Tiffany's (TIF) reports its fiscal third quarter on Thursday, November 29th before the opening bell, with analyst consensus looking for $0.63 in earnings per share, on $857 million in revenues for expected year-over-year (y/y) growth in revenues of 4%, but a decline in earnings per share of 10%.
Since peaking at just over $80 per share in mid-2011, TIF has gotten beaten up sufficiently as comps have slowed, gross margin has compressed and earnings growth has lagged, thanks in part due to the global slowdown, and thanks in part to margin pressure from diamond costs.
|Quarter||y/y rev gro||y/y op inc gro||y/y eps gro|
|Oct '12 q3||4% (est)||-10% (est)|
|Jul '12 q2||2%||10%||-16%|
|Apr '12 q1||8%||-1%||-4%|
|Jan '12 q4||8%||3%||-3%|
|Oct '11 q3||21%||50%||52%|
|Jul '11 q2||30%||24%||56%|
|Apr '11 q1||20%||29%||34%|
|Jan '11 q4||12%||24%||31%|
* Source: Internal spreadsheet, earnings reports and SEC filings
The stock peaked near $85 in late July 2011, which coincides almost perfectly with the y/y peak in revenues and earnings.
Part of TIF's problem the last 18 months has been gross margin compression, mainly from higher diamond and silver costs, as well as the impact of the Japan tsunami on both on tourism in Japan and the U.S. (the European debt crisis didn't help, either), which sharply reduced quarterly comps.
TIF's gross margin also peaked at 59% in the July '11 quarter, and has slid by 3% since then to 56.3% as of the July '12 quarter.
Here is a quick table on the comparison between Tiffany's quarterly "comps" and gross margins:
|Quarter||Gross Mgn||Comps (cc)|
|Oct '12 q3||55.6% (est)|
|Jul '12 q2||56.3%||-1%|
|Apr '12 q1||57.3%||-4%|
|Jan '12 q4||60.4%||5%|
|Oct '11 q3||57.9%||16%|
|Jul '11 q2||59%||22%|
|Apr '11 q1||58.3%||15%|
|Jan '11 q4||60.9%|
* Source: Internal spreadsheet and a SterneAgee research report
* cc - Constant Currency Basis
However, the metric that gives me the most pause is the cash-flow data, which has gradually slowed and left TIF with a current cash-flow valuation that can only be described as "nose-bleed" at best. Here is a table on the cash-flow data, and the trends are unmistakable:
|Quarter||TTM CFO||y/y gro||TTM capex||y/y gro||TTM FCF|
|July '12 q2||$47 ml||-81%||$217||18%||-$169|
|Apr '12 q1||$37 ml||-87%||$224||44%||-$186|
|Jan '12 q4||$211 ml||-30%||$239||89%||-$29|
|Oct '11 q3||$233 ml||-41%||$211||85%||$21|
|Jul '11 q2||$255 ml||-48%||$183||81%||$72|
|Apr '11 q1||$276 ml||-53%||$155||76%||$122|
|Jan '11 q4||$299 ml||-57%||$127||68%||$172|
|Oct '11 q3||$396 ml||$114||$282|
|Jul '11 q2||$493 ml||$101||$392|
|Apr '11 q1||$590 ml||$88||$502 ml|
|Jan '10 q4||$687 ml||$75 ml||$612 ml|
* Source: SEC filings and internal spreadsheet
* TTM CFO - trailing twelve month, cash from operations
* TTM capex - trailing twelve month capital expenditures
* TTM FCF - trailing twelve month free-cash-flow
Readers can quickly see how cash flow fell off a cliff mid to late 2011, and is barely positive today. What compounded TIF's problems is that "capex" continued to ramp until mid 2011, before management had to pull back on it to start conserving cash-flow.
Last quarter, TIF announced it was suspending its stock repurchase plan temporarily, which makes sense given that the company has not been "free-cash-flow positive" on a TTM basis since late 2010, or almost two years.
At $62 per share, TIF is trading at 17(x) the $3.60 estimate for fiscal 2103 (ends Jan '13) and 15(x) the fiscal 2014 estimate of $41.0 for expected earnings growth this year and next of 0% and 14%, although the 2014 consensus estimate is still being trimmed.
Surprisingly, despite low interest rates, but possibly to protect the balance sheet and credit rating, TIF has not increased its long-term debt issuance to fund capex. This could be management's way of saying they expect cash-flow growth to resume in calendar 2013.
Also, the price to cash-flow metric of 160(x) ($7.5 billion market cap divided by the TTM cash-flow of $47ml = 160) gives me more than a little pause when looking at the stock.
TIF has to pursue one of two courses of action here: either cash-flow generation has to resume to fund its capex, or it has to reduce capex consistent with its level of cash flow. It could issue debt here (as a third course of action), but my guess is the ratings agencies are eyeballing the company (not in a good way) and could have already told TIF that a debt issue might result in a possible downgrade of the credit rating given the dwindling cash-flow.
I think the next two quarters are crucial for TIF: the company is a world-class brand, and it needs a good 2012 holiday season, but we will need to see some evidence of better cash flow before we get interested.
The fact is -- like a lot of world class, iconic brands -- the stock may never get truly cheap, and if it does, it might only happen for a short period of time.
We continue to wait and see if we can get TIF under $50 -- my guess is we won't, but the valuation isn't compelling enough here to buy in this mid-range valuation.
On the conference call Thursday morning:
* Listen for Q4 '13 comp guidance and management's discussion about the holiday season;
* Listen for gross margin guidance;
* See if management says anything about cash flow;
* Also, there is a lingering litigation issue with Swatch, which can always be unpredictable. I don't think it has played out completely yet.