Tag Archives: Tiffany

TIF: 4Q10, Japan, fiscal 2011 earnings outlook

March 22, 2011 By in China, Current Market Thoughts, earnings conference calls, Hong Kong, Industry Analysis, Japanese development, Luxury goods, Retail, Stock ideas Tags: , , , , , , , Leave a comment

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

November 26, 2010 By in Current Market Thoughts, earnings conference calls, Industry Analysis, Luxury goods, Retail, Shaping a portfolio for 2011, Stock ideas Tags: , , , , , , , Leave a comment

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.


Tiffany: a very good fiscal 2Q2010

August 31, 2010 By in earnings conference calls, Industry Analysis, Luxury goods, Retail, Stock ideas Tags: , , , , , , , Leave a comment

TIF’s 2Q10

TIF reported earnings for its fiscal second quarter (ended July 31st) before the market opened last Friday.  Ex unusual items, earnings per share were up 45% year on year.  Gross margins were up by a considerable amount. European and Asia ex Japan operations boomed.  Gold and platinum jewelry were up, (less expensive) silver items were flat.

Watches, the most highly cyclical of jewelry purchases, were up 30% year on year during the quarter.

Business accelerated in August.

Two flies in the ointment.  Sales in the US were slightly lower than TIF expected, due to softness earlier in the quarter and on items below $500 in price.  This may have been a question of tough comparisons, as TIF introduced its popular line of key pendants last year.  Or it could be evidence that  although the economy is slowly returning to normal for most TIF customers, things are not getting better for the 10% or so of the workforce that is still unemployed.  (My money is on the latter, but then regular readers will have figured out that I think there’s a structural mismatch between the workers our educational system is churning out and the employees 21st century companies need.  As an investor, though, I have to constantly remind myself not to force this interpretation on data that don’t support it.)

TIF also said that 3Q earnings growth would likely be slowed by unusually large marketing expense in preparation for the holidays, a notable portion of that in support of its burgeoning Chinese business.

TIF maintained its second half earnings guidance, but lifted its full-year expectations to reflect the better than forecast first half.

The stock fell 6% on the news.   I only look at TIF out of the corner of my eye, so don’t ask me why Wall Street reacted so badly.

the details

2Q regional sales comparisons

worldwide   +9%, +6% comp stores

Americas     +8%,  +6%

Pacific ex Japan     +21%, +10%

Japan     +4%, -1%

Europe     +14%, +11%

the Americas

Sales momentum built during the quarter.  Sales gains came predominantly from increases in transaction size.  All price points were strong, except for the lowest–items under $500.

Canada, Mexico and Brazil all had healthy sales increases.  In the US, softness geographically was only evident in southern California, Arizona and Las Vegas (all areas of rampant real estate speculation during the housing bubble).

More than half the growth came from foreign tourists, who account for about 15% of overall US sales.

Europe

Performance for this relatively late-blooming area for TIF were even better than they seem.  On a constant currency basis (factoring out the 10% fall in the € and 7% decline of the £ against the $) European revenues advanced 25% overall and 21% on a comparable store basis.

Most sales are to locals, although TIF did see an increase in purchases from Chinese tourists.

Pacific ex Japan

As usual, greater China and Korea boomed, with sales up over 20% (even though 2009 was an up year for the region).   Australia and Taiwan were relatively flat.

Japan

Once the centerpiece of TIF’s international expansion, Japan remains a tough place to do business.

my thoughts

I don’t know the stock well enough any more to have a strong opinion.  Admittedly, I’ve been looking at TIF more to get a sense of what high-end retail around the world is doing than as a potential investment.

Two things have caught my eye, however:

–TIF has been trading at a market multiple for the past several years.  I think it deserves better than that.

–the company has raised the dividend twice so far this year.  The stock is now yielding 2.4%.

To me, TIF looks attractive. I’ll have to do some research.

Tiffany’s fourth quarter 2009 results

March 24, 2010 By in Current Market Thoughts, emerging markets, Industry Analysis, Luxury goods, Retail Tags: , , , , , , 2 Comments

I’ve just finishing listening to the TIF fourth quarter 2009 conference call.  There are a number of reasons for paying particular attention to what this company has to say, apart from possible interest in it as an investment:

–TIF has been a brilliantly successful marketer over many years, so it clearly has its finger on the pulse of its customers,

–TIF appeals to a broad array of consumers and sells the ultimate discretionary item, jewelry, so it is a good bellwether for consumer sentiment, and

–it’s an increasingly global company, with significant operations in the Pacific (35% of sales) and Europe (12%).

Here’s what the company had to say:

about the economy

There’s no “new frugality” or “new normal.” Consumers are behaving in this economic downturn the same way they have in the past.  They postpone purchases until they feel their jobs are safe and their personal balance sheets have stabilized.  Then it’s back to the stores!  This is what’s happening now.

Same store sales improved significantly around the world, ex Japan, in 4Q. Strength is across all price points.  The gains are almost completely due to increase in the number of transactions, not to customers buying higher-priced items.  In the US at least, the traffic in the stores is not up, either.  Rather, people who were just window-shopping in prior quarters are buying now.  Also,

1Q2010 sales so far are running ahead of the “high teens” year on year sales gains TIF expected. The company guidance is for earnings of $.245-$2.50 a share for 2010, up from $2.09 in 2009 and $2.39 in 2008 (before the worst of the financial crisis hit sales).

The New York region was a bit stronger than the norm for the US.  But of the five best-performing domestic branch stores, three were in (beleagered) California:  Orange County, San Francisco and Beverley Hills.

the economy, sort of

TIF took over $100 million out of its cost base in 2009 by laying off 10% of its staff, saving $60 million annually, and reducing marketing expense by $44 million.  The marketing spending is beginning to increase, and over time TIF plans to add back some of the salespeople it eliminated.

Interestingly, however–and I think indicative of the experience of business as a whole in the US–taking a hard look at itself during the downturn, TIF discovered that it had more “fat” in its operations than it realized.  Some of those lost jobs are simply not going to return.

TIF’s expansion plans

The company’s sales per square foot break out regionally as follows:

——————————–2009————-2008

Americas (53% of sales)         $1900                 $2200

Japan (19%)                               $3300                $3400

Pacific, ex Japan (16%)           $3800               $3800

Europe (12%)                               $2700              $2500

Given these numbers, it should come as no surprise that TIF will focus on the Pacific ex Japan for its expansion this year.  The company plans to open eight new stores there.

There will be no expansion in Japan, a country whose decades-long infatuation with Western luxury goods seems to have come to an end.  Instead, operations there seem to me to be destined to become a cash cow that will fund growth elsewhere.

The situation in the US, which showed by far the largest drop in sales per square foot, is interesting.  TIF has been experimenting with half-size (2500 sq ft instead of its traditional 5000), limited range stores recently–indicating it believes the domestic market for full-size stores is very close to saturated.  It has come to the conclusion, however, that its best choice is to build a hybrid of the two–locations with the “look and feel” of a traditional Tiffany store, but with only 3750 sq ft of space.  TIF will open five of them this year.

Europe, where sales are booming for TIF, will get three new locations.   It’s hard for me to tell whether this success is coming in spite of slow economic activity there or because of it.  European analysts tend to lump TIF together with COH as “affordable” (read: not real) luxury.  And some European luxury purists tend to turn up their noses at non-local brand names.  Still, it’s well worth trying to figure out how big this market can potentially be for TIF.

TIF as a stock

This is one I’m not going to be much help on. TIF has been a very strong relative performer since the market turned up a year ago.  Yet it’s trading at just under 20x earnings guidance for 2010, which is a low price earnings multiple for it historically.  I suspect it’s going to continue to do well vs. the S&P 500 during the year ahead.

The problem for me is that TIF–which I owned for many years–has performed much better than I had expected over the past twelve months.  That’s annoying.  Worse, I find it hard to jump on the bandwagon now.  That’s probably good for you if you own the stock.  In situations like this, my change of heart and subsequent purchase without exception mark the relative performance peak.  So maybe I am doing something useful for TIF just by sitting on my hands.