EUR 850.00 For Business Accounts Only

Morningstar | Tiffany's Results in Line With Preannouncement; Shares Moderately Expensive

We expect to slightly reduce our fair value estimate for Tiffany when we roll our model, as the company reported results largely in line with its Jan. 18 preliminary announcement.

Revenues increased 6.5% for 2018, versus 6%-7% communicated in January.  On constant exchange rates, sales in the fourth quarter rose 1% and were flat on a comparable basis. Gross margin saw continued improvement (80 basis points) in the year thanks to favorable input costs, while operating margin shrank to 17.8% from 19.4% in 2017, weighed down by operating investments, including technology and marketing, that grew 12%. Tourist buying was lower in the second half of the year, and American consumer demand saw deceleration.

For 2019, Tiffany expects low-single-digit revenue growth at actual exchange rates (low-single-digit comparable sales and 3% growth in square footage with some negative currency impact), operating margin slightly above the 17.8% in 2018, and earnings per diluted share increasing by a mid-single-digit percentage.  Operating cash flow is expected at $750 million ($532 million in 2018) and free cash flow at $400 million ($250 million in 2018).

Management highlighted improving demand trends of existing customers and new customers as well as lapsed customers, who hadn't been buying at Tiffany for a while. The company has been focusing on sharper marketing message, new collections (Paper Flowers in 2018, Tiffany True engagement jewelry in 2019), store refurbishments with new displays, store staff training (with regards to diamond quality and provenance) as well as IT and e-commerce infrastructure (internal e-commerce platform will be launched in China in 2019, and e-commerce is growing at a double the pace of revenue growth with strong profitability). The longer-term objective of mid-single-digit sales growth and high-single-digit EPS growth is intact and we believe is achievable, given the strength of Tiffany’s brand and reasonable action plan in place.

Cash flow was pressured by declining profitability as well as an 8% increase in inventories (versus 6.5% sales growth) and declined 43%. Capital expenditures also increased 18%, leading to 64% free cash flow shrinkage.

Jewelry collections was the strongest-performing segment with 11% growth, engagement jewelry grew 4% (an improvement after years of declines), and the designer jewelry and other segment grew in the low single digits.