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RAPAPORT... Tiffany & Co. will benefit from China's increasing demand for jewelry coupled with the country's low rate of diamond penetration, especially as marriage rates increase, according to Sterne Agee analysts Ike Boruchow and Tom Nikic. Sterne Agee's rating on Tiffany & Co. is set at "Buy" with a 12-month price target of $105 per share and earnings per share (EPS) of between $4.10 and $4.60 for the 2014 and 2015 fiscal period. Tiffany & Co.'s shares closed 29 cents lower to $86.65 in New York on April 18. "We continue to believe that Tiffany is one of the most compelling opportunities in our space, given multiple ways to win (Asia growth, domestic turnaround, highly visible gross margin opportunity), and we would be buyers on recent weakness," which is down 10 percent from the peak, according to the analysts. The analysts believe that Tiffany & Co. will benefit from not only macro tailwinds within China, such as increasing consumer affluence, but also the company's internal strategies to focus more heavily on the bridal category. "As these structural trends continue to play out over the long term, China should become an increasingly material piece of the global story," according to the analysts. A decade ago, Tiffany & Co. operated one store on the mainland and 11 in all of Greater China, but today it operates 26 stores on the mainland and 45 in Greater China. Given this, Sterne Agee estimates revenue from China has increased from just about $100 million in 2008 to about $500 million in 2013. "Given the continuing urbanization/Westernization of the Chinese population, growing affluence, and low diamond penetration, we believe this market will remain ripe for growth over the long term. Notably, per-capita spending on jewelry in China is relatively low, at only $42 versus $91 for Japan and $242 for the U.S.," according to the note. Still, there are approximately 400 million Chinese residents between the ages of 20 and 30, representing great potential for bridal jewelry sales and branding. Sterne Agee noted that there were 14 million marriages in 2013. "While Chinese brides had not historically received engagement rings, the increasing Westernization of the urban Chinese population has led to rapid growth of the engagement ring industry in China. Even so, only about 30 percent of all brides in China today receive an engagement ring versus 80 to 85 percent in most other large economies (such as the U.S. and Japan).
"Notably, diamond engagement ring popularity tends to ramp very quickly, as the percentage of U.S. brides receiving engagement rings rose from just 10 percent in 1939 to 50 percent just 20 years later, and the ramp was even steeper in Japan (from 6 percent to 60 percent in just 10 years). With the increasing affluence and Westernization of young Chinese couples, who are getting married at an increasing rate, we believe the prevalence of engagement rings will continue to climb," according to the analysts. Additionally, as Tiffany & Co. continues to market the brand in China, many Chinese consumers are shopping Tiffany stores when they travel abroad due to higher prices at home. Given that outbound tourism from China has grown at a 23 percent compound annual growth rate over the past 10 years, Tiffany's other stores often serve as extensions of the brand's marketing program than points of distribution. Sterne Agee believes those marketing efforts are also contributing to top-line results in the Americas, particularly at the New York City flagship store, Europe and Japan. Given those dynamics, Sterne Agee estimated that total demand from Chinese residents - including tourism outside China - is closer to $800 million.
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