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Tiffany Financial Evaluation

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Financial valuation on Tiffany

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Tiffany Financial Evaluation

  1. 1. Business Case Report Tiffany & Co. Group One Students published this report for educational purposes only. December 12, 2012
  2. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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.

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