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Luxury On Sale: A Look at Specialty Retailer Tiffany & Co.
Tiffany & Co. (TIF), founded way back in 1837 by Charles Lewis Tiffany and headquartered in New York City, is a specialty retailer of fine jewelry (about 90% of sales), as well as china, crystal, fragrances, stationary, sterling silverware, timepieces, and accessories. At the end of 2011, the company, whose iconic blue box and blue bag are recognized around the world, had 247 retail locations, including 87 in the U.S., 55 in Japan, 58 in the broader Asia/Pacific region, 32 in Europe, and 15 in Canada and Latin America. It also engages in a fair amount of direct selling through Internet, catalog, and business gift operations.
The company has gotten off to a surprisingly slow start in fiscal 2012 (ends January 31, 2013), much to the chagrin of investors. (The shares, down more than 15% since the beginning of January, have badly lagged the benchmark Standard & Poor’s 500 Index this year.) In fact, share earnings declined slightly during the April interim, to $0.64, missing Wall Street’s consensus estimate by a nickel and our ambitious call by $0.12, due to higher product costs (that hurt the gross margin) and a deleveraging of SG&A (mostly labor, occupancy, and marketing) expenses. Additionally, same-store sales (up a lower-than-expected 4% globally), a key metric for retailers since it does not factor in gains from unit development, were hampered by lingering weakness in Europe and the Americas.
These factors offset strong comp trends in the booming Asia/Pacific region (excluding Japan), where the appetite for diamond engagement rings is growing, and where young, “aspirational” shoppers continue to seek out the Tiffany label. And they overshadowed the inroads that the company is making in the huge Chinese market. Even so, Tiffany’s long-range prospects are excellent, in our view. And, given the recent retreat in the stock price, we think that now may be a perfect time for patient investors to build positions in this high-profile retail name.
While the next couple of quarters may be choppy, healthy double-digit share-net growth ought to resume by the end of fiscal 2012, as precious metal and diamond costs stabilize and same-store sales comparisons get markedly easier. The company should also be able to gain market share on its home turf, thanks to an ongoing consolidation wave in the U.S. jewelry sector that has seen many financially shaky regional chains and mom-and-pop shops fall by the wayside. And comps trends in challenging markets on both sides of the Atlantic will probably benefit from the rollout of more affordable products, from silver goods to new branded accessories like watches and leather handbags.
Meanwhile, aside from better same-store sales leverage and a slightly more favorable cost environment, margins will likely be bolstered over time by productivity advances and strategic price hikes. (Tiffany, which has historically shied away from discounting and promotional activities that could tarnish its luxury brand, maintains much greater pricing power than most retailers, especially in higher-end merchandise categories.) A mix shift toward more profitable international sales should also be a major plus.
Notably, the jewelry chain, with roughly 150 units located outside of North America, remains rather underpenetrated overseas relative to other large domestic-based specialty retailers. Consequently, we expect square-footage growth, which has generally been on the back burner since the global financial crisis and deep recession of 2008/2009, to accelerate as comps improve and Tiffany seizes upon opportunities to expand its footprint in Europe and Asia. China, in particular, should continue to get a lot of new stores, as the company looks to increase its exposure to that important market.
Expansion opportunities do not appear as plentiful at home, but, despite some fears on Wall Street to the contrary, the retailer still seems far from its saturation point. And a scaled-down store prototype, called “Tiffany & Co. Collections”, will probably help the company to make strides in affluent parts of rural and suburban America. Until now, Tiffany has mainly targeted large metropolitan areas, with its legendary New York City flagship location, the focal point for advertising and public relations efforts, accounting for around 8% of total worldwide sales.
Looking at the company’s finances, a chore no prudent investor should overlook, there is plenty to like here. Indeed, Tiffany, with a Financial Strength rating of A, has a first-rate balance sheet, including more than $340 million in cash assets and a fairly low debt-to-capital ratio of 18%. What’s more, the company generates a lot of free cash flow. This supports a modest dividend payout (the yield typically hovers near 2%), and should prompt the board of directors to authorize further stock buybacks as we head past mid-decade.
All in all, while results have been on the lackluster side of late, we recommend these shares as a long-term play, and believe that investors of all stripes, even the more conservative ones, would do well to take advantage of the current entry point. Tiffany shares are attractively valued by historical standards, with the issue trading at approximately 15 times - slightly more than the median P/E for the broader equity market – our revised earnings call for fiscal 2012. Total-return potential out to the 2015-2017 time frame also looks good following the recent stock pullback.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.