Luxury jeweler Tiffany (click ticker for report: ) announced lackluster fourth quarter results late last week, but provided relatively upbeat guidance. Revenue grew 4% year-over-year to $1.2 billion, falling just a touch short of consensus estimates. Earnings per share rose 1% year-over-year to $1.40, a few cents higher than consensus expectations. For the full-year, revenue rose 4% to $3.8 billion while earnings per share dropped 5% to $3.25.
During the fourth quarter, Asia-Pacific continued to be the company’s growth driver, with constant currency same-store sales growth of 6% driving total constant currency sales growth of 10%. Stores generated a sterling $4,500 in sales per square foot, and that number looks poised to grow in fiscal year 2013, even though the company will be adding four stores in China and seven stores total in the region. Although this will be positive for sales in the region, we fear it may cannibalize sales at the firm’s New York location, which accounts for a significant portion of Tiffany’s revenues. Tourism accounts for nearly 25% of all US sales, and we believe new store openings in Europe and Asia could put downward pressure on the entire geography. Tiffany could also lose some of its luster and heir of exclusivity, thus avoiding growth at all costs remains paramount, in our view.
Fourth quarter sales in America were relatively weak, in our view, growing just 2% year-over-year while same-store sales dropped 2%. We think Tiffany may be losing its luster in North America due to increased online distribution, as well as more storefronts and lower price-points. As a result, we do not think Tiffany holds quite the same psychic prestige in the mind of consumers. Still, the firm will roll out a Great Gatsby collection in tandem with the film’s release later this year, and an exclusive 175th anniversary sale for “special” customers. Both events could provide a nice lift to sales.
European results were slightly better, growing 3% year-over-year, driven by a 1% same-store sales increase. While we aren’t predicting much growth in the European Union in 2013, the company will open 3 new stores in the region, and we like the firm’s entry into the Czech Republic via a store in Prague in 2012. Europe represents about 11% of sales at this time, and we think it will shrink as Asia-Pacific grows. Japan was negative in the fourth quarter, but management believes the region will turn positive in fiscal year 2013. Japanese economic issues are well-articulated at this point, but a rising Nikkei and QE could help boost the region’s fortunes.
However, the market was captivated by the firm’s fiscal year 2013 outlook, which ratcheted up growth expectations. Tiffany believes net sales will grow 6-8% during the year, leading to earnings per share growth of 6% to 9% ($3.43 to $3.53). The outlook anticipates expansion across all geographies, driven by a double-digit sales growth pace in Asia-Pacific. We are a bit skeptical about such a robust growth rate, especially since Chinese economic prospects look relatively uncertain after we’ve seen mixed data points at several different companies. Still, 6-8% growth after a 4% growth in 2012 looks attainable, in our view.
Nevertheless, Tiffany’s guidance could prove conservative, particularly if the US economic recovery accelerates. Additionally, we believe Tiffany looks like an attractive takeover candidate in a low interest rate environment. A Tiffany acquisition might cost a potential acquirer $12-$14 billion, in our view, and we think it could make sense as a part of bigger luxury conglomerate like Louis Vuitton Moet Hennessey or Richemont. LVMH in particular has shown a willingness to make expensive acquisitions, and both firms have done an excellent job managing their respective brands over the past decade. Still, the cost won’t be low, so an acquisition is not a foregone conclusion. Unfortunately, we believe the market is privy to this idea, which could provide a floor for the stock (therefore, a material mispricing to the downside could be mitigated).
Although the business could improve in fiscal year 2013, we think shares look fairly valued, and we are not interested in adding them to the portfolio of our Best Ideas Newsletter at this time. Tiffany expects poor first quarter results, which could present an entry point, but the market may be patient with a prestigious brand name (limiting investment opportunities).