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Morningstar | TIF Updated Star Rating from 28 Nov 2018

We are maintaining our $92 fair value estimate for wide-moat Tiffany after the company reported a significant sales deceleration in the third quarter. After a more than 30% decline since their July high, the shares are trading close to our fair value estimate.

Management reiterated its full-year outlook for high-single-digit revenue growth at constant and reported currencies, which seemed conservative to some market participants following 13% revenue growth in the first half of the year and the planned global rollout of the Paper Flowers collection during the year. We maintain our forecasts for an 8.8% sales increase for the full year, which implies 6% growth in the fourth quarter.

Comparable sales growth slowed to 3% in the quarter at constant currency after a 7% increase in the first two quarters of the year. The company attributed the slowdown to fewer tourist purchases as Chinese nationals bought less than expected in the United States, Hong Kong, and Korea. This is in line with the trends noted by peers, which highlighted repatriation of Chinese luxury buying to the home market following yuan weakness; however, Tiffany seems to be more adversely affected.

Sales to local customers worldwide remained strong, according to the company, with particularly good performance in mainland China. However, this failed to compensate for the weakness in tourist spending. Local consumer demand in the U.S. remained strong through the first nine months of the year with no deceleration in the third quarter. Japan saw a slowdown to 2% growth at constant currency in the quarter versus a 9% increase in the first half, as both Chinese and local demand decelerated (peer LVMH also highlighted normalization of Japanese demand in the quarter). Management said the quarterly weakening was related to tourist flow rather than product. The volume of jewelry sold increased in all three quarters of the year and traffic and conversion rates showed positive developments.

As we argued previously, it is difficult to parse the impact of operational improvements that Tiffany is undertaking (which include a step-up in marketing and communications, focus on in-store service, introduction of newness to collections, and investments in omnichannel capabilities) from cyclical demand drivers in the short run. We believe the current direction makes sense and the strength of the brand is intact; hence we are comfortable with our long-term forecasts for mid-single-digit revenue growth and margin expansion to over 20%. Our forecasts already incorporate a cyclical demand downturn in later years.