We recently downgraded our long-term recommendation on Tiffany & Company (TIF), a high-end jewelry designer, manufacturer and retailer, to “Neutral” with a price target of $63.00. Earlier we had an “Outperform” recommendation on the stock. Tiffany also holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating, and correlates with our long-term recommendation.
We remain concerned about Tiffany’s operations in Japan, which were recently hit by the earthquake and tsunami. The catastrophe may dent its performance to some extent. Notably, Japan had contributed 18% to total net sales during fiscal 2010. Management now expects sales from Japan to drop 15% during first-quarter 2011. The company also lowered its first-quarter earnings guidance to 57 cents from 62 cents a share due to store closures and limited store hour operations in Japan.
Management also notified that owing to its inability to provide a better insight into future sales in Japan, it is not adjusting its sales and earnings guidance for fiscal 2011. For fiscal 2011, Tiffany now anticipates total net sales to rise between 12% and 14%, and forecasts earnings in the range of $3.35 to $3.45 per share, reflecting a growth of 14% to 18%.
Tiffany, which faces stiff competition from Signet Jewelers Limited (SIG) and Zale Corporation (ZLC), holds a significant position in the world jewelry market by virtue of its distinctive brand appeal. The company intends to expand its distribution network by adding stores in both new and existing markets. The company is focused on opening smaller stores that offer selected collections of lower priced higher-margin products, which in turn boost store productivity.
We believe Tiffany is well positioned to support robust sales and earnings growth by leveraging capital investments made over the past several years in distribution, manufacturing and diamond sourcing processes. Moreover, with nearly half of the total sales generated internationally, we believe that the company is well diversified from a regional perspective.
However, due to high exposure to international markets, Tiffany remains prone to currency fluctuations. The weakening of foreign currencies against the U.S. dollar may require the company to either raise prices or contract profit margins in locations outside of the U.S. A rise in price may have a direct impact on the demand.
Moreover, the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively impact their discretionary spending, and in turn the company’s growth and profitability.
Given the pros and cons, we prefer to be Neutral at this stage.
SIGNET GRP PLC (SIG): Free Stock Analysis Report
TIFFANY & CO (TIF): Free Stock Analysis Report
ZALE CORP NEW (ZLC): Free Stock Analysis Report
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