You know you have a hit when a company is not only famous for its jewellery but its boxes. Yes it is Tiffany's (TIF), with its famous little blue boxes it makes men and women swoon, usually for different reasons! TIF jewellery has fascinated everyone for over 150 years with beautiful designs and products, it is a high end purchase but compared to other luxury items has other benefits. Jewellery tends to consist of precious metals and is seen as a store of value, it isn’t necessarily fashion as it is built to last.
However shareholders have not seen any of these benefits with shares down 20% year to date. Shares have been hit by a slowdown in sales from Asian consumers and lower bonuses from Wall Street. TIF reduced sales guidance to 7-8% growth vs earlier expectations for 10% growth. The downgrade so early in the year was disappointing considering 1/3 of annual sales and ½ of earnings are generated in the 4th quarter. TIF is also suffering from strong growth comparisons last year, see chart of comparable same store sales (SSS) below.
Source: TIF 10K
These are shorter term issues but what about the longer term outlook? For a company that has been around for so long it surprisingly still has solid long term growth. TIF has long term plans to add 20 stores a year and is looking to add 24 this financial year. This is decent growth considering there were 251 stores at the end of the first quarter. TIF recently reiterated its long term objectives to achieve 10-20% sales growth and deliver at least mid-teens earnings growth. According to Bernstein research only 12% of the jewellery market is branded compared to 50% of the watch market and 80% of perfumes. Further only 5% is in the hands of the large branded jewellers such as TIF and Cartier etc confirming a growth opportunity for years to come.
There were takeover rumours swirling around September last year from Richemont (owner of Cartier) when TIF was trading around $70. In March last year Louis Vuitton Moet Hennessy (LVMH) acquired Bulgari for about $3.7 billion euros or $5.2 billion doubling the size of its watch and jewellery business. These rumours have died down this year no doubt helped by the fact these companies are incorporated in Europe. TIF would still be a big bite for companies such as LVMH and Richemont as TIFs market cap is $6.8 billion. One potential benefit is that there are no large family shareholders that could block a potential deal. In saying all this it is never a good idea to buy based on takeover rumours. With the share price in the low $50’s any takeover premium has disappeared from its share price giving a better entry point for investors.
The US is TIFs largest market around 50% of revenues. TIF leases its stores except for the New York Flagship store which it owns outright. Retail sales in the flagship store represented 8% of worldwide 2011 sales. TIFs average selling prices range from $250 for gold and silver jewellery to $3,800 for engagement rings, see slide below. The average price for rings has increased since the GFC going from an average price of $3,200 in 2009 to $3,800 in 2011, remember ladies and gentlemen timing is everything!
Source: TIF investor presentation
Once specific TIF risk is designer related. In 2009, 2010 and 2011, the designs of a Ms. Peretti accounted for 10% of TIFs sales, approximately $364m. She is famous for designing TIFs open hearts, is 72 years old and receives a royalty for TIFs use of the Peretti Intellectual Property. TIF is currently in negotiations regarding the purchase of her designs. To date they have not agreed on price but given the materiality to sales the amount offered would likely be significant. Interestingly there seems to be an information campaign on TIF websites detailing her history and how she revolutionised jewellery design. TIF is doing whatever it takes, this sort of behaviour cannot be a good sign as it means TIF will likely have to pay up for the designs.
TIF never goes on sale but luckily it shares do. There are risks but that is why TIF is trading at the low end of its historic valuation range around a 12-13x forward multiple. There are not many opportunities to buy such established luxury brands at these valuations. Given TIFs long term high double digit sales growth potential shares are looking like quite a steal.
Jason
Disclosure: Decisive is long TIF
The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.
