Tiffany: Not That Appealing Despite A Great Start To The Year

May.22.14 | About: Tiffany & (TIF)


Tiffany blows the investment community away with a strong set of first quarter sales and earnings.

Strength in sales is seen across the globe.

Despite upbeat outlook, shares already reflect a great deal of good news.

Tiffany (NYSE:TIF) reported a very strong set of first-quarter results on Wednesday, triggering great enthusiasm among investors. Strong domestic and international sales and a hike of full-year earnings guidance pushed shares to fresh all-time highs.

Despite the strong operational performance, I don't believe that the current valuation is particularly compelling, prompting me to stay on the sidelines.

First Quarter Highlights

Tiffany reported first-quarter revenues of $1.01 billion, which is up 13% compared to last year. Reported earnings rose by 50% to $126 million.

Adjusted for $9 million in one-time expenses recorded last year, earnings were up by 41% with GAAP earnings coming in at $0.97 per share.

Looking Into The Results

The reported topline sales growth of 13% understated the real performance with revenues increasing by 15% in constant currencies. Comparable store sales growth of 11% was really solid as well. In March, Tiffany already said it hiked prices by mid-single digit percentages this year.

US sales were up by 8% to $439 million despite the harsh winter weather. The company's flagship Fifth Avenue store, which generates an incredible 8% of company-wide sales, benefited from more tourists visits.

Asia-Pacific growth was even more impressive with sales increasing by 17% to $261 million, driven by strength in China and Australia. The strong results are comforting given the reports on a crackdown on corruption in China and impact on sales of other luxury goods.

Japanese sales rose by 20% to $174 million despite significant headwinds from the depreciating yen which shaved off 9% of reported revenues. The consumption tax hike on April 1 pushed sales forward.

Europe continues to be problematic despite a 9% jump in revenues to $101 million. Sales were up by just 2% in constant currencies as comparable store sales fell by 3%.

The company managed to boost gross margins by 200 basis points to 58.2% of sales on strong pricing. Operating margins improved as well with selling, general and administrative costs increasing by just 5%, bolstering operating margins to 20.7% of sales.

Disappointing was the mere 6% increase in e-commerce sales on a global basis, thereby trailing reported overall revenue growth.

2014 Outlook

For the year of 2014, Tiffany expects earnings to come in between $4.15 and $4.25 per share, 10 cents higher than previously anticipated.

Sales are expected to increase by high-single digits, while the company anticipates to open net 9 new stores. Underlying this outlook is a continuation of gross margin expansion and effective sales leveraging operating expenses.

Valuing Tiffany

Tiffany held $381 million in cash and equivalents while total debt stood at $992 million, resulting in a net debt position of around $600 million.

Inventories rose by 6% to $2.4 billion in order to support anticipated sales growth, yet like always a lot of the cash for the firm is tied up in these inventories.

At $96 per share, equity in the company is valued around $12.4 billion. Based on the outlook for roughly $4.5 billion in annual sales, the company is valued at 2.8 times annual revenues. Shares trade at 22-23 times guided earnings for this year.

The company's quarterly dividend of $0.34 per share provides investors with a 1.4% dividend yield.

Investors Are Very Enthusiastic

Shares in Tiffany jumped on the earnings report with both revenues and earnings coming in way ahead of the consensus estimates. Sales were driven by new and expanded jewelry collections, led by the company's successful Atlas collection. The low-price collection actually fetches higher gross margins for the company, explaining part of the gross margin expansion.

Items in the Atlas collection which focuses on silver sell for generally less than $500 while the company's top end fine jewelry items sell for tens of thousands of dollars.

As is becoming more evident in today's retail environment, the high-end segment of the market which Tiffany is serving is performing well, while the general middle and lower-end class is suffering harshly.

Despite the solid outlook for the year, shares already trade at 22 times earnings which is not cheap at this point in the cycle. I remain on the sidelines. The $300 million, three-year repurchase program being authorized is not impressive at all, implying expected repurchases of less than 1% of the outstanding share base per year.

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.