Tiffany & Co: Overvalued Since 2018


Thesis

Tiffany & Co. (NYSE: TIF) is an overvalued company with an unsuitable management which is failing in its millennial re-branding efforts and now faces secular headwinds. Wall Streets optimism by new management and activist investor activity by JANA Partners is entirely overblown and unwarranted given the facts. The investment on the part of JANA Partners appears quite strange and marks the firms first move into the retail space. Given the current managements expertise, it appears to be a 2005 management team for a 2018 turnaround. The companys Chief Artistic Officer, the man in charge of creating new collections for millennials, allegedly was asked to leave his creative position at Coach because he [didnt] have much insight into the younger generation. With little to no threat of acquisition and only a 3% short float, we believe that the aforementioned catalysts make TIF out to be an attractive short.


(Original Image Source: PopSugar.com which has been modified by us)

Overview

Tiffany & Co. operating through subsidiaries, manufactures, creates and sells jewelry and other luxury goods. Since its original incorporation in 1868, TIF has built a cultural image of the little blue box. According to the Companys own annual filing, the brand recognition and customer perception are the single most important asset of the Company. But as our research shows, this brand recognition which TIF has enjoyed historically is shifting away as management fundamentally seems to misunderstand millennials and continues to disappoint.


Management’s corporate strategy includes four key components: capture millennial spenders, increase the amount of new collections releases, revamp in-store experience, and increase online sales. This combination and the lack of execution of these core objectives does not bode well for the companys future performance.


Data Source: Company Filings

Failure to capture millennial spenders: Philosophically, the millennial generation appears to value things much differently than previous generations. This has put a strain on TIF to leverage its brand image and perception to capture its target millennial audience. Essentially, the millennial generation seems to have pushed value more to experience and personal meaningfulness than social materialism. This suggests that the little blue box has significantly less value to their generation and the research supports this. We surveyed millennials from five college campus in the United States (roughly 80 total) and 50 randomly sampled millennial women from around the world and asked them about status versus substance. The data was collected via an online survey which participants filled out without knowledge of our thesis. From a statistical standpoint, perhaps it would important to keep in mind that the total sample group was more skewed towards the US which represents the largest geographic segment for TIF. In addition to this, TIF operated in every area from which we surveyed.


Using the same data we collected, we found that the millenials we polled really did not value the little blue box experience. We asked if they would buy a necklace or ring from TIFs website given its price and largely the answer was no. We then asked if they would the exact same products at a 50% discount second hand. 73% said yes to the necklace and 53% said yes for the ring. Perhaps not coincidentally, we should note that the average discount for Tiffany jewelry on the popular consignment websites, TheRealReal (www.therealreal.com) is indeed roughly 50%.


The results of our research show that an overwhelming majority viewed TIF as a status symbol while preferring to purchase from start-up designers over TIF. This suggests that given equality in quality, Millennials indeed value uniqueness and substance over status symbols and social materialism.

New collections releases flopped: TIFs new collections stand as a testament to how much management misunderstands their audience. The companys Chief Artistic Officer is Reed Krakoff who joined the team in 2017. Formerly he was the executive creative director of Coach. Looking at a few of products from TIFs new collections, notably, we see a $575 sterling silver paper cup, a $350 golden straw, and $9,000 ball of sterling silver yarn.


(Source: Tiffany’s website)


In addition, the companys Hardwear collection has failed to stir up millennial interest. Perhaps to drive my point on their marketing efforts home, recently on my Instagram feed, I saw a sponsored ad for Tiffany’s. Imagine my surprise when I saw the products the company thought I would prefer: A $270 sterling silver bottle opener.


Though Wall Street touts optimism at this new Chief Artistic Officer, the story we heard from industry experts show a different story. Here are some notable thoughts on Reed Krakoff and his designs. The sources of these quotes are from within the industry and have requested to remain anonymous.


(Source: we created this image)

The final quote is the smoking gun in our case for management’s understanding of the new generation: the chief artistic officer allegedly was asked to leave Coach because he did not understand the new generation and was then hired to create new collections for Tiffany for the new generation.

Empty stores, bored employees, no millenials: On Friday, February 9th, the weekend before Valentines Day, we took a trip to the Grove LA, one of the most popular and busy retail and entertainment complexes in the world. We chose to go at 5pm, at peak hours to catch everyone shopping who just got off work. This is what we found: an empty store with no millenials or any customers for that matter. One employee even admitted to the lack of customer traffic that day. This is not something that you would expect of a high-end jewelry brand if everything was going smoothly. To add to this, while inside, the sales employee tried to sell us the $350 golden “lifestyle” straw rather than any actual jewelry.


Valuation

From a valuation standpoint, the bearish story continues. On a comparables basis, no matter which set you pick, TIF appears to trade a large premium despite its considerable headwinds. Part of this, we believe is a result of the little blue box effect which continues to fade as millennials become the target audience. Even as TIF begins to fall, the threat of acquisition by a European conglomerate seems highly unlikely as well. The last American Brand to be acquired by a European conglomerate was DKNY in 2001.


We took a look at two cases: one based on our projections and one based on management projections. The first one assuming flat same store sales growth which we believe to be an accurate reflection of where TIF is heading. In this case, other key cost assumptions were increasing gross margins at 50 bps annually, advertising costs increasing by 25 bps annually, and fix costs still 85% of SG&A which is historical for the company.The second case assumed management guidance on Same Store Sales which is roughly 3%. In this case, other key cost assumptions were also the same.


In our flat same store sales case, our model shows an implied downside of 47% and 22% downside using management projections for same store sales growth. In order to get a 20% upside, TIF would need to overcome all of the obstacles it faces and accelerate same store sales continually starting now through 2022. We feel that this is entirely unreasonable and far beyond even the most bullish Wall Street estimates.



Even when trying to back into a terminal growth rate using a European conglomerate 10.5x EV/EBITDAR exit multiple, we get an implied terminal growth rate of 6%, which is entirely unrealistic for TIF. We see the potential downside reaching 47% as continued poor product rebranding efforts lead to poor same store sales growth. This coupled with TIFs high operating leverage will result in potentially large earnings misses.


Given all of this, we are bearish on Tiffanys & Co. and recommend shorting it. Luckily the cost of the short is quite low given its relatively low short float. We believe managements millennial rebranding failures will continue to weigh down same store sales and lead to major future earnings disappointments.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The research, idea, graphs and charts for this article are credited to Roma Forrest and Blaze Li. We are not a registered investment advisers or broker/dealers. Readers should conduct their own research and due diligence and obtain professional advice before making investment decision. We will not be liable for any loss or damage caused by information obtained herein. Readers are solely responsible for their own investment decisions

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