EUR 850.00 For Business Accounts Only

Morningstar | Tiffany Sales and Profits Hit by Lower Tourist Spending in First Quarter; Fair Value Estimate Intact

We are keeping our $90 per share fair value estimate for wide-moat Tiffany as the company reported first-quarter results below our annual expectations. We believe the shares are fairly valued.

Worldwide sales on a constant exchange rate basis were flat in the first quarter, driven by retail footprint expansion, with comparable sales down 2% (versus 4% growth we expect for the year and low-single-digit management guidance). The first quarter was negatively impacted by lower tourist flows and unfavorable exchange rates (3% headwind to sales). The comparison base is challenging with 7% comparable sales growth in the first quarter 2018. Sales with the local customers were up 3% in the quarter on a global basis.

Management adjusted full-year profit expectations slightly downward. It now expects net earnings per diluted share to grow by low to midsingle digits (mid-single-digit percentage increase in prior guidance and 6% we expected). Operating margin is expected to be equal or slightly above that of the prior year (slightly above in prior guidance and a 40-basis-point expansion we forecast). Guidance for $750 million in operating and $400 million in free cash flow was unchanged. The new guidance incorporates tariffs on exports from the U.S. to China of 25%, which the company decided not to pass over to the consumer (sales in Greater China contributed around 17% of revenue in 2018 and current tariffs on jewelry range from 8%-10%, having been reduced from 20%-35% in July 2018). Management expects tourism to remain subdued, however, the comparison base starts to be easier in the second half of the year.

Operating margin in the quarter was down to 16% from 19.8% a year ago, as a result of both gross margin shrinkage (it was down by 130 basis points due to fixed cost deleverage, mix toward more expensive jewelry, and higher wholesale diamond sales) and a deleverage of store occupancy costs (SG&A increased by 250 basis points as a percentage of sales).

Jewelry collections was the only segment that recorded growth in the quarter (4% at constant exchange rates). Management highlighted strong performance of newness and of the most expensive lines, confirming the solidity of the brand’s luxury standing. Designer jewelry was the weakest with an 11% decline.

Sales in the Americas recorded a 4% drop, with a 25% decline in tourist spending (it accounts for a low-double-digit share of sales in the region) and positive but cautious performance of locals. Chinese tourist spending in the U.S. registered an even bigger slump in the quarter; however, management downplayed the impact of anti-American sentiment among Chinese on its brand appeal. The brand is continuing to grow “strongly” in Mainland China, although sales in the APAC region were up by 3% at constant exchange rate in the quarter with flat comparable sales.