Shares of Tiffany & Co. (TIF), the jeweler and specialty retailer, ended the week with gains of 6% over the past week. On Monday, Tiffany reported its second quarter results.
Second Quarter Results
Tiffany reported second quarter revenues of $887 million, up 2% on the year. In constant currencies, net sales rose by 3%, while comparable store sales fell by 1%. Gross margins fell by 270 basis points to 56.3% as a result of higher product acquisition costs.
Net earnings rose 2% to $92 million, with diluted earnings per share coming in at $0.72. This compares to last year's earnings of $0.69 per share, and analysts consensus of $0.74 per share.
The company opened 9 new stores during the quarter, bringing the total store count to 260.
Chairman and CEO Michael Kowalski commented on the results:
"These second quarter results met the expectations contained in our previously reported financial guidance. Not surprisingly, sales growth has been affected by economic weakness in a number of markets and by a very challenging prior year comparison to a 30% increase in worldwide net sales."
Segmental Information
Sales in the Americas fell 1% on the quarter to $434 million. Comparable store sales fell 5% in the second quarter, falling 9% in the New York flagship store. Internet and catalog sales rose by 3%.
Sales in the Asia-Pacific region rose by 1% to $174 million. Sales increased by 3% on a constant currency basis, while comparable store sales fell by 5%.
Japanese sales, which are not included in the Asia-Pacific region, increased 11% to $159 million. On a constant exchange rate basis, sales and comparable store sales rose by 10%.
European sales fell by 1% to $100 million. On a constant exchange rate, total sales increased by 8%. Comparable store sales rose by 2%, as growth in continental Europe was offset by softness in the UK.
Outlook
For the full year ending 2013, Tiffany expects net earnings of $454-$473 million. Diluted earnings per share are expected to come in at $3.55-$3.70 for the full year ending in January. This compares to an earlier forecast of $3.70-$3.80 per diluted share.
Net sales in US dollars are expected to increase by 6-7%, compared to an earlier guidance of 7-8% growth. The company expects to add a total of 28 company's owned stores, which implies 15 new store openings in the second half of the year.
Valuation
Tiffany & Co ended its second quarter with $367 million in cash and equivalents. The company operates with $940 million in short and long term debt, for a net debt position of roughly $573 million. For the first six months of 2012, Tiffany's reported net revenues of $1.71 billion. The company net earned $173 million, or $1.36 per diluted share.
The company is on track to generate annual revenues of $3.7 billion, on which it is expected to earn around $3.60 per share. Currently, the market values the firm at $7.8 billion. This values Tiffany's at 2.1 times annual revenues, and 17 times annual earnings. The valuation compares to a revenue multiple of 1.0 times for Signet Jewelers Limited (SIG), which trades at 12 times annual earnings.
Currently, Tiffany pays a quarterly dividend of $0.32 for an annual dividend yield of 2.1%.
Investment Thesis
Year to date, shares of Tiffany's trade with modest losses of 7%. Shares rose to highs around $73 in March of this year, but fell to lows of $50 in June and July of the year.
Over the past five years, shares rose some 20%. Shares fell to lows of $20 in 2009 and recovered to peaks of $80 in 2011. At the moment shares have pulled back to levels around $62. Tiffany expanded its revenues from $2.8 billion in 2008 to an expected $3.7 billion in 2012. Net income doubled from $220 million in 2008, to an expected $460 million this year. The company almost doubled its dividends from $0.66 in 2008 to an annualized payment of $1.28 at the moment.
I think Tiffany is fairly valued at these levels, and don't see a convincing long or short opportunity. I remain on the sidelines, and I will re-evaluate the prospects for the business, after a significant move in the share price or underlying performance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
