Tiffany Sparkles for Patient Investors - Barron's

Tiffany & Co. (TIF) has seen its shares drop 59% this year as sales and profits fell victim to the global economic downturn, but patient investors have plenty to look forward to. Trading at a record low valuation, Barron's Johanna Bennett thinks the jeweler's shares can regain their value in a few years.

Tiffany's stock is trading near a record low at 8.7 times forward earnings. A bleak 2009 with falling profits is already reflected in the stock price, and Tiffany expects profits to start recovering in 2010, or possibly late 2009. In the meantime, the company has scaled back plans for new stores, and plans to cut costs and jobs. The company could also benefit from the recession, gaining market share as small boutiques and family jewelry shops go out of business.

The third-largest player in the $35B U.S. jewelry market, and with 40% of its sales from diamond jewelry, Tiffany has "always leaned towards the high-end of the market which provided good insulation from the twists and turns of the economy," says analyst George Van Horn. At the moment, that insulation is looking a bit thin. Demand for luxury goods has fallen in both the developed and emerging economies, same-store sales were down 7% last quarter and could fall as much as 25%-35% this quarter in the U.S. As such, Tiffany has slashed its profit projection for the year to $2.30-$2.50/share, down from $2.82-$2.92/share.

Still, Van Horn believes that when markets begin to turn around, "one of the first to benefit will be the high end of the industry, which Tiffany dominates." According to Thomson Reuters, Tiffany's FY 2010 profits could climb 20% to $2.68/share, and in the meantime its 3.4% dividend yield beats both the S&P 500 and the 10-year Treasury.

• The shares are attractive right now, but you must be patient," says Larry Coats, CEO of Oak Value Capital Management. "This is a good business with good management and the stock now trades at bargain valuations. That is what people should look for right now.

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• Tiffany & Co. (TIF): Q3 EPS of $0.35 beats by $0.10. Revenue of $618M (-1.4%) vs. $644M. (PR)
• Seeking Alpha editor Judy Weil makes the case for why discount jewelers might recover first.

Comments

[Kingsley An...:]

How long does one have to wait? You can say the same thing about oil, financials. Parking money in something with a long-term possibility of gain is speculative.

2008 Dec 07 06:38 AM

[ChipSeal:]

Wow! They "slashed" earnings projections by 20%!

I think management is way optimistic about the depth and breadth of this still looming recession, and as such they will be caught out with high inventory, high debt and high costs.

"In terms of share repurchases, we were active early in the third quarter and spent $90 million to repurchase 2.3 million shares at what we thought was the very attractive average cost of $39.61 per share." (From the conference call as transcribed at SeekingAlpha.com) Aren't they pleased about that!

$100 million of long term debt is due soon, but management isn't worried- "...we were evaluating opportunities to issue new debt, up to $300 million in order to repay $100 million of senior notes coming due within the next 12 months as well as to fund potential share repurchases."

No luck there so: "you should note that on our $450 million revolving credit facility we had $339 million outstanding at October 31 so there was still $111 million available." Provided of coarse that all covenants can be maintained!

Luxury retail is the most vulnerable sector in the hard times ahead. Management's attitude seems to be "we are special, we are immune from market forces". From the conference call:

"In closing, the 2008 holiday season is upon us and many customers will undoubtedly be seeking Tiffany's extraordinary products. Tiffany is a trusted American institution. We offer timeless design and craftsmanship that lasts. The Tiffany & Co. brand is worthy for celebrating important personal milestones, incorporating the established values of romance, love and honor."

Come spring, Tiffany's will be a better buy than now.

2008 Dec 07 10:51 AM

[Jon Kurd:]

this is way too optimistic...the free money has vanished for a very long time. TIF had -30 comps for November !!

not to forget the debt on the books.

This one is a value trap !

2008 Dec 07 04:59 PM

[H - NYC:]

I was in Tiffanys this weekend. The store was half empty. The people inside were mainly tourist and they were just looking. I also went to Target in Jersey (packed). Tiffany is last on my long list!!!

2008 Dec 08 07:29 AM

[SG2:]

TIF recovery in 2010???? Ok, if you think your bonus will be the same in 2010 as it was in 2007 or you will even have a job since the millions of unemployed people searching for jobs are finding it nearly impossible to find a job after 6 to 12 months of searching and let alone a job that will pay a salary even close to what they were making in 2008! Not to be a grinch but the last four years have been a complete bubble the like I hope to never see again and we are coming back to reality now and a Tiffany's recovery in 2014 would have been much more believable unless all the sudden home prices spike through the roof and people make the same mistake of leveraging up to their eye balls and buy stuff they don't need and can't afford again! Hopefully Barrons is right but this is likely a fundamental change in consumer spending habits that should have occured a long time ago and will take another huge economic bubble to get Tiffany's earnings back up to the level of 2007 or even 2008.

To further my point, the SpendingPulse research went on to say: "Luxury sales, which include sales at high-end department stores, leather goods boutiques, pricier jewelry stores and restaurants, fell 34.5 percent, SpendingPulse said. Excluding jewelry, sales fell 21.2 percent." money.cnn.com/2008/12/... So... it appears that luxury jewelry sales may have fallen as much as 40% to 50% over the holidays. It will be interesting to see how sales perform internationally for Tiffany's but given we are in a global recession and I strongly believe a fundamental change in spending and valuations has occured I do not see this company performing as well in 2009 or 2010. Brian Tunick, managing director of specialty retail for JP Morgan was asked which retail stocks he would short for 2009, Tunick noted Men's Warehouse, Tiffany and Abercrombie & Fitch. www.thestreet.com/stor... I think he is right on and would buy Tiffany at $15/share but wouldn't touch it with a 10 foot pole at $22/share. People are no longer using their homes as credit cards and nobody is safe at any income level from this recession as job layoffs are forecasted to continue at historically high levels in 2009. Most companies have already finished their 2009 business and staffing plans and the 2008 economic bad news will filter through into even more corporate layoffs in 2009 not to mention all of the retail employees on the chopping block once the January last ditch sales and returns season is over.

Oh and as for TIF picking up market share in this environment... TIF is very much a niche player even within its own market segmant and I think the pawn shops will pick up way more market share in these times as people try to get cash by unloading their Tiffany's jewelry on Ebay and anywhere else they can get rid of their overpriced Tiffany's jewelry.

2008 Dec 27 07:11 PM