Financial valuation on Tiffany

1. Business Case
Report
Tiffany & Co.
Group One
Students published this report for
educational purposes only.
December 12, 2012

2. Table of Contents
1. Executive Summary
2. Industry Overview
The luxury goods and specialty retail and store market
3. Company overview
4. Financial Analysis
A. Tiffany’s financial analysis
B. Competitor Company Overview—Signet Jewelers and Blue
Nile
5. Findings and Recommendation

3. 1. Executive Summary
Charles Lewis Tiffany founded Tiffany & Co. in 1837. The Tiffany & Co. brand
encompasses jewelry, watches, sterling silver merchandise, china, crystal, stationery,
fragrances, and leather accessories. Jewelry represented 91% of net sales in FY 12
(fiscal year ended Jan. 31). Diamonds are at the heart of the company's jewelry
offering, which also includes colored gemstones and silver and gold jewelry.
To
drive sales, Tiffany introduces new products annually; however, we believe jewelry
bearing the designer names Elsa Peretti, Paloma Picasso, Frank Gehry or Jean
Schlumberger are important differentiators. In FY12, Tiffany internally produced
about 60% of what it sold. The company has four reportable segments: Americas
(50% of FY 12 net sales), Asia-Pacific (21%), Japan (17%), and Europe (12%).
Revenues in each segment include sales from Tiffany & Co. stores and boutiques as
well as sales in select markets through business-to-business, Internet, catalog and/or
wholesale operations. The company's non-reportable segments (less than 1%) consist
of wholesale distribution in certain emerging markets such as the Middle East and
Russia, wholesale sales of diamonds purchased by the company, and earnings and fees
received from a licensing agreement with Luxottica and The Swatch Group,
respectively, for sales transacted under Tiffany & Co. trademarks. At the end of FY 12,
TIF had e-commerce-enabled websites in 13 countries and 247 stores in 22 countries.

4. E-commerce sales accounted for 6% of consolidated worldwide net sales in FY 12.
2. Industry Overview
The luxury goods and specialty retail and store market
According to global management consulting firm Bain & Company, 2009 was the
worst year on record for the luxury market, with sales declining 8% worldwide. That
year, sales of jewelry and watches (the "hard luxury" category) plummeted an even
steeper 17%. In 2010, however, sales rebounded, as renewed optimism among
wealthier consumers led to increased luxury spending, albeit with an increased focus
on quality and service.
Coupled with growing demand in emerging markets, total
luxury sales rose 13% in 2010, with hard luxury sales increasing an even better 23%.
Bain & Company, which is the leading adviser to the global luxury goods industry, in
the 11th Edition of its industry bellwether “Luxury Goods Worldwide Market Study”
estimates that worldwide luxury goods sales grew 10% in 2011, led by a 19% gain in
the hard luxury category. Bain also estimates that the highest growth came from
Asia-Pacific (excluding Japan), at 27%, followed by the Americas (9%), Europe (7%),
and Japan (2%). Within the emerging markets, sales increased an estimated 35% in
China and 10% in India. Bain projects total luxury sales to increase 6% to 7% in 2012.
According to Bain & Company, the 10% increase estimated for the market in 2012
represents the third straight year following the “great recession” that luxury goods
revenues will grow annually by double-digits.
Asia-Pacific sales, driven by China,
are projected to grow by 18%, while the Americas region is also projected to post
strong gains, with revenues rising by 13% by year ’s end.
Growth in Europe will

5. approximately halve versus la st year, expected to grow by 5% this year.
Bain
estimates that the luxury goods market will grow by 4-6% per year between 2013 and
2015.
Precious metals have been very strong in the last decade, appreciating
significantly in spot price.
Gold, silver, and platinum in the last two years have
shown some declines from all-time highs and also showing overall stabilization. This
is important for Tiffany and other companies that are in the jewelry business because
it keeps costs lower, which will improve margins.
Diamond prices have also shown
some weakness in the la st two years. Diamonds have been very resilient over the past
few decades, with very steady gains and low volatility, even during recessions.
However, these recent declines are unusual.
This is good for Tiffany and other
jewelry companies because lower diamond prices help keep costs under control, and
the company won’t have to implement price increases to their customers in order to
maintain healthy margins.
During 2012, diamond prices have risen by 7.1%, but
have showed a few months of declines as well, which suggest that volatility still exists
in the industry.
3. Company Overview
Tiffany & Company is an American multinational luxury, jewelry and silverware
corporation, with headquarters in New York City.
Tiffany sells jewelry, sterling
silver, china, crystal, stationery, fragrances, personal accessories, as well as some

6. leather goods.
Many of these goods are sold under the Tiffany name at Tiffany
stores and through direct-mail and corporate merchandising.
Goods are also sold
wholesale to third-party distributors. Tiffany is renowned for its luxury goods,
especially for its diamond jewelry, and especially its diamond engagement rings.
Tiffany markets itself as an arbiter of taste and style.
specific shade of light blue.
Tiffany’s has trademarked a
As such, the shade cannot be used as packaging or in
advertisement by any entity that might be associated with or in direct competition
with Tiffany & Co. or its subsidiaries or be used to cause confusion among
consumers.
4. Tiffany’s Financial Analysis
Tiffany’
Tiffany’s net sales increased at a 5-year compound annual growth rate (CAGR) of
5.9% while its gross margin widened from 56.5% to 59.1% and its EBIT margin from
16.8% to 19.8%.
The company's FY11 profitability metrics were: 18% return on equity (ROE), 14%
return on capital (ROC) and 11% return on assets (ROA), all up about more than 200
basis points year-over-year as the global luxury market rebounded. In an effort to
conserve cash, Tiffany suspended its 700 million-share repurchase program in late
2008, but it was resumed in January 2010 when market conditions improved. A new
buyback program was approved in January 2011 to repurchase up to $400 million
through January 2013.
Additionally, Tiffany has consistently paid a cash dividend to

7. shareholders, which increased every year. From FY09 to FY11, Tiffany has increased
its dividend from $0.68/share to $1.12/share, demonstrating its strong financial cash
position.
In FY12, TIF estimates its net sales will grow 18%, its gross margin will hold flat, and
that its EBIT margin expansion will achieve 80 basis points. ROE, ROC and ROA
improved to 19%, 16%, and 12%, respectively.
2012 Total assests, $4,158,992
O ther amounts
Cash
(dollarassets, in thousands) and cash
Property,plant
and equipment,
net
18%
net
6%
equivalents
10%
Accounts
receivable
4%
Prepaid
expenses and
other current
assets
3%
Deferred
income taxes
9%
Inventories, net
50%

8. Income Statement Analysis
(Million $)
2012
Revenue
3,643
100.00%
3,085
100.00%
2,710
100.00%
2,860
100.00%
2,939
100
Operating Income
889
24.40%
758
24.57%
579
21.37%
633
22.13%
640
21.
Depreciation
146
4.01%
148
4.80%
139
5.13%
138
4.83%
122
4.1
Interest Expense
43.5
1.19%
47.4
1.54%
50.5
1.86%
29
1.01%
16.2
0.5
Pretax Income
665
18.25%
547
17.73%
390
14.39%
346
12.10%
522
17.
Effective Tax Rate
34.00%
Net Income
439
12.05%
368
11.93%
266
9.82%
220
7.69%
331
11.
S&P Core Earnings
432
11.86%
375
12.16%
271
10.00%
252
8.81%
269
9.1
Balance sheet
2012
2011
2010
2009
2008
Cash
442
741
786
160
247
Current Assets
2890
69.49%
2,685
71.87%
2,446
70.13%
2,049
66.05%
1,844
63.
Total Assets
4159
100.00%
3,736
100.00%
3,488
100.00%
3,102
100.00%
2,922
100
Current Liabilities
627
15.08%
480
12.85%
600
17.20%
602
19.41%
585
20.
Long Term Debt
538
12.94%
588
15.74%
520
14.91%
425
13.70%
343
11.
Common Equity
2349
56.48%
2,177
58.27%
1,883
53.99%
1,588
51.19%
1,637
56.
Cash Flow
2012
Total Capital
2948
100.00%
2,827
100.00%
2,610
100.00%
2,014
100.00%
2,046
Capital Expenditures
239
8.11%
127
4.49%
75.4
2.89%
154
7.65%
186
9.0
Cash Flow
585
0.19843962
516
18.25%
405
15.52%
358
17.78%
453
22.
0.9
2011
0.8
2010
0.8
(1)Asset turnover
2012
2011
2010
32.70%
2009
31.90%
2011
2008
36.40%
2010
36.60%
2009
(3)Days' receivable
18
22
21
(4)Days' inventory
507
470
442
(1)Total assets leverage ratio
1.80
1.70
1.90
(2)Total equity ratio
77%
72.00%
85%
2008
100

9. 4.2 Competitor Company Overview
Signet Jewelers
Signet Jewelers operates as a specialty jewelry retailer in the United States, the United
Kingdom, the Republic of Ireland, and the Channel Islands. The company retails
jewelry, watches, and associated services. As of January 28, 2012, it operated a
network of 1,318 stores in 50 states in the United States that trade nationally in malls
and off-mall locations as “Kay Jewelers,” and regionally under various mall-based
brands.
It also operated at destination superstores under the ‘Jared The Galleria Of
Jewelry’ trade name as well as a network of 535 stores in the United Kingdom,
including 14 stores in the Republic of Ireland and 3 in the Channel Islands under the
H. Samuel, Ernest Jones, and Leslie Davis brands.
Blue Nile
Blue Nile, Inc. was founded in 1999 and operates as an online retailer of diamonds
and fine jewelry worldwide. Its fine jewelry selection includes diamond, gemstone,
platinum, gold, pearl and sterling silver jewelry and accessories, as well as wedding
bands, earrings, necklaces, pendants, bracelets, and watches. Blue Nile, Inc. sells its
products through its website bluenile.com. The company lets buyers customize their
purchases on every detail, and offers free shipping, insurance, and certification.

10. 5. Findings and Recommendation
Along with the overall luxury good market and consumer demand for high-end
jewelry, Tiffany’s operating environment has grown weaker after seeing a strong
FY2011 and strong first half of FY2012.
During the July interim, comps in Tiffany’s
focus regions declined in the mid-single digits, compared to double-digit comps, as
demand for expensive jewelry weakened against a challenging macroeconomic
backdrop. Part of this weakness may be due to the cumulative effect of previous price
increases, which may be turning off some of the company’s less affluent, aspirational
customers. This might be a reason why margins have been under pressure lately. The
profit squeeze is being amplified by higher metal prices. Of note, the gross margin
contracted by 270 basis points on a year-over year basis during the second quarter.
Results will probably improve in FY2013. For starters, we expect commodity
headwinds to ease materially by next year, as prices for silver, platinum, and
diamonds have already started to come down from their recent highs. Margins should
also benefit from productivity gains and a heightened emphasis on the more profitable
international business and we see same-store sales strengthening a bit with the help of
easier comparisons, new product rollouts and limited-edition collections, and
market-share advances on the home front, where a consolidation movement continues
to sweep through the jewelry industry. Tiffany has not made any significant
acquisitions over the years, yet the company has increased its dividend 10 times in

11. nine years, and increased the size of its share buyback program, which only leaves the
company with around $347 million cash, but $978 million in long-term debt. Perhaps
now would be the time to cut or suspend the dividend and buyback in order to use the
cash to make acquisitions. Otherwise, the company would have to issue new stock or
debt to raise money, which could have a negative impact for shareholders. All told, we
believe the longer-term prospects look good. There is ample room for Tiffany to
expand its retail footprint, we think, particularly in Europe and the Asia/Pacific region
where sales continue to be strong and resilient despite a slowdown in the Chinese
economy and continuing global recession concerns that have caused many other
consumer discretionary companies to be weaker.
FY2011 was a record year for Tiffany. The company achieved record sales and profit.
We see Tiffany beating these results in FY2013 on expected benefits of opening
smaller but more productive stores, price increases taken to offset rising diamond and
precious metal prices, and leveraging of relatively fixed infrastructure costs.
Fundamentals for growth remain strong, but it is going to be a bumpy ride. The
strategies that brands relied on to win in the past simply aren’t going to connect with
the segments that will matter most in the second half of the decade, which include
better monetization of e-commerce.
Also, luxury good companies need to focus
more on strengthening the supply chain and on better inventory management.
Companies such as Tiffany will need to work harder to retain their core customers and
continue to build on brand loyalty, the overall customer experience, and excellence in
execution.