Shares of Tiffany (TIF) spiked up in Tuesday's trading session following the release of its first quarter results for 2013.
The company reported a solid set of results on the back of the promotions surrounding its 175th anniversary and the successful debut of The Great Gatsby movie.
After the strong results, I remain cautious. Tiffany has identified some headwinds for the remainder of the year and the current valuation is a bit rich after shares have already risen almost 40% so far in 2013.
First Quarter Results
Tiffany generated first quarter revenues of $895.4 million, up 9% on the year before. In constant currencies sales rose by a more impressive 13%, driven by a 8% increase in comparable store sales. Revenues came in far ahead of consensus estimates of $855.1 million.
Net earnings rose by 3% to $83.6 million, as earnings per share increased a penny to $0.65 per share. The company recorded a $9 million charge for restructuring and occupancy related costs, impacting earnings by $0.05 per share.
Adjusted earnings, which exclude the occupancy related charges, came in at $0.70 per share, exceeding consensus estimates of $0.52 per share.
CEO and Chairman Michael Kowalski commented on the developments during the quarter, "We are pleased with this start to the year. Worldwide, first quarter sales exceeded our expectations, enabling us to improve our sales leverage on fixed expenses and achieve earnings growth. In addition, we celebrated Tiffany 175th anniversary with our very successful Blue Book event and promotional activities surrounding the debut of the film The Great Gatsby, for which we designed the jewelry."
Looking Into The Results
Tiffany experienced healthy revenue growth across the globe. US sales rose by 6% to $408 million, driven by a solid 3% growth in comparable store sales.
Asian revenues rose by 15% to $223 million thanks to a 9% increase in comparable store sales, driven by a solid performance in China and Japan. European sales rose by 6% to $93 million. In constant currencies revenues increased by 8%, driven by 6% increase in comparable sales.
Despite the solid revenue growth, margins did come under a bit of pressure. Gross margins fell by 110 basis points to 56.2% of total revenues as a result of a shift in the product mix towards higher priced products which typically carry lower margins. Despite the $9 million in charges, SG&A expenses fell by 40 basis points to 40.4% of total revenues.
Based on the first quarter results, Tiffany reiterates its full year earnings outlook of $3.43-$3.53 per diluted share. This implies that full year earnings per share are expected to increase between 5.5% and 8.6% on the year. The guidance is exactly in line with consensus estimates of earnings of $3.48 per share.
The earnings guidance is based on some key assumptions. Tiffany assumes global sales to increase by a mid-single digit percentage in US dollars. It furthermore is based on the assumption of 14 new store openings, half of which will be opened in the Asia-Pacific region.
Gross margins are expected to remain under continued pressure. Margin pressure should be offset by a lower selling, general & administrative ratio as a result of positive operating leverage.
Tiffany ended its first quarter with $464.9 million in cash and equivalents. The company operates with $974.1 million in short and long term debt, for a net debt position of just over $500 million.
For the full year of 2012, Tiffany generated annual revenues of $3.79 billion, up 4.1% on the year before. Despite the revenue growth, earnings fell by 5.2% to $416.2 million over the past year.
Factoring in gains of about 4% in Tuesday's trading session, the market values Tiffany at about $10.1 billion. This values the company at 2.7 times annual revenues and 24 times annual earnings.
Tiffany recently hiked its quarterly dividend by 6% to $0.34 per share, for an annual dividend yield of 1.7%.
Some Historical Perspective
The recovery of the US economy and global consumer spending has pushed shares upwards in recent times. Shares of the luxury retailer traded in their mid-fifties back in 2007, just before the financial crisis broke out. Shares fell all the way to $20 per share in 2009 to peak in the low eighties during the summer of 2011.
After a consolidation phase, and a pullback to level in the mid-fifties in the summer of 2012, shares have found their way up again. Shares steadily rose to approach levels of $80 at the moment.
Between its fiscal 2009 and 2012, Tiffany has increased its annual revenues by a cumulative 40% to $3.79 billion over the past year. Net earnings advanced by 57% to $416 million in the meantime.
Investors are positively surprised with the solid first quarter results. While Tiffany reported stagnant comparable sales for the final holiday quarter of 2012, comparable store sales accelerated towards 8% in the first quarter. At the same time, adjusted earnings rose by 10% over the past quarter, while Tiffany originally guided for a 15-20% drop in earnings.
Positive results were driven across all regions, and were supported by a recovery in China as well as strong results in Japan. The flagship store on 5th Avenue saw a strong quarter as well. The single store made up an incredible 8% of total sales in the first quarter.
Yet management is warning investors to not read too much into the results. The first quarter is traditionally less important. Last year it made up 21% of total full year revenues and earnings.
Furthermore the drop in the Yen is impacting Japanese sales going forwards, while it sees some weakness in America as well. Poor selling results of less expensive jewelry like silver, which carries higher margins, are impacting results as well. Tiffany expects silver sales growth to lag overall sales growth for the remainder of the year, putting pressure on gross margins.
Still the underlying trends remain supportive. The company is on track to open 4 new stores in China this year, bringing the total to 26. A 20% increase in Japanese store sales was very solid as well, although most gains were "masked" by an 18% depreciation of the Yen.
After the recent run-up shares are valued at a rich 22-23 times 2013's expected annual earnings. Another cautious sign is that the company decided to raise its dividend, to boost shareholder payments, but it didn't buy back any shares during the quarter. This is a bit surprising and could indicate that the company thinks shares are fairly or richly valued, given that Tiffany has $164 million remaining under its current authorization.
Based on the current valuation, I remain on the sidelines.