Stock Outlook: Tiffany & Company

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 (TIF) 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.