Huang_Sheng_TIF_StageII

Financial Modeling and Valuation Project
Company Evaluation: Tiffany & Co.
Sheng Huang
BU.230.620.81
Spring 2016
Johns Hopkins University

Company: Tiffany & Co. Ticker Symbol: TIF Industry: Jewelry Stores
Recommendation: HOLD Current Price: $72.09 (25/04/16) Target Price: $81.07
1
In this research, I used various methods we’ve learned in this class to
evaluate the performance of Tiffany & Co in the past and to forecast the
target stock price of the firm in the future. After carefully analyzing the
potential and risk of the firm, I suggest our clients to hold the stock. Since
the current market price $72.09 (25/04/2016 close price) is below the
target price $81.07 coming from our model, there’s a high chance that the
stock price will rise in the future.
Highlights
I initiate coverage on Tiffany & Co. (TIF) with a Hold recommendation
based on a one-year target price of $81.07, offering 4.5% upside from its
closing price of $72.09 on April 25th, 2016. My recommendation is
primarily driven by:
 Management Platform - Tiffany has been able to adapt to a
changing environment in the jewelry store industry through
leveraging their economies of scale, utilizing an efficient
international-based marketing strategy and integrating their
revenue management system. Through these business practices,
Tiffany has maintained stable profitability and growth
 Growth Drivers - Tiffany has been able to grow their revenues by
improving international market share. As part of its long-term
strategy to open additional stores, management plans to add 33
Company-operated stores and close eight existing stores in 2016:
opening eight in the Americas, five in Asia-Pacific, two in Japan,
and one each in Europe and Russia
 Valuation - Valuation methods indicate a current intrinsic value
of $81.07 per share. TIF offers slight long-term upside through
strategic expansion into the Asian market, as well as continued
exposure to current geographic locations. We evaluated Tiffany’s
intrinsic value primarily through a discounted cash flow analysis
and a relative multiples valuation
 Main Risks to Tiffany Include – The Company generates a
majority of its worldwide net sales outside the United States. It
also has foreign manufacturing operations, and relies on certain
foreign third-party vendors and suppliers. In addition, the
Company maintains investments in, and provides loans to,
Note: SIG - Signet Jewelers Limited
Valuation DCF Multiples
Estimated Price $81.09 $81.05
Weights 50.0% 50.0%
Target Price $81.07

2
certain foreign suppliers. As a result, the Company is subject to
the risks of doing business outside the United States
Recent News
 TIF reported full year results- 03/18/2016: On a constant-
exchange-rate basis (see “Non-GAAP Measures”), worldwide net
sales rose 2% due to higher sales in Asia-Pacific, Japan and
Europe and comparable store sales were equal to the prior year.
Reported in U.S. dollars, worldwide net sales declined 3% to $4.1
billion.
 TIF has declared a regular quarterly dividend of $0.40 per share
of Common Stock- 02/18/2016: The dividend will be paid on
April 11, 2016 to shareholders of record on March 21, 2016.
Future dividends are subject to declaration by the directors.
TIF Pledges to achieve net-zero greenhouse gas emission by
2050-- 11/12/2015: Tiffany & Co. today pledged to achieve net-
zero greenhouse gas emissions by the year 2050, joining other
leading companies in setting long-term climate change goals –
and asking world leaders to do the same.

Chart-1
Business Description and Competitive Positioning
Tiffany & Co. is an old and mature company in the jewelry retail
industry, which sells luxury jewelry, diamonds and all kinds of personal
accessories. Usually the products of a particular jewelry store chain are
aiming for creative designing and can differentiate from one another.
Thus the companies in this industry have a relatively high net income to
sales percentage (10.53 % on average) while other industries’ profit
Key Statistics 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Net Profit 439190 416157 181369 484179 463900 574241.3 625939.1 682087.9 743062.9 809270.2
Revenue 3642937 3794249 4031130 4249913 4104900 4440270 4803040 5195449 5619917 6079064
Stockholders Equity 2611318 - 2733968 2850671 2929500 3284069 3672763 4098625 4564965 5075373
Total Assets 4158992 4630850 4752351 5180603 5129700 5540626 5987036 6475331 7009203 7592663
Number of common stockholders 14490 16533 15645 15241 14640 14640 14640 14640 14640 14640
Dividends 142840 158594 170312 191171 203400 219672 237245.8 256225.4 276723.5 298861.3
Stock Price 63.8 65.75 83.19 86.64 63.84 70.83 78.59 87.19 87.19 87.19
Current Asset 2889675 3151589 3228388 3611387 3508400 3667663 3967311 4291441 4642051 5021307
Current Liability 626677 586592 696740 648033 729900 738861 799225.9 864522.7 935154.2 1011556
Quick Asset 626275 678836 555849 926625 1093000 1035972 1114351.8 1204548 1307797.5 1425452
Inventory 2073212 2234334 2326580 2362112 2225000 2513193 2718521 2940624 3180873 3440750
Aveg Inventory 2073212 2153773 2280457 2344346 2293556 2369097 2615857 2829572 3060749 3310812
COGS 1491783 1630965 1690687 1712738 1613600 1824951 1974050 2135329 2309786 2498495
Capitalization 924462 1087044.8 1301507.55 1320480.24 934617.6 1036951.2 1150497.4 1276476.8 1276476.8 1276476.8
Total Debt - 2019532 2018383 2329932 2200200 2256557 2314273.7 2376705.9 2444238.8 2517289
Total Equity - 2611318 2733968 2850671 2929500 3284069 3672763 4098625 4564965 5075373
Source: Company Data
Figure 1: Total Revenue ($ in 000s)
Figure 2: Revenue by Country
Europe
12%
Japan
14%
Asia
Pacific
Americas
48%
Others
3%
VANGUARD
GROUP INC
30%
BANK OF
AMERICA
CORP /DE/
22%
JPMO
RG…
STATE STREET
CORP
14%
HARRIS
ASSOCIATES L P
13%
Figure 3: Top 5 Organizational
Shareholders

3
margins are around 7%. However, the assets turnover ratios of the
jewelry industry (0.8 times per year) are much lower than other
industries, for example grocery stores’ asset turnover ratios are around
3 times per year. achieving a high ROA ratio (10.15% on average). As for
jewelry stores like Tiffany’s, it’s very typical that they have high
inventory ratio compared with other stores.
According to Porter’s Five Forces analysis method, we can be clearer
about the competitive positioning of the firm within this industry. At
first, the rivalry among existing firms is not very high compared with
others. Although almost all luxury brands have set foot in the jewelry
business, Tiffany is irreplaceable for its professionalismand its
affordable price. Secondly, the jewelry industry has potential barriers to
entry, including accessibilities to the high-quality raw materials and
professional tools and designers. Since Tiffany is famous for its diamond,
it doesn’t need to worry much for its substitutes. Fourthly, in this
industry, buyer power is relatively low, because the products are unique.
Individual consumers tend to exhibit low price sensitivity and high brand
loyalty.
Overall, Tiffany & Co. is a company with a high profit margin but low
operating efficiencies (low turnovers). It’s very competitive in the
current jewelry market for its unique design and the potential barriers in
this industry.
The following chart details the number of TIFFANY & CO. retail
locations operated by the Company since 2003:
Chart-2
Figure 4: Porter’s Five Forces
Source: Self Calculation
Figure 5: SWOT Analysis
Figure 6: Historical Cap Structure:
Book Value

4
Financial Analysis
To better evaluate the performance of Tiffany & Co., I collected the
financial statements of the company in the past five years from Mergent
online and build up a forecast model based on a series of assumptions.
And then, I used the forecast data in the next 5 years to estimate the real
enterprise value as well as the risk of the firm.
As we can see from the pro forma model (see chart-1) I built to forecast
its performance in the next 5 years, Tiffany & Co.’s profitability, liquidity
ratios together with operating efficiency ratios are stable and in a slowly
Chart-3
growing trend due to an annual 8.17% (given by yahoo finance analyst
estimate) sales growth rate. Although the sales growth rate in 2015 was
-3.41% and the average growth rate in the past 5 years were around
5.27%, the sales growth rates of the whole industry in the past are no
less than 10%. There’s reason to believe that Tiffany’s was behaving
under the average level within the industry. As Tiffany’s released the
new series of ‘key pendant necklace’ at the end of 2015, its growth rate
is likely to increase in the future and gradually catch up with the industry
average rate.
Source: Yahoo Finance (https://biz.yahoo.com/p/742conameu.html)
Chart-4
Compared with its biggest competitor in the United states---Pandora,
Tiffany’s profitability is relatively low. Its ROE ratio is only 17.19% while
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
EPS 30.31 25.17 11.59 31.77 31.69 39.22 42.76 46.59 50.76 55.28
Dividend per Share 9.86 9.59 10.89 12.54 13.89 15.00 16.21 17.50 18.90 20.41
P/E Ratio 18.71 20.12 23.16 61.39 17.73 18.44 18.89 17.4 16.24 15.16
Return on Asset
(ROA) 10.56% 8.99% 3.82% 9.35% 9.04% 10.36% 10.45% 10.53% 10.60% 10.66%
EPS Growth Rate -16.95% -53.94% 174.03% -0.26% 23.79% 9.00% 8.97% 8.94% 8.91%
Dividends Growth Rate 11.03% 7.39% 12.25% 6.40% 8.00% 8.00% 8.00% 8.00% 8.00%
Sales Growth Rate 4.15% 6.24% 5.43% -3.41% 8.17% 8.17% 8.17% 8.17% 8.17%
Current Ratio 4.61 5.37 4.63 5.57 4.81 4.96 4.96 4.96 4.96 4.96
Quick Ratio 1.00 1.16 0.80 1.43 1.50 1.40 1.39 1.39 1.40 1.41
Invetory Turnover
Ratio 0.72 0.76 0.74 0.73 0.70 0.77 0.75 0.75 0.75 0.75
Total Asset Turnover
Ratio 0.88 0.82 0.85 0.82 0.80 0.80 0.80 0.80 0.80 0.80
Total Debt to Total
Capitalization
- 1.86 1.55 1.76 2.35 2.18 2.01 1.86 1.91 1.97
Total Debt to Equity - 0.77 0.74 0.82 0.75 0.69 0.63 0.58 0.54 0.50
12.93% 13.03%
17.49%
Growth Rates
Valuation Ratios
15.84%-16.82%
10.97%12.06%
16.98%6.63%
4.50% 13.31%
Coverage Ratios
Financial Ratios
Profitability Ratios
Return on Equity
(ROE)
Net Profit Margin
Liquidity Ratios
Operating
Efficiency Ratios
17.04%
11.30%11.39% 13.13% 13.22%
16.64% 16.28% 15.95%
Description
1-Day Price
Chg % Market Cap P/E ROE % Div. Yield %
Debt to
Equity
Price to
Book
Net Profit
Margin
Price To
Free Cash
Tiffany 1.05 9.4B 19.14 17.19 2.2 37.58 3.3 9.7 140.83
Pandora 0.65 99.5B 27.88 55.79 NA 42.47 16.21 24.2 79.55
Jewelry Stores 0.628 1673.79B 26.2 15.1 1.554 41.433 5.26 7.6 -1382.2
Figure 7: Long Term Debt to
Asset
Source: Company data, self-calculation
0.00%
5.00%
10.00%
15.00%
20.00%
2010 2012 2014 2016 2018 2020 2022
ROE ROA Net Profit Margin
Figure 8: Profitability
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
2010 2012 2014 2016 2018 2020 2022
EPS Dividend per Share P/E Ratio
Figure 9: Valuation Ratios

5
Pandora is almost 50% more profitable regarding the return on equity
ratio. An even higher difference in the net profit margin shows the
operating efficiency of Tiffany can be improved dramatically if we can
restructure the company. However, the good thing is the profitability
ratios are still relatively higher than the industry average level. Net Profit
Margin of the whole industry is approximately 7.60%, and Tiffany’s
figures were always higher than that for the past 5 years.
I also noticed that the leverage ratio (debt to equity ratio) is lower than
its competitor as well as the average industry level. This means Tiffany’s
relies more on equity financing rather than debt financing. However, the
(cost of equity) financing is much higher than the cost of debt. According
to my calculation, the of Tiffany is 9.22% (using CAMP model), while
the is only around 2% in this market. Therefore, Tiffany can save its
financing cost and increase profitability by changing its capital structure.
Valuation Model
Based on the 8.17% estimate of sales growth rate in the next 5 years,
together with other assumptions, I made a forecast of the company’s
future free cash flows.
Past performance isnot an indication offutureperformanceand shouldnot bereliedupon assuch.
Chart-5
-100.00%
-50.00%
0.00%
50.00%
100.00%
150.00%
200.00%
2010 2012 2014 2016 2018 2020
EPS Growth Rate
Dividend Growth Rate
Sales Growth Rate
Figure 10: Growth Rates
0.00
0.20
0.40
0.60
0.80
1.00
2010 2012 2014 2016 2018 2020 2022
Inventory Turnover Ratio
Total Asset Turnover Ratio
Figure 11: Operating Efficiency
0.00
1.00
2.00
3.00
4.00
5.00
6.00
2010 2012 2014 2016 2018 2020 2022
Current Ratio Quick Ratio
Figure 12: Liquidity Ratios

6
Chart-6
In my model, I first calculated the WACC (weighted average cost of
capital) by combining the historic capital structure (using both book
value and market value) and the target capital structure. According to
Moody’s credit rating, Tiffany’s corporate bonds are rated for Baa2 since
2014, thus the 1-year would be 0.61% and the 5-year would be 1.74%.
And the of the firm is 8.70% based on Gordan Model and 9.22% using
CAMP. Since the historic equity to debt ratio were 0.27 on average (see
chart-6), we expect the long-term D/E to be a little higher than that (to
save the higher cost of equity financing) at 0.30 for the next 5 years.
After that, we obtain the expected WACC rate at 7.60%.
Chart-7
We also assume that the long-term free cash flow growth rate to be
around 5%, which is estimated through g= real growth + inflation. The
inflation rate is likely to be 1% in the next 5 years and, I used the average
historic growth rate to represent expected real growth rate in the
future.
Chart-8
Then I discounted all the future free cash flows at the WACC I just
calculated and obtained the enterprise value $10,909,302 (thousand)
and thus the share value of $81.09 per share which is $10 higher than
the current stock price $72.09 (25/04/2016 close price). I suggest my
Valuing the Firm
WACC 7.60% uniform distribution 18% to 22%
Long-term free cash flow growth rate 5.00% uniform distribution 2% to 6%
Year 0 1 2 3 4 5
FCF 331,051 229,396 260,953 295,696 333,917
Terminal Value 13485094
Total 331,051 229,396 260,953 295,696 13,819,011
Enterprise value, present value of row 60 10,909,302
Add in initial (year 0) cash and market securities 843,600
Asset value in year 0 11,752,902
Subtract out value of firm's debt today -1,470,300
Equity value 10,282,602
Share value 81.09
Based on S&P 1500 Indexes
Five-Year market priceperformance
through April 20, 2016
NOTE: All Sector & Sub-Industry
information is based on the Global Industry
Classification Standard (GICS)
Pastperformance is not an indication of
future performance and should not be
relied upon as such.

7
clients to hold the stock. Since there’s a high chance that the stock price
will rise in the future.
Risk Analysis
I also conducted a risk analysis using Monte Carlo simulation by
assigning the likely distribution of several key statistics such as sales
growth rate, COGS/sales and long-term cash flows growth rate. After
10,000 times simulation, we got the likely result of the Tiffany’s future
stock price shown below (Figure-1).
,;]
Figure-1
The result shows that the mean of our results lies at $81.37 per share,
which is very close to my previous estimation. However, as we can see
from the figure, there’s a high likelihood that the price will fall below
$80.00 per share, close to the current stock price. And the result is very
sensitive to the COGS/Sales ratio. If any incidents happen to influence
the COGS/Sales ratio, the stock price would deviate from my expectation

8
Suggestion
Based on all the analysis I made above, I suggest my clients to hold the
stock Since the current market price $72.09 (25/04/2016 close price) is
below the target price $81.09 coming from our model.
As we can see, there’s a high potential for Tiffany’s stock price to
increase, since its PE ratio is currently below the industry average level
which means the stock price of Tiffany is under evaluated. Although the
net profit margin is much lower (3 times lower) than it competitor, the
ROE ratio is relatively stable (1.4 times lower than Pandora’s ROE). As
long as Tiffany can reduce it COGS by a little bit, there would be a huge
increase in its profitability ratios and thus leading to a soar in the stock
price in the future.

Huang_Sheng_TIF_StageII

Recommended

Recommended

More Related Content

Viewers also liked

Viewers also liked (12)

Similar to Huang_Sheng_TIF_StageII

Similar to Huang_Sheng_TIF_StageII (20)

Huang_Sheng_TIF_StageII