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RAPAPORT... Sterne Agee analysts Ike Boruchow and Tom Nikic raised their earnings outlook for Tiffany & Co. as lower material costs and improving sales for the brand's silver business are expected to boost margins. Sterne Agee maintained a rating of ''Neutral'' on the stock, but it increased profit estimates to a range of $3.50 to $4 per share from $3.46 to $3.95. Additionally, Sterne Agee raised its price target on Tiffany's shares to $86. Tiffany's shares closed on the New York Stock Exchange on August 14 basically flat at $81.60.
The analysts opined that headwinds in 2012, particularly regarding Tiffany's gross margins, were likely to be reverse this year given lower raw material costs, the retailer's ability to implement price increases and the performance of its silver business. ''Thus, we see potential for significant margin inflection and improved profit generation in 2013 and 2014,'' they wrote in a note to clients.
Obviously with lower costs coupled with price increases, there is significant margin improvement (a 200-basis-point opportunity over the next two years) and Sterne Agee estimated that Tiffany's product costs would drop between 5 percent and 10 percent this year, while the decrease would accelerate next year to between 10 percent and 15 percent. Boruchow and Nikic added that early weakness in Tiffany's entry-level silver product weighed on profitability; however, it is the highest margin category with estimated margin of between 80 percent and 85 percent. ''By our math, we believe the slump in silver has been an approximately 150 basis points drag to gross margins over the past three years. However, we feel that management's strategy of increasing focus on higher fashion silver, rather than basics, will bear fruit, as evidenced by the early success of the recently launched Ziegfeld collection,'' the analysts wrote.
If Tiffany can recapture silver sales that were lost, the mix benefit and the top-line leverage could present another 200 basis points opportunity, they said. Sterne Agee stated that while Tiffany does have multiple tailwinds over the next two years, the potential upside to numbers suggests the stock valuation is not as expensive as it seems.
Tiffany's shares are trading 36.8 percent higher than one year ago and they closed at a record $82.84 on August 13. Tiffany reports its second-quarter results on August 27.
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