in continental Europe, after a 14% increase last year.

the stock

I haven’t changed my mind about TIF since I wrote about the stock after the 4Q11 earnings release.  I still think the company can earn $3.75 a share this year and $4.50 or so next.  Applying a 20x multiple to these figures gives us a $75 target based on 2011 eps and $90 on 2012.  Applying 25x gets correspondingly higher figures.

One thing is different, however.  TIF is no longer the sub-$60 stock it was in March.

TIF has exceptionally strong management, a wonderful brand name, and it’s also in the right place at the right time.  So I think it will continue to be an outperformer.  I’m happy to hold the stock.  I’ve trimmed my own position a bit, though, mostly because of its size.  I’d be an eager buyer on weakness.


TIF: 4Q10, Japan, fiscal 2011 earnings outlook

the results

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.

Japan

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.

the stock

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.

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.