Tiffany & Co. (NYSE:TIF) disrupted its string of quarterly losses with surprise positive earnings in 4Q2015. However, the management acknowledged the existence of difficulties and projected 1Q2016 earnings to fall 15% to 20% followed by another decline of 5% to 10% in 2Q2016. It is only in the back half of 2016 that the management of Tiffany anticipates improvement in financial performance.
This Tiffany analysis article discusses the company’s strength and weaknesses to enable you make informed investment decision regarding the stock. But first is a brief recap of Tiffany’s financial performance for the last quarter.
4Q2015 summary
Tiffany & Co. (NYSE:TIF) posted 4Q2015 EPS of $1.46, outpacing the consensus estimate of $1.40 but falling short of the year ago EPS by 3%. Revenue of $1.2 billion for the latest quarter pulled back 6% from the corresponding quarter a year ago and topped the consensus estimate. Unfavorable foreign exchange movement was largely responsible for the topline hit.
2016 outlook
Tiffany & Co. (NYSE:TIF) is hoping for 2016 revenue to increase in low-single-digit on constant currency basis or remain flat as the previous year on reported basis.
The chart below shows Tiffany’s revenue for the last five quarters:
What’s exciting about Tiffany?
- Solid brand appeal
Tiffany & Co. (NYSE:TIF) products need no introduction among jewelry buyers. It takes years and massive investment to create a recognizable brand and Tiffany has done it and it can now reap the benefits. Tiffany is well positioned to leverage its strong brand appeal to beat the competition and fuel growth over the long-term. The company has also recently focused on expanding distribution network, thus paving the way for more sales.
- Geographic diversification
As Tiffany & Co. (NYSE:TIF) diversifies its product mix, the company has also been active in diversifying its geographic markets. In the recent years, the company has focused on expanding its business in Canada, Mexico, Brazil, Russia and the Middle East. The expansion into more international markets should further boost Tiffany’s international revenue that currently account for nearly 50% of its total annual sales.
A diversified geographic footprint also helps the company to spread market risks.
- Small store concept
Tiffany & Co. (NYSE:TIF) has figured out that it could drive sales by targeting customers with low-cost jewelry products. The idea is that the company could use the lower price strategy to drive sales in emerging markets and further boost its international penetration. The strategy could also enable the company to offset the advantage that the competition may have enjoyed over it in low-cost market. Additionally, the lower price points would also increase customer traffic and Tiffany can seize the opportunity to upsell those customers to its more expensive products that attract higher margins.
As a way to increase the sale of the small ticket products, Tiffany is in the process of opening 11 new small stores this year.
- E-commerce
Tiffany & Co. (NYSE:TIF) is also leveraging the power of the Internet to help fuel sales by providing customers a convenient way to shop online. In fiscal 2015, the company reported that e-commerce accounted for 6% of its net worldwide sales.
- Positive shareholder orientation
Tiffany & Co. (NYSE:TIF) returns value to shareholders through a combination of dividends and shares repurchase. The company has also consistently sweetened its quarterly dividend payout over the last 13 years with the last coming in May 2015 when it boosted dividend payout by 5%. Early this year, the board of Tiffany authorized repurchase of $500 million worth of shares over the next three years.
Tiffany has demonstrated that it could continue to sweeten shareholder returns if its expansion efforts produce more free cash flow.
- Forex tailwind
As much as unfavorable foreign exchange movements have produced pain and suffering for Tiffany in the recent years amid strengthening dollar, the tide could change. Foreign currencies such as the Japanese yen and the common market currency Euro have recently demonstrated strength against the greenback and that should produce favorable results for Tiffany. Stronger foreign currencies make Tiffany’s products more affordable in the international markets and that should fuel demand and sales. Today, Tiffany generates more than 50% of its sales outside the U.S.
What’s worrying about Tiffany?
- Macroeconomic risks
Because Tiffany & Co. (NYSE:TIF) sells discretionary products, demand for its products is closely tied to people’s ability to spend on such items. But unfavorable macroeconomic conditions such as high unemployment rates, limited access to credit and increase in the cost of fuel and energy tend to douse customers’ purchasing power and could produce weak demand for Tiffany’s products.
- Forex headwind
As Tiffany & Co. (NYSE:TIF) expands abroad and generates a significant amount of its revenue outside the U.S., it also gets more exposed to foreign exchange headwind. When the U.S. dollar is stronger, Tiffany’s products become more expensive for international buyers and the company has to cut prices to boost demand but that ends up hurting margins. Additionally, a stronger dollar means that international sales are worth less than they should when converted to USD.
- Foreign tourists
A substantial portion of Tiffany’s domestic sales are generated by foreign tourists to the U.S., but a stronger USD tends to limit the flow of foreign tourists to the U.S. because of the higher travelling costs. As such, Tiffany could face a sales squeeze if weakness in foreign tourist inflow persists.
- Tough times in Europe
The recent wave of terrorist attacks in Europe has complicated the business picture for Tiffany & Co. (NYSE:TIF) on the continent. Not only did the attacks people’s travel plans, but also hurt businesses and led to loss of income for some. As a result, demand for discretionary products suffered as recently confirmed by several Europe luxury companies reporting in 1Q2016.
- Pressure in Asia-Pacific
Economic slowdown in China is expected to continue weighing negatively on Tiffany’sjewelry business. Tiffany reported 8% decline in comparable sales in Greater China in 4Q2015.
Although Japan has traditionally been a bright spot for Tiffany, the strengthening of the Japanese yen in the recent months could limit sales to tourists flowing into the country.
Takeaway
There are several odds stacked against Tiffany & Co. (NYSE:TIF), but the company enjoys unique advantages that it can draw to drive growth and profitability in the coming quarters.