Analyzing Tiffany& Co (TIF)

By Yaser Anwar, CSC of Equity Investment Ideas

TIF reported 3rd Q EPS of $0.18 (excluding one time tax benefit and gain on securities sale of $0.03), were above street expectations of $0.16. US comps were up +6% (Sept +7%, Oct +4%) but Japanese comps down -5% (Sept -4%, Oct -7%). Operating margins were flat, with GM declines offset by lower SG&A rate.

The stock had a great day due to-

1) Sales growth in November higher than expectations, with US comps & International comps stronger than expectations

2) Europe and non-Japan Asia sales strong and above internal expectations in 3Q, with comps +21% and +17%; respectively,

3) Buyback of around $100 mill of shares in 3rd Q,

4) Gehry collection results were above expectations,

5) Higher end jewelry is performing best

6) Strength in London with Bond St. store “meaningfully” higher and the New US stores performing well.

7) Increased 2006 guidance to $1.79-$1.84 from $1.77-$1.82, which implies 4Q06 guidance of $0.99-$1.04, cons. is at $1.02.

Investors should note that the Japanese business remains weak and management no longer providing specific Japan comp guidance, instead they are now focus on Intl., comps decelerated monthly throughout the quarter, but they appear better on a 2 year basis. Also that gross margins continue to be pressured by higher raw material costs & inventory was up double digits to +19%.

• TIF’s primary growth drivers are new store openings and SSS. Over the next few years, TIF anticipates annual mid-single digit growth in worldwide square footage with the opening of three to five US stores and five to seven international stores.
• Investors should expect net sales growth to be driven by new products and multi-channel distribution, and for an operating margin improvement from expanded internal manufacturing and diamond sourcing capabilities, and expense controls.
• TIF’s new $700 share repurchase authorization should also provide support for EPS growth

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