Tiffany Earnings Preview: Margins, Cash-Flow Remain Real Issues

| About: Tiffany & (TIF)

Tiffany (NYSE:TIF) reports its fiscal 4th quarter, before the bell on Friday, March 22nd, 2013, with analyst consensus looking for $1.25 billion in revenues and $1.35 in earnings per share (EPS) for year-over-year (y/y) growth of 5% and -3%, respectively.

Fiscal Q3 '12, released in late 2012, showed TIF disappointing again and issuing soft guidance. Revenues rose 4% but EPS fell 30% as gross margin accounted for $0.08 of the $0.14 earnings miss.

TIF has struggled for the last year with lower margins thanks to lower silver volumes and Canaccord Genuity noted in its March 8th, 2013 report that TIF's latest FY '12 guidance was 19% below its initial read.

Earnings per share has missed the last 4 quarters, inventory has grown faster than sales the last 5 quarters, and cash-flow has been horrid, but since the stock peaked at over $83 in mid-2011 and then fell to close to $50 by mid-2012, the recent rally from $50 to $70 has occurred without any change in fundamentals - except Japan.

Perhaps it is no coincidence that Japan and the yen bottomed and peaked in the summer of 2012, and Shinzo Abe's policies have now sent the Nikkei sharply higher and the yen sharply lower.

If Japan can comp mid-single-digits in calendar 2013 and Europe can continue its turnaround, maybe there is some justification for TIF to trade near $70 per share, but right now the valuation is stretched.

Y/y revenue and EPS growth, with margins

quarter end

y/y rev


y/y EPS






Net inc


1/13 q4 (est) 5% -3% 57% (NYSE:E) 23% 14%
10/12 q3 4% -30% 54.4% 14% 7%
7/12 q2 2% -16% 56.3% 17% 10%
4/12 q1 8% -4% 57.3% 16% 10%
1/12 q4 8% -3% 60.4% 24% 15%
10/11 q3 21% 52% 57.9% 18% 11%
7/11 q2 30% 56% 59% 16% 10%
4/11 q1 20% 34% 58.3% 18% 11%
1/11 q4 12% 31% 60.9% 25% 16%

* source: internal spreadsheet, 10-Q's, K's and earnings reports

As the reader can quickly see, even in the last 12 months, growth has slowed for TIF, although the stock has rallied nicely since July '12.

Since we are big cash-flow investors, meaning we base a lot of our decisions off the cash-flow valuation of a particular stock, it is that metric that looks particularly horrid for TIF:

TIF's trailing twelve month (TTM) cash-flow and free-cash-flow

quarter-end TTM cash-flow



TTM free-cash



10/12 q3 $74 -68% ($143) -771%
7/12 q2 $47 -81% ($169) -337%
4/12 q1 $37 -87% ($186) -253%
1/12 q4 $211 -30% ($29) -117%
10/11 q3 $233 -41% $21 -92%
7/11 q2 $255 -48% $72 -82%
4/11 q1 $277 -43% $122 -76%
1/11 q4 $299 -57% $172 -72%
10/10 q3 $396 $282
7/10 q2 $493 $392
4/10 q1 $590 $502
1/10 q4 $687 $612

*Source: internal spreadsheet, 10-Q's and 10-K's, with some cash-flow data annualized or spread over 4 quarters

With current fiscal '12 and '13 EPS estimates of $3.21 and $3.50 for this year and next, assuming -9% EPS growth with this last quarter of the year, and then +9% this year, TIF's current multiple of 21(x) and 19(x) EPS seems pretty lofty, and close to 2(x) the expected growth rate for next year.

Our internal model values TIF at $72, while Morningstar puts TIF's fair value at $59, which at the current price of $68, means TIF is pretty-fully valued.

What is puzzling to me is what is holding the stock aloft ? The cash-flow alone, paints a concerning picture, and analysts such as the Canaccord Genuity numbers-cruncher, downgraded TIF to sell on March 8th, and yet the stock hasn't cracked.

We are waiting for the appropriate level to buy the stock for clients and for us that is closer to $50 per share, preferably below that price too.

On Friday morning, March 22nd, when TIF reports, either the company has to put up a healthy upside surprise in both EPS and cash-flow, preferably driven by margins, or I think the stock has to come in substantially to make it a better risk-reward for readers.

The recovery in Japan, which is between 15% - 20% of TIF's revenues and between 23% - 29% of TIF's operating income, MIGHT be one such catalyst for the stock. A robust economic recovery in Japan would definitely help, but a recovery in North America's margins would help more.

Another tremendous brand trading at a premium valuation. Be patient, and wait for your price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.