EUR 850.00 For Business Accounts Only

Morningstar | Tiffany's 2Q Results Show Continued Strength Across Regions and Categories; Shares Rich

We are keeping our fair value estimate of $92 per share for wide-moat Tiffany after the company reported second-quarter results. Although management increased full-year earnings guidance from the prior quarter to $4.65-$4.80 per diluted share from $4.50-$4.70, this is still below our expectation for $4.92 per diluted share. The upward revision is related to a lower than previously expected tax rate (mid-20s versus high 20s previously guided) but damped by the negative effect of import duties in China (prices lowered immediately on inventory that still incorporated previous duties) and depreciation charges related to the renovation of the New York flagship store. The company now expects operating and free cash flow to be around $100 million lower than prior expectations due to increased investments in high jewelry inventory. We consider the shares pricey at current levels and believe upcoming operational improvement and brand quality are more than priced in.

Second-quarter revenue growth in constant currencies was 11%, helped by 7% comparable sales, with all regions and product categories contributing. Sales trends in the second quarter were broadly in line with the first quarter and came on top of an unchallenging comparison base (comparable sales declines in the low single digits in 2017 and high single digits in 2016). Management kept its guidance for high-single-digit sales growth for the year (we expect 8.8% revenue growth with a 1.9% contribution from space and 6.9% comparable sales). Increased marketing activities, new collection acceptance, and a continued supportive demand backdrop should help fuel sales growth.

All product categories contributed to growth; jewelry collections were especially strong at 18%, with strong performance of the iconic lines and early success of the Paper Flowers collection. Engagement jewelry, a weaker performer for the company historically, also delivered high-single-digit growth on top of three years of declines.

Engagement jewelry saw a positive impact from the Believe in Love campaign and product personalization possibilities. We continue to expect long-term lower growth for this category, given declining marriage rates.

Americas, the company’s biggest region, continued to perform strongly with high-single-digit comparable sales growth in the first and second quarter. Strength among U.S. consumers this year was also noted by several luxury competitors that reported previously. Asia-Pacific also continued its strength, fueled by 9%-10% comparable-store sales and store openings. European store expansion continues to be offset by negative comparable sales, as sales to locals are solid but tourist purchases are softer.

Tiffany previously announced the renovation of its New York flagship store, which would take around three years and result in a significant expansion of client-facing space. Although this comes at a cost (capital expenditure is expected to rise to 7%-9% of sales in the coming years from the company's 6%-7% midterm target), we believe it should help enhance brand visibility. The company expects no sales disruption during the renovation, as it will occupy an adjacent building.