Tiffany & Co. (NYSE:TIF) became a household name in the 1960s after the release of the Audrey Hepburn classic, Breakfast at Tiffany’s. Since then, the company’s momentum has not waned. Today, TIF is among the world’s top luxury retail brands. Girls all over the world dream of wearing a large diamond ring with the TIF insignia on their wedding day. But TIF’s product line includes more than just rings. The company now offers a dynamic product pipeline with different price points, which is one of many reasons we like the stock. Scout Capital, Partner Fund Management, Senator Investment Group, and Sigma Capital are among the hedge funds that initiated brand new positions in this stock during the first quarter.
Worldwide demand for the TIF products has remained strong, and the company has been active in opening new stores to satiate that demand. 24 new stores should come online this year. Estimates are that the Americas region has “long-term potential for more than 150 stores” and Europe has “potential for 50 stores.” There are currently 102 stores in The Americas and 32 in Europe. The regions we identify with the most opportunity for new store buildout with high ROIs are Asia Pacific, in particular China, the Middle East, and India. TIF has done well in capturing sales in Asia. Asia contributes ~21% of sales, and with an increasing number of wealthy consumers in China and the broader Asia region, we think earnings and sales growth will continue to scale.
TIF has been relentless in introducing new products and collections. Product development efforts have been very successful with lower-priced items like key and locks that still boast the TIF name but inherently have a lower price point. This year alone, there are a slew of new collections: 1837 jewelry collection, Villa Paloma, ENCHANT, and the New Art Deco collection. We also think watches present an interesting growth opportunity. Currently TIF is resolving a quarrel with Swatch but once that is over, we think the company will take a look at watches as a potential pipeline product.
Tight control of the supply chain is another TIF strength. It is very important that TIF is able to maintain a constant supply of high-quality diamonds. So TIF directly sources over half of its rough diamonds. This procurement strategy allows the company to secure supply during shortages and to source ethically. Control also applies to manufacturing with 60% of merchandise manufactured internally.
We really look favorably on TIF’s decision to branch out beyond the traditional brick and mortar business into eCommerce (see more on this topic). TIF has 13 websites in 18 countries. Even though ecommerce sales only represent 6% of revenue, we see that number picking up with the trend of an increasing number of consumers making online purchases. TIF is also being smart about where to further build out eCommerce sites. The company has indicated that it will wait to enable eCommerce in China when it feels it has the necessary distribution capacity. TIF has tight controls on what products it sells online i.e., engagement rings are not available. This fits well with the company’s high-service, customer experience model, and its strategic decisions like this that further support our thesis on the company. For those interested in mobile technology, TIF does have an app but the focus is on education regarding its diamonds and not transaction-oriented.
The space in which TIF operates is fragmented. We consider TIF to be high-end but not ultra high end. TIF’s competes with De Beers, Cartier, and Bulgari, all of which are privately-held. Chanel, Gucci, Hermès, and Dior have also been ramping up their accessories departments, which TIF will have to reckon with. The ultra high-end is comprised of Van Cleef & Arpels, Harry Winston, and Leviev. In Asia, Chow Tai Fook is the major player (mass market) with ~1,500 stores.
We believe that the company’s geographic expansion ,tight product controls, product pipeline, and integrated supply chain position it well to take market share in the high-end luxury market and meet its stated goals of 10%-12% sales growth. Granted Q4 was a difficult one for jewelry retailers in part due to price increases, but we believe the growth story is alive and well. Also, TIF is using its healthy free cash flow to benefit shareholders, increasing the quarterly dividend 16% and repurchasing $174 million of common stock. The shares are currently trading at ~16.3x 2012 earnings, but based on the aforementioned factors, we think there is room for multiple expansion to ~19.0 to ~20.0x 2012 earnings.