The Long Case For Tiffany & Co

8/10/2019 The Long Case For Tiffany & Co.

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Stock: Tiffany & Co.Recommendation: BUYTeam #10:

Owen GilmoreJerry JiangZiv Israel

November 5-7, 2014


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Jack Ferraro, MBA70

RECOMMENDATION: BUY

Current Price: $98.00

Target Price: $126.40

Est. Timing: 2+ years

Upside: 29%

IRR: 11.6%

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EBITDA Multiple Method

Weighted average cost of capital: 8.0%

Net present value of free cash flow $1,651

Terminal multiple 10.7x

Terminal value $18,234Present value of the terminal value 15,258

Implied perpetuity growth 3.5%

Enterprise value $16,909

Plus: Net cash ($658)

Equity value $16,251

Diluted shares: 128.6

Equity Value Per Share $126.37

Price Target $126.40

Implied upside 29.0%


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Tif fany & Co .

Founded by Charles Lewis Tiffany in 1837,

incorporated in 1868, and went public in 1987

Multinational luxury jewelry retailer that sells jewelry,

sterling silver, watches and other luxury items Well-known for their brand and diamond jewelry

Items sold in high-quality, luxury mall and streetlocations

Sales also generated through the internet and catalogs

Tiffany publishes the Blue Book to showcase theirhigh-end jewelry


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Tif fany & Co .

Geographic sales:

Americas contribute less than 50% of Tiffanys salesand continue to trend down

Greater China currently represents roughly half thesales in the Asia-Pacific region

Limited exposure to Europe and Emerging Markets

Geographic FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Revenues

Americas 55.7% 52.1% 51.0% 49.6% 48.5% 47.8%

Asia-Pacific 12.7% 15.7% 17.8% 20.5% 21.4% 23.4%

Japan 18.7% 18.9% 17.7% 16.9% 16.8% 14.4%

Europe 9.6% 11.3% 11.7% 11.6% 11.4% 11.7%

Other 3.2% 2.0% 1.8% 1.4% 1.9% 2.8%

Total Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Source: Capital IQ


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CURRENT CAPITALIZATION / TRADING STATS

Source: Yahoo Finance


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HISTORICAL STOCK CHART



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COTINUE

D

ORGANIC

GROWTH

1) Strong Revenue Growth from AsiaConsumers

2) Continued Improvement in GrossMargins

3) Remain a Leader in Product Innovation

INVESTMENT THESIS


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THESIS #1 Grow th f rom Asian Consumers

289 stores worldwide

as of the end of FY13

Plans to open 13 new

stores in FY14, with fivealready completed

Tiffanys adding five stores in the Asia-Pacific region,representing a 7% increase in store locations

H1 sales jumped in Asia-Pacific, up 15% (~$66M)

Due to increases in number of jewelry units sold and anincrease in the average price per jewelry unit

Source: Yahoo Finance; Company financials


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THESIS #1 Growth from Asian Consumers

We see stratospheric savings rates, extreme pricesensitivity and aversion to credit-card interestpayments On the other, there is the Chinese fixationwith luxury goods and a willingness to pay as much as120% of ones yearly income for a car.

A Diamond is Forever, glorifies eternal romance. InChina obligation, a familial covenantrock solid, likethe stone itself.

Tiffanys is already well entrenched in the region

1 Wall Street Journal


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THESIS #1 Growth from As ian Consumers

Industry forecasting slowing revenue growth in China(and across rest of Asia-Pacific)

However, has had stronger growth in the Asia-Pacific

region than other US and China jewelry manufacturers

While revenue growth should

slow, expect Tiffanys will

continue to experience better

growth than peers

Source: IBIS World


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THESIS #2 Improved Gross Marg ins

Tiffanys brand and products command high

gross margins historically in high 50s

Healthy trends in recent years Gross margins improved from 57% to 59.1% for 12m

ended 1/31/13 and 12m ended 7/31/14, respectfully

Company sparing closes stores that generate lowrevenue and replaces with better ones which reducecosts and improve margins


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THESIS #2 Improved Gross Marg ins

Tiffanys able to expand gross margins with a variety offactors

Has consistently been able to increase prices across all

geographic regions without significantly volume drops

Source: Oppenheimer Equity Research


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THESIS #3 Produc t Innovat ion

Leadership in product innovation has continued

Atlas Collection was relaunched

in fall 2013

First debuted in 1995 and inspiredby the Greek god, Atlas

Tiffany T Collection launched in fall 2014

Designed by Francesca Amfitheatrof, Tiffanys newlyhired design director

Strong, graphic form of the Tiffany T

Source: tiffany.com


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THESIS #3 Produc t Innovat ion

Tiffany T Collection

50+ styles

Range of metals (yellow, white, rose gold)

Diamonds accents included in some items Price ranges from a few hundred dollars up to $20,000

Key design director hire and ability to successfullylaunch new (and relaunch old) product lines shows

Tiffanys commitment to continuing their leadership inproduct innovation

1 Oppenheimer Equity Research


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VALUATION

Tiffanys slightly expensive based on its historical

TEV/LTM EBITDA multiple

Currently 12.4x vs average of 10.6x



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COMPS (Luxu ry Retai lers)

TIF P/E ratios near midpoint of company comparables

P/E range 11.6x 32.8x

NameMktCap

(M US$)

Price

(loc)

YTD

(%)PE FY0 PE FY1 PE FY2 PB FY0 PB FY1 PB FY2

14ROE

(%)

15ROE

(%)

Net Debt/

Eq.

EV/EBITDA

T12M

EV/EBITDA

FY1

EV/EBITDA

FY2ROIC T12M

TIFFANY & CO 12,575 97.30 4.8 22.7x 22.4x 19.6x 4.3x 4.1x 3.6x 18.1 20.0 23.3 22.2 11.7 10.5

SIGNET JEWELERS 9,669 120.50 53.2 24.2x 21.9x 18.2x 3.6x 3.4x 2.9x 14.8 16.3 (8.9) 16.7 13.4 11.5

SWATCH GROUP-BR 24,953 448.80 (23.7) 13.5x 15.5x 13.9x 2.5x 2.3x 2.0x 15.5 15.3 (12.3) 8.9 10.0 9.0 18.9

DOMINION DIAMON 1,159 15.59 2.2 32.8x 15.3x 20.2x 0.9x 0.8x 0.8x 5.0 3.5 (15.0) 3.9 3.0 3.6 (0.0)

RALPH LAUREN COR 14,825 169.04 (4.3) 19.9x 19.8x 17.2x 3.7x 3.6x 3.3x 18.3 19.6 (24.4) 10.4 10.2 9.2 15.6

COACH INC 9,152 33.26 (40.8) 11.6x 17.7x 16.3x 3.8x 3.6x 3.3x 19.7 21.8 (30.1) 7.2 8.7 8.0

BURBERRY GROUP 10,717 1,517.00 0.1 20.6x 19.6x 18.0x 5.8x 4.8x 4.2x 26.6 25.0 (33.3) 10.5 10.8 9.9 30.4

HERMES INTL 32,707 249.00 (5.4) 31.6x 30.1x 26.7x 8.9x 7.7x 6.4x 27.8 25.8 (35.1) 18.1 17.3 15.3 31.7

LVMH MOET HENNES 85,681 135.65 2.4 20.2x 19.8x 17.6x 2.5x 2.4x 2.2x 12.5 13.5 20.3 10.2 10.5 9.5 10.5

KERING 24,779 157.85 2.8 23.6x 16.6x 14.3x 1.9x 1.8x 1.6x 10.3 11.8 30.8 12.0 12.0 10.6 7.3

PRADA S.P.A. 15,727 47.65 (30.9) 22.5x 23.0x 20.3x 4.7x 4.2x 3.7x 19.1 19.1 (11.0) 11.7 12.0 10.7 20.2

CHRISTIAN DIOR 32,189 142.05 3.7 17.9x 16.9x 13.7x 2.2x 2.3x 2.0x 14.2 12.3 26.9 6.8 7.0 6.6 9.6

MICHAEL KORS HOL 14,944 72.70 (10.4) 19.1x 17.5x 15.1x 6.7x 5.6x 4.1x 36.8 30.6 (52.9) 11.8 9.9 8.5


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DISCOUNTED CASH FLOW

Discounted Cash Flow Analysis for Tiffany & Company

Dollars in millions, except for shares

Period Ending Jan 13,FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 2015e 2016e 2017e

Revenues $2,849 $2,710 $3,085 $3,643 $3,794 $4,031 $4,481 $4,964 $5,460EBITDA 628 579 759 897 861 975 1,190 1,440 1,702

Less: D&A (136) (139) (148) (146) (164) (181) (203) (215) (228)

EBIT $492 $440 $611 $751 $697 $794 $987 $1,225 $1,474Operating Margin 17.3% 16.2% 19.8% 20.6% 18.4% 19.7% 22.0% 24.7% 27.0%

Less: Taxes $134 $124 $179 $226 $227 $73 $345 $429 $516

Tax-effected EBIT $359 $316 $432 $525 $470 $720 $642 $796 $958

Plus: Depreciation and Amortization $136 $139 $148 $146 $164 $181 $203 $215 $228

Less: Net Capital Expenditures 154 75 127 239 220 222 242 265 290

(Increase)/decrease in working capital (276) 269 439 251 184 100 100 100Free Cash Flow to the Firm (FCFF) $340 $656 $184 ($7) $163 $496 $502 $646 $796

Earnings per share (diluted) $2.14 $2.91 $3.45 $3.28 $1.42 $4.65 $5.85 $7.11


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Perpetuity Growth Method EBITDA Multiple Method

Weighted average cost of capital: 8.0% Weighted average cost of capital: 8.0%

Net present value of free cash flow $1,651 Net present value of free cash flow $1,651

Terminal growth rate 3.5% Terminal multiple 10.7x

Terminal value $18,234 Terminal value $18,234Present value of the terminal value $15,258 Present value of the terminal value 15,258

Implied EBITDA multiple 10.7x Implied perpetuity growth 3.5%

Enterprise value $16,909 Enterprise value $16,909

Plus: Net cash* ($658) Plus: Net cash ($658)Equity value $16,251 Equity value $16,251

Diluted shares: 128.6 Diluted shares: 128.6

Equity Value Per Share $126.37 Equity Value Per Share $126.37

Current share price: $98.00 Price Target $126.40


DISCOUNTED CASH FLOW


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DISCOUNTED CASH FLOW - Sens i ti v it y Ana lys is

Perpetuity Growth Method

Weighted Average Cost of Capital

7.00% 7.50% 8.00% 8.50% 9.00%

2.50% $128.47 $115.13 $104.21 $95.10 $87.39

Terminal 3.00% $144.19 $127.63 $114.37 $103.52 $94.48

Growth 3.50% $164.41 $143.26 $126.80 $113.63 $102.85

Rate 4.00% $191.36 $163.35 $142.33 $125.98 $112.89

4.50% $229.10 $190.14 $162.30 $141.42 $125.17

## = Expected Return on Investment is 25%+


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DISCOUNTED CASH FLOW - Downs ide




Revenues $2,849 $2,710 $3,085 $3,643 $3,794 $4,031 $4,316 $4,627 $4,959EBITDA 628 579 759 897 861 975 1,091 1,211 1,342

Less: D&A (136) (139) (148) (146) (164) (181) (203) (215) (228)EBIT $492 $440 $611 $751 $697 $794 $888 $996 $1,113

Operating Margin 17.3% 16.2% 19.8% 20.6% 18.4% 19.7% 20.6% 21.5% 22.5%

Less: Taxes $134 $124 $179 $226 $227 $73 $311 $349 $390




(Increase)/decrease in working capital (276) 269 439 251 184 100 100 100

Free Cash Flow to the Firm (FCFF) $340 $656 $184 ($7) $163 $496 $438 $497 $561Earnings per share (diluted) $2.14 $2.91 $3.45 $3.28 $1.42 $4.15 $4.69 $5.28


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DISCOUNTED CASH FLOW - Downs ide





Terminal value $12,032 Terminal value $12,032

Present value of the terminal value $10,069 Present value of the terminal value 10,069



Plus: Net cash* ($658) Plus: Net cash ($658)

Equity value $10,688 Equity value $10,688

Diluted shares: 128.6 Diluted shares: 128.6



Implied upside (15.2%)


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DISCOUNTED CASH FLOW - Sens i ti v it y Ana lys isDowns ide

Perpetuity Growth Method

Weighted Average Cost of Capital

7.00% 7.50% 8.00% 8.50% 9.00%

2.20% $84.50 $76.13 $69.20 $63.37 $58.39

Terminal 2.70% $94.17 $83.93 $75.62 $68.73 $62.94

Growth 3.20% $106.40 $93.55 $83.37 $75.11 $68.27

Rate 3.70% $122.32 $105.70 $92.93 $82.82 $74.61

4.20% $143.94 $121.53 $105.01 $92.32 $82.28

## = Expected Return on Investment is 25%+


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INVESTMENT SUMMARY

Tiffany & Co. presents an attractive opportunity

Strong Asia-Pacific revenue growth, driven byincreased units sold and greater revenue per unit, willbecome significant top-line contributor

Improving gross margins will lead to improved netmargins and strong free cash flow

Tiffanys leadership in product innovation createsopportunities for new revenue lines

Tiffany & Co. strong BUY with 29% upside (11.6% IRR)


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Risk: Continued market volatility and market declines inNorth America currently a strong market at 48% of revenues

Mitigant: Diversification outside the US

Risk: Commodities price volatility

Mitigant: Focus on retaining ability to pass through higher input

costs to the consumer

Risk: Strengthening US dollar

Mitigant: Hedging (although can be expensive)

INVESTMENT RISKS/MITIGANTS


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APPENDIX

Tiffany & Co.


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MANAGEMENT TEAMName/Position Background

Michael Kowalski CEO &Chairman of the Board

Frederic Cumenal -President

Caroline Naggiar CMO

Mr. Michael J. Kowalski has been the Chairman and Chief Executive Officer of Tiffany & Co.since January 2003 and February 1999 respectively. Mr. Kowalski served as the President ofTiffany & Co. from January 1996 to January 2003, Executive Vice President from March 1992to January 1996 and Chief Operating Officer from January 1997 to February 1999. He hasbeen a Director of Tiffany since January 1995 and The Bank of New York Mellon Corporationsince July 1, 2007. He serves as a Director of Jewelers of America and PSB Group Inc.

Mr. Frederic Cumenal has been President of Tiffany & Co., since September 24, 2013 and isresponsible for the businesses in Asia, Japan, Europe and Emerging Markets at Tiffany & Co.Mr. Cumenal served as Executive Vice President of Tiffany & Co. from March 10, 2011 toSeptember 24, 2013. He served as Chief Executive Officer & President of Champagne Moet &Chandon SA. He has been Director of Tiffany & Co., since September 24, 2013.

Ms. Caroline D. Naggiar serves as Senior Vice President of Tiffany & Co. and has been itsChief Marketing Officer since 2007. Ms. Naggiar was assigned additional responsibility for thePublic Relations department in 2007 and served as Senior Vice President of Marketing ofTiffany & Co. since February 1998. She joined Tiffany & Co. as Vice President of MarketingCommunications in June 1997.


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HISTORICAL MULTIPLES

Tiffanys slightly expensive based on its historical

TEV/LTM EBITDA multiple

Currently 12.4x vs average of 10.6x


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INDSUTRY ANALYSIS (FIVE FORCES)Threat of new Entrants: Low

Brand highest asset toTiffanys

Threat of Substitute Products:

High

Consumers concernedabout conflict diamonds

More expensive to acquireconflict free diamonds

Bargaining Power of

Buyers: Moderate to Low

Superior pricing power Ability to pass higher

input cost to consumers

Rivalry Among Existing Firms:High

High industry growth rate Competitors expanding

globally

Bargaining Power ofSuppliers: High

Products usecommodity inputs


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Tiffany & Company 12m ended 12m ended 12m ended 12m ended 12m ended 12m ended 12m ended

Dollars in millions, except per share data 1/31/2009 1/31/2010 1/31/2011 1/31/2012 1/31/2013 1/31/2014 7/31/2014

Income Statement FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 LTM 2015e 2016e 2017eAmericas $1,586.6 $1,410.8 $1,574.6 $1,805.8 $1,840.0 $1,926.9 $2,023.21 $2,124.37 $2,230.59

(11.1%) 11.6% 14.7% 1.9% 4.7% 5.0% 5.0% 5.0%

Asia-Pacific 363.1 426.3 549.2 748.2 810.4 944.7 1,228.1 1,535.1 1,842.1

17.4% 28.8% 36.2% 8.3% 16.6% 30. 0% 25.0% 20.0%

Japan 533.5 513.0 546.5 616.5 639.2 578.6 590.1 601.9 614.0

(3.8%) 6.5% 12.8% 3.7% (9.5%) 2.0% 2.0% 2.0%

Europe 273.1 306.3 360.8 421.1 432.2 469.8 516.8 568.4 625.3

12.2% 17.8% 16.7% 2.6% 8.7% 10. 0% 10.0% 10.0%

Other 92.6 53.3 54.2 51.3 72.5 111.2 122.4 134.6 148.1

(42.5%) 1.7% (5.3%) 41.4% 53.4% 10. 0% 10.0% 10.0%

Total Revenue $2,848.9 $2,709.7 $3,085.3 $3,642.9 $3,794.2 $4,031.1 $4,214.8 $4,480.5 $4,964.4 $5,460.0

Revenue Growth (4.9%) 13.9% 18.1% 4.2% 6.2% 4.6% 11.1% 10.8% 10.0%

Cost Of Goods Sold 1,202.4 1,179.5 1,263. 0 1,491.6 1,631.0 1,690.7 1,725.0 1,792.2 1,936.1 2, 074.8

Gross Profit $1,646.4 $1,530.2 $1,822.3 $2,151.4 $2,163.3 $2,340.4 $2,489.8 $2,688.3 $3,028.3 $3,385.2

Gross Profit Margin 57.8% 56.5% 59.1% 59.1% 57.0% 58.1% 59.1% 60.0% 61.0% 62.0%

Selling General & Admin Exp. $1,018.1 $950.8 $1,063.0 $1,254.3 $1,302.4 $1,365.9 $1,413.4 $1,498.3 $1,588.2 $1,683.4

Depreciation & Amort. 135.8 139.4 147.9 145.9 163.6 180.6 191.5 203.0 215.2 228.1

Other Operating Exp., Total $1,153.9 $1,090.2 $1,210.9 $1,400.2 $1,466.1 $1,546.5 $1,605.0 $1,701.3 $1,803.3 $1,911.5

Other Operating Exp., Total 40.5% 40.2% 39.2% 38.4% 38.6% 38.4% 38.1% 38.0% 36.3% 35.0%

Other Operating Exp., Total Growth (5.5%) 11.1% 15.6% 4.7% 5.5% 3.8% 6.0% 6.0% 6.0%

Operating Income $492.5 $440.1 $611.4 $751.1 $697.2 $793.9 $884.8 $987.1 $1,225.0 $1,473.7

Operating Income Margin 17.3% 16.2% 19.8% 20.6% 18.4% 19.7% 21.0% 22.0% 24.7% 27.0%

Interest Expense ($29.0) ($55.0) ($54.3) ($48.6) ($59.1) ($62.7) ($67.7) ($68.0) ($68.0) ($68.0)

Other Non-Operating Expense, net 0.1 4.6 7.0 5.1 5.5 5.7 5.7 0 0 0

Other Unusual Expenses (97.8) 0.4 (16.6) (42.7) 0 (482.1) (472.7) 0 0 0

Income Before Taxes (EBT) $365.8 $390.0 $547.5 $664.9 $643.6 $254.8 $350.1 $919.1 $1,157.0 $1,405.7

Income Tax Expense 133.6 124.3 179.0 225.8 227.4 73.5 109.4 321.7 404.9 492.0Effective Tax Rate 36.5% 31.9% 32.7% 34.0% 35.3% 28.8% 31.2% 35.0% 35.0% 35.0%

Net Income $232.16 $265.75 $368.46 $439.14 $416.17 $181.31 $240.73 $597.39 $752.03 $913.69

Net Income Margin 8.1% 9.8% 11.9% 12.1% 11.0% 4.5% 5.7% 13.3% 15.1% 16.7%

Diluted Shares 124.7 124.3 126.6 127.4 126.7 127.8 128.6 128.6 128.6 128.6

Change in Share Count -0.3% 1.8% 0.6% -0.5% 0.9% 0.6% 0.0% 0.0% 0.0%

Recurring EPS $2.14 $2.91 $3.45 $3.28 $1.42 $1.87 $4.65 $5.85 $7.11

EPS Growth 36.2% 18.4% -4.7% -56.8% 32.0% 227.5% 25.9% 21.5%

Consensus EPS (Capital IQ as of 11/6/14) $4.34 $4.95 $5.69

My estim ates vs. Consensus 7.0% 18.1% 24.9%


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Revenues $2,849 $2,710 $3,085 $3,643 $3,794 $4,031 $4,481 $4,964 $5,460

EBITDA 628 579 759 897 861 975 1,190 1,440 1,702

Less: D&A (136) (139) (148) (146) (164) (181) (203) (215) (228)

EBIT $492 $440 $611 $751 $697 $794 $987 $1,225 $1,474Operating Margin 17.3% 16.2% 19.8% 20.6% 18.4% 19.7% 22.0% 24.7% 27.0%

Less: Taxes $134 $124 $179 $226 $227 $73 $345 $429 $516




(Increase)/decrease in working capital (276) 269 439 251 184 100 100 100Free Cash Flow to the Firm (FCFF) $340 $656 $184 ($7) $163 $496 $502 $646 $796

Earnings per share (diluted) $2.14 $2.91 $3.45 $3.28 $1.42 $4.65 $5.85 $7.11





Terminal value $18,234 Terminal value $18,234

Present value of the terminal value $15,258 Present value of the terminal value 15,258



Plus: Net cash* ($658) Plus: Net cash ($658)

Equity value $16,251 Equity value $16,251

Diluted shares: 128.6 Di luted shares: 128. 6




Documents

The Long Case For Tiffany & Co