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Tiffany: Short-Term Recovery, Long-Term Risks – Seeking Alpha

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Tiffany’s (NYSE:TIF) stock offers investors the prospect of minor rewards with outsize risk. The stock is trading at a forward P/E of almost 24, and while same-store sales have shown a turnaround and the macroeconomic environment is favorable, we think the company is vulnerable and ill-prepared for the long-term.

Sales Trends Starting to Improve

Over the past few quarters, Tiffany has seen same-store sales rebound from an abysmal 2016. The chart below shows quarter over quarter same-store sales in constant currency (e.g. excluding the impact of foreign exchange fluctuations) for the past two years.

(Source: Author using company data)

In the company’s latest earnings press release, it highlights improving trends in its largest North American market.

Management noted varying degrees of growth across most of the U.S., Canada and Latin America with higher spending attributed primarily to local customers. On a constant-exchange-rate basis, there was a 6% increase in both total sales and comparable store sales.

The company also saw strength in the second largest Asia-Pacific region.

Management attributed retail sales growth primarily to higher spending by local customers, and particularly noted growth in mainland China, Hong Kong and Korea.

Only the company’s smallest region showed some challenging conditions with same-store sales falling (despite overall sales growth) in Europe although performance varied.

Management noted varying performance across the region with overall sales growth attributed to higher local customer spending.

In the company’s conference call, the CFO did say that sales came in below expectations but progress was being made.

Worldwide sales growth of 3% in the quarter is obviously below that range, but importantly, some sequential progress was made in comp store sales, which were down 1% in the third quarter after being down 3% in the first quarter and down 2% in the second quarter.

We think that in the short term, Tiffany will continue to see sales improvements based on favorable macroeconomic trends for its target market.

Macro-Economic Trends

Tiffany’s target market is upper middle income to high-income households. In the US, the company’s largest market, trends for upper income households will improve markedly under the recently passed tax law.

Urban-Brookings Tax Policy Center found that the 80-90th percentile would see its after-tax cash income go up by 2%, 90-95th by a bit over 2%, 95-99th by 4%, top 1% by a bit over 3%, and the top .01% by a little less than 3%. However, in dollar figures, the effect is much more pronounced with the 80-90th percentile seeing an increase of almost $3000, 90-95th approximately $4,500, 95-99th about $13,500. Top 1% about $51,000 and the top .01% about $193,000. While studies have shown that the marginal propensity of households to consume falls as incomes rise, the tax cuts at least ensure that cash flows for Tiffany’s target market will remain strong and customers should at least remain willing to purchase jewelry.

Tiffany’s target market may also continue to benefit from the wealth effect of a strong stock market. Stock ownership is again concentrated among Tiffany’s target market. Less than half of all households own stocks. The top 90-99% of all households own 38% of all stocks and the top 1% owns 44% of all stocks. Again, there is mixed evidence to show that an increased wealth effect will cause upper income households to spend more but it should at least make them feel comfortable to continue its current spending patterns and at the very least a rising stock market can’t hurt.

In the rest of the world, economic trends are favorable as well. We have entered the first period since the great recession where all major economies (US, China, eurozone, and Japan) are all growing at once. The latest annualized GDP growth rates for the major economies are the US at 2.3%, China at 6.5%, Europe at 2%, and Japan at .7%.

A favorable macroeconomic backdrop should ensure that Tiffany’s sales recovery will continue. However, we have serious concerns about the company’s prospects over the long term. In particular, we believe the company may be ignoring potential competition and changing consumer habits.

Whistling Past the Graveyard

E-commerce has never really been thought of as a big threat to the fine jewelry industry. After all, it has historically only made up a low single digit percentage of industry sales. Here’s what Tiffany’s CFO Marc Erceg (some transcripts spell his name “Erseg” but his official Tiffany’s bio lists his name as “Erceg”) said about Tiffany’s e-commerce business (highlights ours).

In addition to these sales highlights, I should point out that ecommerce sales increased at a slightly faster pace than overall sales growth. We will certainly continue to invest in the online channel and digital marketing, but believe that most customers after getting their information online still are and will continue to be attracted to the in-store experience.

Elsewhere in the conference call, he expanded on the company’s CapEx plans for the coming year. Notice how the company does not intend to expand CapEx but instead keep it steady at 6-7% of sales (highlighted).

Capital expenditures year-to-date were $146 million, and our full year forecast which assumed approximately $250 million in spending has been revised slightly downwards with our best estimates now being somewhere in the $235 million to $250 million range. The revision is solely due to timing expenditures as we continue to anticipate annual CapEx spending of somewhere between 6% and 7% of sales. We invested $28 million in the third quarter to buy shares at an average cost of $92 per share, which is slightly up from $21 million we invested during the second quarter, and more than doubled the $11 million we invested during the first quarter.

Both tidbits from the conference call are a worrisome thing for long-term investors in Tiffany.

First, online jewelry sales have been growing quite a bit faster than the global jewelry market as a whole. From 2015 to 2016, jewelry sales increased 3% but online sales jumped 15%. However, Tiffany reported that its online sales only slightly outpaced brick and mortar sales. Tiffany’s management says they believe their customers will continue to shop in-store but this statement doesn’t quite match up with industry data. Within the 15% online jewelry sales growth from 2015 to 2016, the sales of cheap, costume jewelry rose 12% while the sale of fine jewelry rose 16%. Tiffany’s market (fine jewelry) appears to be moving online at a faster rate than the lower-end market.

Online market share for jewelry sales is estimated to be around 5% to 6% currently and projected to reach about 10% by 2020. While those stats are broadly agreed on by experts, what doesn’t seem to be in agreement among experts is how far online penetration will reach. We’ve read market research by McKinsey and Edahn Golan that predict online jewelry sales to plateau at around 10%. By contrast, other sources such as the Manufacturing Jewelers and Suppliers of America (MJSA) see online sales continuing to grow. It would seem wise for companies to prepare for uncertainty and invest in e-commerce operations to “future proof” their business.

There is also the threat of greater competition. Branded jewelry sales are predicted to grow faster than unbranded sales.

(Graphic source: McKinsey)

McKinsey also sees new entrants entering the market in the form of existing luxury goods makers expanding into jewelry.

The risk here is that some (or many) of the new entrants will focus their efforts on e-commerce sales to a greater degree than Tiffany and thus gain market share at its expense. In fact, one of the largest criticisms the MJSA had for current jewelers is how they are stuck in the past with their marketing and advertising efforts. Indeed, they pointed out that the lack of omni-channel retailing was hurting smaller independents. So, it would be safe to assume that Tiffany’s lack of focus on omni-channel could eventually become a source of trouble if larger luxury conglomerates like LVMH (owner of Bulgari), Hermes, Christian Dior, and Richemont (owner of Cartier, Van Cleef, Piaget) make a push into Tiffany’s target market.

Valuation and Summary

Using a reverse DCF model, Tiffany with a five-year high growth period and a 10% discount rate show that at Tiffany’s current share price of $100.93 the market is implying 10.3% annual free cash flow growth over the next five years.

Current Share Price


Discount Rate


Long Term Growth Rate


Short Term Growth Rate


Short Term Growth Period

5 years

TTM working capital adjusted FCF


NPV of high growth period


NPV of terminal value


Add: Cash


Less: Long-term debt


Equity value


Shares outstanding


Price per share


As same-store sales improve, operating leverage should grow. That means double digit free cash flow growth is not out of the question. Indeed, since FY2015 operating margins have fallen from 20.97% to 18.52% in FY2016, then 18.02% in FY2017, and finally down to 17.19% over the trailing twelve months. An improvement in margins back to the FY2015 high over Tiffany’s last fiscal year of $4,000M in sales translates to an extra $151M dropping down to the bottom line. It’s also worth noting that the approximately 10% implied growth over the next five years is right in line with consensus analyst estimates.

In the short term, there is no reason to think Tiffany’s can’t hit or even beat consensus estimates given the strengthening macroeconomic tailwind. However, in the long term, the company’s lack of focus on e-commerce has the potential to put the company at a severe disadvantage in relation to competitors and deprives it of exposure to fastest growing segment of the fine jewelry market.

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.