Monday, April 21, 2014

Tiffany: Luxury Ain’t Dead- 04/29/2014

Topic: Tiffancy


  1. Resources: Morningstar Direct, Company 10K

    Company Overview
    Tiffany is an international jeweler and specialty retailer. It designs, manufactures, and sells fine jewelries.
    Revenue segments (% of Rev and % of OI)
    289 locations WDW
    Americas 126, 48%/ 40%
    Asia-Pacific 121, 38%/49%
    Europe 42, 12%/11%
    Other countries 3%/-.1%

    Same store sales%, Europe 20%, Asia 11%
    Rev growth 6.2%, GM 58%,

    Economic Moat
    Tiffany's wide economic moat was underscored by its luxury image and ability to charge a premium. Though customers tastes and preferences will change, it is hard to reverse consumer's perception of a brand that has been existing for more than 100 years. Tiffany will continue to maintaining its premium pricing and building its brand image through marketing efforts. Tiffany has historically used popular culture such as movies to highlight the brand, "Take the great Gatsby" promotion as an example.

    What is going well
    - Tiffany is vertically integrated. Tiffany has operations along many stages of the value chain, so there is strong control of its brand through all stages of the supply chain.
    As a polisher of diamonds and jewelry manufacturer, it has historically purchased between 40% and 70% of the diamonds used in its jewelry and receives the rest through purchase agreements.
    - World economy is recovering, and emerging markets represent substantial growth opportunities as the size of middle-class grow. Tiffany has been able to expand its business by 7% a year without sacrificing its gross margins for the past 20 years.


    - The jewelry retail market has traditionally been very fragmented, and .De Beers is a monopoly in the diamond market, with more than 50% in 2012. Risks from suppliers are high despite Tiffany's vertical integration. It has also formed a partnership with LVMH to penetrate the retail market, creating a direct competition.

    - Meanwhile, Internet specialized retailers such as Blue Nile are increasing online competition. Comparing ring prices is faster and easier than before, and it is prudential to believe most customers are still price sensitive for jewelry though not to a high extent.

    - Tiffany relies on its designers and licenses to create luxury brand image. Therefore, it runs the risk that some of its designers and licenses might not be able to be replaced with lines with same success. For example, Elsa Peretti has been a designer for Tiffany exclusively since 1974 and accounts for 10% of Tiffany's sales.

    - Revenue is concentrated in a few key markets, e.g, the Manhattan flagship store contributes about 10% in revenue every year. Over the long run, Tiffany's sales will affected by economy conditions and customer's preference.

    Tiffany has a wide economic moat and medium uncertainty based on potential risk factors.

  2. Sources:
    - 2013 10K
    - Seeking alpha
    - Zacks
    - Barron’s

    Business Overview: is a holding company that operates through its subsidiary companies, selling jewelry and other items that it manufactures or has made by others to its specifications.

    It has five business segment: (% of total revenue in FY 2013)
    - Americas: 48%;
    - Asia-Pacific: 23%;
    - Japan:14%
    - Europe: 12%;
    - Other: 3%

    Core Businesses: Americas
    - Americas currently includes sales in 121 Company-operated TIFFANY & CO. stores and through business-to-business, Internet, catalog and wholesale operations
    - Sales in U.S. market- 88% of the segment
    - total sales in the Americas increased 5%
    - Comparable store sales increased 3%, driven by sales in its flagship New York store

    - The gift-givers and gift-receivers are mainly targeted when special occasions occur
    - affluent self-buyers aged 20 to 35
    - Business Customers
    - Wholesale distributors 1% of sales

    Competitors on a basis of similar price range, product range, and the target market:
    - Blue Nile, the largest online retailer of diamonds in the United States
    - Pandora, one of the most well-known and popular contemporary jewelry designs

    Financial Overview:
    - FCF: -67 M, outflow mainly because the arbitral-award payment to The Swatch Group Limited, totaling 480 m
    • FCF as % of Rev: -2% in 2013, 1%in 2012, -1% in 2011
    • FCF as % of OCF: -43% in 2013, 8% in 2012, -14% in 2011
    • Use of FCF:
    o Dividend payment: 171 m, dividend payout ratio 94%, increased 56% in 2013
    o Company expenditure: opening new stores around the world

    What is going right?
    - Strong Pricing Power: with its strong brand recognition, TIF has pricing power over its customers. In the first half of the year, Tif implemented a price increase, which, together with the reduced product cost pressures, brought up gross margin by 1%. While revenue increased 6%, which proved its relative strong pricing power.
    - Robust expansion plan: Plans to add 13 Company-operated stores in 2014: four in the Americas, five in Asia-Pacific, two in Japan, and one each in Europe and Russia
    - Appreciated return to shareholders: resume of share repurchase program: announced a 300 m share repurchase program expiring in 2017. Its dividend also increased by 6% quarterly in 2013

    What can go wrong?
    - Revenue:
    • Expected lower gross margin due to A continued shift in sales mix toward higher-priced, lower-margin products
    • Smaller luxury spending in China during 2014. Overall spending by wealthy Chinese fell by 15 percent in 2013, the third consecutive year of decline, according to a survey by the Hurun Report. Spending on gifts in particular also declined by a quarter. This trend is expected to carry on in the following year
    • Exposed to Currency Fluctuations: more than half of the sales from international market. The weakening of foreign currencies against the U.S. dollar may require the company to either raise prices or reduce profit margins internationally
    • Changes in costs of diamonds and precious metals or reduced supply availability may adversely affect the company's ability to produce and sell products at desired profit margins
    - Expenses:
    • Continuous increases in fixed and variable labor costs, such as sales commissions and incentive compensation, and store occupancy and depreciation expenses
    - FCF:
    • Volatile global economic conditions may have a material adverse effect on the company's liquidity and capital resources

  3. Source: 10k, Bloomberg, seeking alpha and morningstar
    Engagement: 29%
    Statement fine solitaire: 16%
    Designer: 15%
    Silver gold: 30%
    All other: 9%
    Geographic revenue: Americas: 50%, Asia-pacific: 37.5%, Europe: 12%, Other: 1

    -Growth: revenue increased 6% in 2013, operating income declined 56%, net income declined 56%.
    Non GAAP NI increased 15%, high operating expense due to Arbitration expense. In the quarter ended January 31, 2014, the Company recorded a charge of $480,211,000, related to the adverse arbitration ruling between The Swatch Group Ltd. and the Company, which includes the damages, interest and other costs associated with the ruling.

    -1.7% in 2013, 3% in 2012, -1% in 2011
    -43% in 2013, 33% in 2012, -14% in 2011
    Dividend: 170M

    Gross: 58% in 2014, 57% in 2013, 59% in 2012
    Operating margin: 19%, 18%, 19%
    Avg: 22%, signet: 14% swatch: 27%, coach: 29%, burberry: 25%
    Net margin: 5%, 11%, 12%
    Avg: 17%, signet: 9%, swatch: 23%, coach: 20%, burberry: 13%
    ROE: industry avg: 23.9%, TIF: 6.8%

    EV/EBITDA: 12.08 avg: 11.20
    PE: 22.88, avg: 21.99

    Revenue will increase by a high-single-digit percentage
    Adding 13 Company-operated stores and closing four existing stores
    CapEx increase to 270M in information technology system
    FCF at least 400M

    Retail and online sales: individual customer who need jewerly themselves or as gifts
    B to B: business customers
    Wholesales: independent distributors, but less than 1% sales worldwide.

    -What's going right:
    Great product differential, relative high pricing power. Higher premium than competitors

    -What could go wrong:
    Revenue: jewelry and luxury products have high demand elasticity, the consumption is highly seasonal and can be easily affected by the global economic conditions, especially in China.
    Cost: FX rate risk, more than half of business is outside US. Changes in costs of diamonds and precious metals or reduced supply availability may result in higher raw material cost