Tiffany & Co-Valuation Seems Generous to Me
On Monday, Tiffany & Co reported what seemed to be somewhat disappointing earnings of $1.09 versus a street consensus of $1.13. TIF actually has had a fairly good history of positive earnings surprises in recent quarters (data courtesy of Reuters):
As you can see, the negative surprise was not hugely negative either. What went right and what went wrong?
The fourth quarter was actually surprisingly strong on a sales basis. The breakdown by geographic segment looks strong across the board for the fourth quarter:
For the Americas:
+14% versus a drop of 29% the previous year
For the US+12% versus a drop of 33% the previous year
For Asia Pacific:
Sales were also strong throughout with exception of Japan, rising 14% in dollar terms. Outside Japan, sales were robust at +38% in constant currency. Japanese sales in the fourth quarter were down 9% in constant currency.
Particularly strong sales here +18% on a constant currency basis.
Tiffany was quite defensive through 2009, reducing headcount by 900 people and opening only 10 stores, taking capex down to $75 million from a more normal level of about $200 million. Ex one time items, it appears that SG&A positively leveraged by 140 basis points in the quarter to 35.7%. However, the dollar amount of SG&A was increased by 12.7%, as the company indicated, largely tied to incentive compensation. Strong cuts through through the year seem to have come somewhat unglued in the fourth quarter due to incentive payments.
Given a fairly aggressive plan for new store additions (adding 17 stores) and increased marketing spend, management is guiding for 10% SG&A growth in 2010. With marketing growing faster than sales, TIF is going for market share, perhaps not an unwise strategy when small independent competitors may be having difficulty securing financing for their expensive inventory.
Nevertheless, incentive compensation seems to be driving SG&A growth at Tiffany and I wonder about how well this will leverage into earnings per share. Consensus earnings per share estimates for Jan 2011 are already at $2.47 up 21.0 % from this year's $2.04. It is interesting to note that earnings estimates for the upcoming year were $2.01 just six months ago.
I have provided a spreadsheet compiled from Gridstone Research analysis at the following link:
As the analysis indicates, return on equity has gone up to 15.3% from 13.5% in 2007 largely due to the use of higher financial leverage. Tiffany has purchased over $1 billion in common stock in the last three years (generally at higher prices than current.) About $400 million in new long term debt was issued last year. Asset turnover and operating margins worsened over this period.
Considering other benchmarks for management's performance, the return on invested capital remains lackluster despite what seemed to be a reasonable year. ROIC was 12.2% up from last year's 10.7% but not up to the 2008 and 2009 levels of 12.7% and 15.9%.
EBITDA margins have fallen to 16.3% in 2010 down significantly from last year. Surprising! Capital intensity (the amount of capital it takes to generate sales) has also moved up slightly from prior years. As well, one of the most important missions for a retailer is working capital management. In the quarter, strong inventory controls were very evident with inventory falling 10.8% versus last year relative to the 17% revenue gain. Yet, working capital management turnover was 1.65 times for 2010 down from levels generally better than 2 times in the past.
Tiffany at 19.3 times forward estimates which presume 21% growth seems expensive to me.
Disclaimer: Neither I, my family or clients have a current position in Tiffany.