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Revisiting Tiffany's: Strong Moat But Possible Dilution

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About: Tiffany & Co. (TIF), Includes: LVMHF
by: Energy HC Investor
Energy HC Investor
Long/Short Equities, biotech, healthcare, REITs
Summary

Tiffany's is currently fairly valued or even overvalued due to recent news events.

Tiffany & Co. has a great marketing strategy and brand value, but it's share price is not justified by its financials.

Tiffany's has an impressive moat for a domestic jewelry company.

Investment Thesis

Tiffany & Co. (NYSE:TIF) has been a brand name retailer with market share in categories such as bridal and jewelry. The industry has high barriers to entry and a few top competitors. Combined with Tiffany's strong free cash flow, this should make the company a valuable long-term investment. However, the company has traded at a premium recently given the news tied to LVMH.

Company Overview, Moat, and Success

Tiffany & Co (NYSE:TIF) is global jewelry company that designs and sells high-quality gemstones and jewelry, specializing in diamonds. The company is broken up into four product segments: fashion jewelry, engagement jewelry, statement jewelry, and non-jewelry accessories. Diamonds are the company's main stream of revenue, providing over half of net sales. The company's non-jewelry accessories include crystals, china, and fragrances.

When investors and the general public think of luxury, it's typically the European brands such as Chanel, Gucci, and Louis Vuitton. These brands often times have defining features, such as the Red and Green colors of Gucci or the LV logo. Thus, it's the notoriety that draws in many of these new consumers to purchasing these expensive goods. Given Tiffany's has a strong presence in the diamond and jewelry markets, it's difficult to incorporate a noticeable logo on a gem. Yet, the firm manages to draw attention from one color alone: Tiffany Blue. This brand competitive advantage has been sustained throughout the years, and it's allowed the America-based brand to maintain its place within the competition.

(Source: The Packaging Company)

The company rejects over 99% of the world's high-quality diamonds. The diamonds used for the company's products are cut to near perfection, meaning a higher quality for a higher price. Furthermore, the jewelry has more affordable pieces relative to other high-end products such as Cartier. Pricing for Tiffany's Elsa Peretti Collection ranges from $100 to $1000+, with the low end being cheaper without sacrificing the quality or design. Furthermore, Tiffany & Co. offers handcrafted and personally made engagement rings, which more and more people are beginning to use for that special moment. Given their brand name and warranties, it's obvious that many customers are willing to spend thousands for a little blue box.

Company Analysis and Key Drivers

1. Products

Tiffany's has continuously introduced new designs and new platforms as an attempt to generate more sales. Furthermore, the company has made an effort to make certain services more personal. For example, Tiffany & Co. offers a "Design" section for those that are looking to build their own ring. Tiffany's products are sold to customers of all ages, and their social media presence has made the retailer more popular with younger generations. The firm has a wide range of products ranging from necklaces to "everyday objects" such as an silver can.

2. Marketing

Tiffany's has made itself a brand name through online marketing. The company focuses on the use of digital and social media to emphasize the aesthetic qualities of not only its jewelry but stores. The store currently has a massive following of 9 million users on Instagram, topping competitors such as Cartier. The company has even opened up its "Blue Box Cafe", beckoning customers to come and take photos. The firm's brand has contributed to this strong marketing advantage as consumers naturally post photos with the product given its recognizable colors.

3. Stores

Tiffany & Co stores are notable for their pristine outside look and light blue decor. The company plans to renovate many of their stores in the near future while also maintaining and year-over-year square footage growth. From personal experience, each store offers superb customer service, and retail locations offer perks such as gift wrapping and cleaning. One trend that might provide additional cash flow generation is opening stores in the APAC region, specifically China. The growing upper-middle class in the East has led to an increased amount of spending on luxury goods.

LVMH Bid

LVMH recently announced a $15 billion bid on for Tiffany's, and the market reacted as expected, jumping from ~$98/share to ~130/share overnight. As a result of the news, Tiffany's has essentially reached a fair valuation or even overvaluation without any particular thesis playing out, currently trading at ~18x EV/EBITDA. Although the firm's sustainable competitive advantages and investments may justify this multiple, it would be difficult for the firm to not suffer from brand dilutions and other synergistic issues post buy-out. Thus, if rumors on a higher bidding price turned out to be just murmurs, the firm would be considered fairly valued if not overvalued.

Disclosure: I/we 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.

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