Tiffany

Stock price: $46.9
Conclusion: Q1 numbers, even better than expected, confirm a strong momentum in sales and positive leverage on fixed costs. Tiffany belongs to our investment list. We stick tour valuation range target of $54-$55 per share.

Q1 10 results: Sales up 22% (+18% organic). Net earnings more than doubled to $0.50. Guidance 2010 upgraded to $2.55-$2.60 EPS from $2.45-$2.50 previously.

Looking for +26% EPS growth this year, helped by strong Q1
-A strong start helped by easy comps. Sales jumped 18% (-22% last year) with excellent growth in all regions except Japan (Asia +37%-America+20%-Europe+19%). Comparable store sales increased 10% worlwide, mid teens in America and in Europe and low twenties in Asia. Operating earnings almost doubled reflecting positive leverage on fixed costs.
-We forecast sales to increase 11.7% to $3026m for the year, EBIT to reach $548m (18% margin) and net earnings to achieve $323m (+22%). Our sales growth assumes $1.23/€ for the rest of the year. Tiffany’s store base will expand by 7% in 2010 to 236 stores, notably in Asia Pacific, in the US and in Europe. Gross margin could gain more than a full point while SG&A should increase by around 10%, notably advertising (+24%).

Medium term outlook points to double digit growth
-Pricing points is well balanced to get traffic in the stores
-Strong potential for retail expansion in the US but also in the Rest of the World (cf previous comment). Asia Pacific accounted for only 16% of sales last year, while Europe was still underpenetrated (11% of sales).
-Improved store productivity
-Right classic image well adapted to the current environment.

Tiffany trades at 18xP/E and 16xP/E based on our 2010 and 2011 estimates. Our DCF points to $55 per share, suggesting 17% potential return.

Long Tiffany at time of writing.

Tiffany

Stock price: $46.9
Conclusion: Today’s weakness offers a good entry point. We upgrade our valuation range to $54-$55 per share, based on our 2010 and 2011 estimates. We think that Tiffany is well positioned to achieve double digit growth in EPS, based on its products assortment, its network expansion combined with store productivity improvement.

2009 results: Sales down 5% to $2.71bn (-5% organic). Adjusted net earnings down 15% to $255m (EPS $2.04). Guidance 2010: 11% increase in sales and net earnings of $2.45-$2.50 per share.

Medium term double digit growth looks sustainable.
-Well balanced pricing points. Around 40% of sales consist of product sold at an average price between $200-$700 which helped during the downturn. However, higher pricing points (average price between $3000 and $3300) account for an even higher proportion of sales, which should help to drive sales in Asia Pacific.
-Retail network will further expand. Tiffany operated 220 stores at January 2010 (vs 206 stores in 2009). Management will open 17 new stores in 2010 (+8%). We think that Tiffany can increase its footprint in the US (from 91 stores to 150 stores), but also in the Rest of the world (129 stores). In Europe (27 stores), UK makes 50% of sales which leaves ample room for expansion in the Continent. In Asia Pacific (96 stores), despite a long term decline Japan still accounts for nearly 60% of sales, implying room for upside in Mainland China. We think store openings and increased gross square footage could boost sales by 5-6% pa.
-Smaller store formats combined with full assortment should help to improve productivity in the future. We think comparable store sales could increase by 4-6% pa in the next 3 years, following 8% decrease last year.
- Tiffany’s classic positioning in jewelry looks well adapted to the current environment. As to watches, we think it might take time to build a legitimity and it will be difficult to compete against well established brand such as Cartier. We are not counting on a quick success for watches in our forecasts.

Tiffany trades at 18.7x-16.3xP/E based on 2010 and 2011 estimates ($2.49-$2.85 EPS), implying 10% discount to peers. Our DCF based valuation points to $55 per share, suggesting 17% potential return.

Tiffany

Stock price: $43.9

Conclusion: Tiffany has been more resilient than we thought thanks to efficient cost control, tight cash management and improved forex. The stock trades at a premium to the sector, which seems justified by its long term growth potential. Despite low visibility in the US and in Japan, we raise our valuation range to $45-47 per share.

Sales down this year but outperforming peers in the jewelry industry
We expect Tiffany to end the year with sales down 9% like for like (-13% first 9months), implying stable revenues in Q4. Comparison base should help, as sales declined by 31% in the US in the last two months of 2008. In addition, sales in Asia Pacific and in Europe could grow double digit in Q4. Japan is the only region where Tiffany does not expect any recovery.
9% decline looks remarkable considering the geographic exposure of Tiffany ( 70% of sales in the US and in Japan) and the cyclicality of the jewelry segment. Why ? Tiffany positioning was probably more adapted to the downturn: 40% of sales consist of products sold at an average price between $200-$700. In addition, the group is growing double digit in Asia Pacific and in Europe where it just started to develop a network.

EBIT expected to decrease by 18%, could have been worse…
Gross margin could decrease by slightly more than 100bp and EBIT margin erode by 200bp to 15% of sales.Tiffany managed to reduce Selling, General and Administrative expenses by 11% in the first nine months, which again looks great considering that only one fifth of SGA is variable. In addition, marketing spending should have fallen double digit, helped by lower media rates.
Adjusted net earnings should decrease by 22%, while reported earnings could increase by 12% due to the impact of one off last year combined with a tax benefit this year.
Cash earnings look better thanks to sharply reduced Capex (€85m) and lower trade account and inventories. Net debt was down to $380m versus $660m a year ago.

Looking for +6+7% growth in sales and low double digit growth in earnings next year.
Notwithstanding reduced visibility in the US, we expect Tiffany to resume growth next year. US retailers are starting to see more stability compared to six months ago in areas such as jewelry or accessories (cf Saks statements) which is encouraging. In addition, Asia Pacific and Europe offer double digit growth prospects owing to the expansion of the store network. Increased square foot could add a couple of points combined with +2% positive forex impact.
Given the high proportion of fixed costs, we expect Tiffany to benefit from positive leverage and EBIT to increase by 12%.

Tiffany trades at 20x P/E based on 2010 forecasts, which is not cheap but justified by its long term growth potential. The group offers long term double digit growth prospects driven by the international expansion of its network in Asia (less than 50 stores excluding Japan) and in Europe (25 stores, half in the UK) coupled with margin enhancement (+500bp upside potential) thanks to increased store productivity and SGA leverage. Our DCF suggests a valuation range between $45-$47 per share.

Tiffany

Stock Price : $27,5
Conclusion: Low visibility coupled with high P/E lead to further downside risk.

Q1 fiscal 2010 results: Sales down 22% to $523m, down 18% like for like. Net earnings down 62% to $24,3m. Management confirmed guidance of 11% decline in sales and net earnings of $1.50-1.60 per share.

Tiffany numbers confirm once again that hard luxury players suffer more than soft players in today’s environment.
We feel that the risk exists to see Tiffany revising down guidance over the course of the year.
First, sales could decline at a faster rate of 13-14%, assuming 10% like for like decrease for the rest of the year, which seems realistic considering the adverse economic environment. In addition, forex impact could remain negative based on current spot rates.
As to margins, only one fifth of SGA is variable which leaves little room for manoeuvre. Nevertheless, the group should benefit from the savings attached to staff reductions and other cost related initiatives. We estimate the EBIT margin at around 13.2% in fiscal 2010 vs 17% pre exceptionals last year.
Interest expenses will increase more than 50% due to higher debt.
Consequently, EPS could be closer to $1.45, lower than the $1.50-1.60 range confirmed by management.

The stock trades at 19.4xP/E and 8.8x EV/EBITDA implying a 15% premium to the sector, which we feel is not justified by Tiffany’s earnings outlook.