Tiffany (NYSE:TIF) has recently reported good Q4 results, with good revenue growth and flat comps, despite a troubled environment in the United States. I am positive on TIF because I see good growth prospects driven by international expansion and rising tourist spending. Moreover, the strong balance sheet, the good global performance and the company's nature of pure-play in the jewelry market makes it an attractive buyout target for a bigger luxury group that wants to gain exposure to the segment.
Luxury stocks have performed very badly in the period between April 2015 and June 2016, due to a combination of factors. The main factors that generated the weakness in the sector where recessions in emerging markets and the dollar strength. In the last few months, the sector started to give signs of recovery, with several important players reporting growing sales and comps, including LVMH (OTCPK:LVMHF) (OTCPK:LVMUY), Salvatore Ferragamo (OTCPK:SFRGF) (OTCPK:SFRGY) and Prada (OTCPK:PRDSY) (OTCPK:PRDSF), to name a few. These companies indicated better conditions in China and other Asian countries as important factors that contributed to their strong performance, helped by rising spending from tourists, which was suffering due to the strong dollar and terrorism in Europe.
In this context of positive results from many players in the luxury industry, Tiffany didn't disappoint, reporting good quarterly results on March 17. Before analyzing Tiffany's recent results, I would like to give a look at how the company and the stock performed in the recent past.
The stock reached a top at the end of 2014 and started to fall while revenue growth was declining. As I said, the company's results were significantly affected by factors such as weak tourist spending and troubled emerging economies. Despite the temporary headwinds, Tiffany remained profitable and kept reporting strong margins.
The stock bottomed in June 2016, and the company returned to growth after a few quarters of contraction.
For Q4 2016, the company reported relatively strong results on many fronts. Total net sales rose 1% to $1.2 billion and comparable store sales were flat compared to Q4 2016. In constant currency, net sales rose 2% and comparable store sales were flat. This indicates an improvement in comparison to Q3, when net sales rose 1% to $949 million and comparable store sales declined 2%.
Sales performance across geographical regions was mixed. I am going to summarize the company's performance in each region and compare constant-currency performances for sales growth and comps to Q3.
In the Americas, total sales declined 3% in the fourth quarter to $587 million, while comparable store sales declined 2%, both in a reported and constant-currency basis. This is a bit worse than the company's performance in Q3, when revenue fell 2% and comps declined 2%. Management attributed the weak results to lower spending by both U.S. customers and foreign tourists. At the same time, sales in Tiffany's New York flagship store declined 7% in Q4. The luxury environment is still relatively weak in the United States, while it is already recovering in many other parts of the world. Tiffany has also been negatively affected by the New York flagship store's proximity to the Trump Tower, which has hindered foot traffic. Despite the 2% contraction in comps, I think we can still say the company is performing well in a difficult environment.
In the Asia-Pacific region, total sales of $284 million in the fourth quarter were 9% above the prior year, as a result of new openings, while comparable store sales declined 2%. On a constant-exchange-rate basis, total sales rose 10% and comparable store sales declined 1%. This is much better than what happened in Q3, when constant currency sales rose 3% and comps declined 10%.
In Japan, sales rose 15% to $185 million in the fourth quarter, while comparable store sales rose 19%. In constant currency, total sales were 8% above the corresponding quarter of 2015 and comps were 12% higher. This is a huge acceleration from Q3, when sales in constant currency declined 4% and comps rose only 2%.
In Europe, total sales declined 7% to $146 million, while comps declined 9%. On a constant-currency basis, sales rose 1% and comps declined 2%. This also shows an improvement in comparison to Q3, when sales in constant currency declined 2% and comps fell 7%.
A few thoughts on these results. Performance across regions remain mixed, but we can notice how every market besides the Americas reported improving sales and comps in comparison to Q3. The weak conditions in North America didn't neutralize the effects of growth in other markets, and we can expect the performance in the region to improve in the next quarters as the "Trump Effect" on foot traffic in New York is probably a short-term phenomenon. On the other side, tourist spending remains relatively weak due to a combination of factors, with the ongoing dollar strength being the main one. Tourist spending has long been a major source of revenue for Tiffany, as it accounts for 25% of total US sales and 40% of sales in its flagship New York store. Nonetheless, I see the company's exposure to tourist spending as a short-term weakness but also as a long-term strength.
Despite the strong dollar, tourism in the United States is in secular growth, thanks to factors such as rising population, economic growth in many emerging markets and rise of the Chinese middle class. Goldman Sachs is particularly positive on this factor and forecasted spending from Chinese tourists in the U.S. to rise 125% between 2016 and 2020. The investment bank is not alone in forecasting strong growth for the coming years. Boyd Group International, a strategic aviation solutions and planning company, expects the number of Chinese tourists in the U.S. to grow 170% in the same period. This is not a phenomenon limited to China. According to U.S. commerce department, total tourism in the country is expected to grow 21% in the next five years. I expect this trend to have a very positive impact on Tiffany's sales.
Still a good stock to own
It is difficult to find negative factors for this stock that are not related to short-term headwinds. It's true, tourist spending is still weak as a result of a strong dollar, affecting sales in North America. Nonetheless, growth in other regions is more than offsetting that weakness. Growing revenue and flat comps indicate an improving trend and I expect this trend to persist in the future, helped by rising tourist spending and momentum in several regions.
Tiffany can count on a very high level of brand awareness and is growing in many markets outside North America. The company is a unique, pure-jewelry operator with a strong balance sheet, a growing dividend and good profitability. It operates in a segment of consumer discretionary with a low level of cyclicality that should benefit from a positive long-term trend in tourism and tourist spending, while it is already well-positioned to take advantage of the economic growth in many emerging markets thanks to its presence in every continent.
From a long-term perspective, I think this stock has the potential to perform very well, but it is not dirt cheap. TIF constitutes one of the cases where we have to pay for quality. The stock is now trading at almost 2.9 times sales, not very far from the 5-year high of 3.285, and its 5-year P/E of 29.8 is not depressed compared to historical levels.
Nonetheless, the bull case is more compelling if we consider that the company's performance has improved for the second consecutive quarter and that management expects a further expansion in 2017:
For the fiscal year ending January 31, 2018 ("fiscal 2017"), management's outlook calls for: (1) worldwide net sales increasing over the prior year by a low-single-digit percentage and by a mid-single-digit percentage on a constant-exchange-rate basis and (2) net earnings per diluted share increasing by a high-single-digit percentage over 2016's earnings per diluted share of $3.55 and by a mid-single-digit-percentage over 2016's earnings per diluted share (excluding charges) of $3.75.
It's evident that revenue has recovered and is now accelerating. I have positive expectations for an investment in TIF as I think international growth and rising tourist spending will help the company report solid growth numbers in the future. Moreover, we have to consider the company's strong balance sheet when assessing the stock's attractiveness. The balance sheet is rock solid with a 0.40 debt-to-equity ratio, a current ratio of 5.65 and only $525 million in net debt against a market cap of $11,500 million. The strong balance sheet, the good global performance and the company's nature of pure-play in the jewelry segment makes it an attractive buyout target for a bigger group that wants to gain exposure to the segment.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in TIF over 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.