equity report tiffany final-version ops done
TRANSCRIPT
Published by CityU Student Research & Investment Club
Copyright © CityU Student Research & Investment Club 2
THE FINAL PAGE OF THIS REPORT CONTAINS A DETAILED DISCLAIMER The content and opinions in this report are written by university students from the CityU Student Research & Investment Club, and thus are for reference only. CityU Student Research & Investment Club is not responsible for any direct or indirect loss resulting from decisions made based on this report. The opinions in this report constitute the opinion of the CityU Student Research & Investment Club and do not constitute the opinion of the City University of Hong Kong nor any governing or student body or department under the University.
Copyright © CityU Student Research & Investment Club 1
Tiffany & Co. (TIF:NYSE)
Our Analysis of Tiffany & Co. hereupon referred to as “Tiffany & Co.”, “TIF” or “Tiffany”) has been driven by a DCF (Discounted Cash Flow) modelling approach. Our Valuation gives ‘TIF’ a fair share value of USD 125.88 with a (HOLD) recommendation, which has been calculated through a DCF valuation of the 5-Year forecast period ranging from the years ending 31st January 2020E to 2024E. Tiffany & Co. is a long time key player in the luxury jewellery segment, holding an estimated 10% of the global market share, which is challenged with a bleaker overall global economic outlook, and below expectation revenue performance in the past quarter. The overall market growth in its segment has been low and stable, and is primarily driven by rising spending from Chinese consumers. LVMH Acquisition of Tiffany & Co. : Tiffany’s recent bullish run from being priced in the mid USD 90’s to its current high of USD 133.48 is driven primarily by positive market reaction to its offer and confirmation of acquisition from LVMH. With a potential market-leading combined market share that is expected to make their combination the largest in the segment, surpassing closest rival Richemont, Tiffany’s integration is expected to lead to improved profitability in the long run, as per analyst estimates. Millennial Driven Growth : In the near future Millennials are expected to be a key driver of growth in the segment with expectations of them being the overall luxury markets leaders, with an estimated 45% market share by 2025 according to Bain & Co. Proposed entry into the Indian market : Tiffany & Co. planning to enter the Indian market demonstrates high growth potential given the rapid rising of consumer income levels in India’s massive middle class. Tiffany has announced plans to expand into the Indian market through two primary store openings in Mumbai and New Delhi. China fuelled growth: China is expected to deliver 65% of the world’s spending on luxury goods as we head toward 2025. Already being a major driver of growth in the luxury segment, it is acting as a key setter of preferences for firms like Tiffany, eager to capture a piece of the most rapidly growing regional demographics.
Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. Target price is for 12 months.
Research Analysts:
Murtaza Salman Abedin +852 59858568
Daria Yong-Tong Yip [email protected]
Samya Malhotra
Gerald Akhmelvan [email protected]
Raymond Widjaja
Siddhant Jain [email protected]
Assistant Analyst:
Mandeep Singh [email protected]
December 6th, 2019
Americas
Equity Research
Jewellery
Rating Hold
Price (12/06/2019 USD) 133.48
Target Price (USD) 125.88
% up from Price on 12/06/2019 5.69%
Market cap. (USD, Billions) 16.01
Enterprise Value (USD, Billions) 17.69
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TIFFANY & CO STOCK VOLUME
Copyright © CityU Student Research & Investment Club 2
Table of Contents Company Overview ................................................................................................................... 3
Brand Overview .................................................................................................................................3 New Market Entry.............................................................................................................................3 LVMH Offer ......................................................................................................................................3 Review of Quarter .............................................................................................................................3
Revenue Analysis ...................................................................................................................... 4
Industry Overview ..................................................................................................................... 5 Chinese Consumers and Impact on the Industry ...........................................................................5 Personal Luxury Goods Segment Displaying Healthy Growth.....................................................6 Shift to Digital Purchases and Network Consolidation (Distribution Trends) ............................7
Investment Thesis ...................................................................................................................... 9 Sustainable Market Growth through Buyout Offer and Rising Demand from the Youth ........9 Aggressive Expansion Plan in Asia Pacific despite Decline in Sales Associated with Tourists 10 Gambling Towards a New Booming Market ................................................................................11
Valuation ................................................................................................................................. 12
Market Catalysts ...................................................................................................................... 13 Synthetic Diamonds and the Cannibalization of Natural Gems .................................................13
M&A Analysis: Tiffany Acquisition by LVMH ..................................................................... 14 Key Activity in The Segment ..........................................................................................................14 Key Insights of the M&A Activity for Tiffany..............................................................................14
Investment Risks ..................................................................................................................... 16 Commodity Risk ..............................................................................................................................16 Declining of Chinese Tourists Sales ...............................................................................................16 Uncertainty of the Expansion Plan ................................................................................................16 Synthetic Diamonds Cannibalization ............................................................................................16
Appendix .................................................................................................................................. 17 Income Statement ............................................................................................................................17 Balance Sheet ...................................................................................................................................17 Cash Flow Statement.......................................................................................................................18
Copyright © CityU Student Research & Investment Club 3
Company Overview Brand Overview
Tiffany & Co. is an American luxury jewellery firm, founded by Charles Lewis Tiffany in 1837,
headquartered in New York City. The company became famous in the early 20th century, with store
network expansion in emerging markets being one of its prime objectives. It is known for luxury goods,
specifically its diamond and sterling silver jewellery. It has over 300 stores in major cities worldwide
and has an employee base of 14,000.
New Market Entry
Recently, Tiffany & Co. has announced intentions to enter the Indian market. India being the world’s
second largest gold jewellery market and home to an emerging middle class have been major factors
for this decision. The expansion will start with two store openings in New Delhi and Mumbai.
LVMH Offer
On October 28th 2019, Luxury goods giant Moet Hennessy Louis Vuitton SE (LVMH) made a USD14.5
billion bid to buy Tiffany & Co. Bernard Arnault claims to have made a USD120-a-share offer to buy
the US-based jeweller. This bid was rejected and a counter-offer at USD135-a-share was then accepted.
Finally, on November 25th 2019, it was decided that LVMH will acquire Tiffany for USD135 per share
in cash. Both the companies shook on closing the deal at USD16.2 billion. Tiffany is now going to be
a part of LVMH’s 79 brands, in the jewellery and watches division. This deal is expected to go through
in the middle of 2020.
Review of Quarter
As of the announcement of Q2
results, worldwide sales have
declined 3% to USD1 billion and
comparable sales have undergone a
4% decline. Net earnings of
USD136 million were 6% lower
than 2018’s USD145 million. The
net earnings per diluted share have
dropped from USD1.17 in the prior
year to USD1.12. Gross margin of 62.2% in the H1 and 62.7% in Q2 have also decreased compared to
63.5% and 64% in the respective prior year periods.
Figure 1 Source: CURIC
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Revenue Analysis The company’s annual revenue declined from 2016 to 2017 by 2.51% to USD4.002 billion, then rose
from 2017 to 2018 by 4.2% to USD4.17 billion. Tiffany’s annual revenue increased by 6.53% from
2018 to 2019 to USD4.442 billion. Gross profit has continued to increase at a stable rate from USD2.16
billion in 2017 to USD2.81 billion in 2018. Tiffany’s revenue for the July 31st 2019 ending quarter was
USD1.049 billion, which inflicted a decline of 2.55% year-over-year. The revenue for the twelve
months ending July 31st 2019 was USD4.385 billion, with a 0.79% decline.
Its earnings growth are expected to resume in H2 of 2019 based on its strong E-Commerce business
base, which has grown roughly twice as fast since the Q4 of 2018. Its revenue for 2019 is expected to
rise by 3%, and net earnings are expected to rise by 5%. Its sales growth has, however, shown a
significant slowdown from 7% last year.
After a string of increases in 2018, the gross profit margin fell for the second straight quarter.
Furthermore the gross profit margin has slipped from 64% a year ago to 62.7% of sales and is down to
62.2% of sales so far in 2019 compared to 63.5% in the same period last year.
In Q2 of 2019, the comparable store sales dropped by 1% compared to last quarter's flat score. In most
Tiffany markets, this result reflected soft demand, with comps falling 4% in the Americas, 6% in
Europe, and 1% in Japan. Most of these losses have been offset by modest growth in China. In the
Americas, which constituted 47% of its Q4 sales, Tiffany’s flat growth was attributed towards the
slowdown of spending by local customers and foreign tourists. In Asia, which constituted 24% of sales,
Tiffany observed a rather strong growth in China, allaying fears of backlash from rising trade tensions
with the US. Japan, constituting 15% of sales, also remained one of the strongest market for Tiffany
and its growth is attributed to higher spending from both local customers and tourists. The European
market with a 12% sales share is the toughest market as of today due to the in-active demand from its
customers, both local and tourists.
Figure 2 Source: CURIC
Copyright © CityU Student Research & Investment Club 5
Industry Overview
Chinese Consumers and Impact on the Industry
As one of the countries with the largest opportunities for growth, not only due to its current population
of approximately 1.4 billion (18.59% of worldwide population), China’s rising middle-class, fuelled by
an economic boom, is the engine powering spending in high-end goods. China’s rising middle-class has
even maintained their appetite for luxury goods despite concerns of a recession and a gloomier future
economic outlook. China is expected to deliver 65% of the world’s spending on luxury goods up
through 2025, according to UnionPay’s research on its transactional data. Considering China’s large
share in the luxury market, it is no wonder that Chinese customers’ tastes and preferences have such a
great influence on the luxury industry as evidenced by brands competing to reshape their strategies of
product design and aesthetic. An example of this is the imperative of brands to stay current and
innovative to appeal to the well-informed and trendy Chinese customers. As demonstrated by the
widespread use of social media, such as TikTok, WeChat, and Weibo in China, a company that can use
these platforms to its advantage will be at the forefront of the digital wave flowing constantly to Chinese
consumers.
This opportunity is illustrated in a study of the touchpoints of Chinese customers. It showed that among
the 1000 survey respondents, a mix of online and offline touchpoints was consulted for 3-5 hours per
week and with one saying that they had exposure to a digital influence at some point in the journey.
While online channels have a strong pull, the tipping point that converts prospective customers into
purchasers is the sales staff in-store. This is because Chinese customers still prefer to purchase in-store,
for the high-quality service and the ability to appreciate the products in a sensory-based experience.
McKinsey’s survey of engagement showed that for about 50% of post-80’s and post-90’s consumers,
sales staff should be providing regular updates on product information, helping pick out accessories
based on knowledge of customer preference and personality and previous purchases, and helping them
get into fashion shows or parties.
Figure 3 Source: Tiffany & Co. Q3 Report & Fool.com Article with Holiday representing the final two months of 2018. Shows YOY Sales Growth by Region to demonstrate the growth opportunities available.
Copyright © CityU Student Research & Investment Club 6
The key takeaway is that for brands that can drive high customer engagement through social media,
influencers with heavy followings such as Angelababy or Gogoboi will have a greater sway and reach
in raising brand awareness. As 80% of China’s luxury shoppers are under 45, it is integral that brands
stay innovative and use social media to keep up with Chinese consumers. This can come in the form of
online limited editions, collaborations with influencers, and online-only sales and contests requiring
following on social media. This can also leave ample and flexible room for brands to be creative in their
marketing strategies to shape the tastes of Chinese consumers by using Chinese specific social media,
such as WeChat. It is also important for brands to understand how this will shape their strategies in
retail and product design, marketing, staffing, and branding. An omnichannel approach with offline and
online touchpoints will be integral to any marketing strategy targeting China. Sales staff should also
receive proper training, and have an in-depth understanding of local trends and culture. One-to-one
relationship building should be prioritized, and personalized suggestions will offer a high-quality
customer experience. A.I. can additionally be used to help organize big data, and convert data into
actionable insights through the identification of relationships and trends. For instance, analysis can
model how changes in sentiment can change purchase patterns, and identify the root causes of
decreasing foot traffic. This will allow companies to develop more precise marketing strategies and
communication methods, especially important in the dynamic and emerging market of China.
Personal Luxury Goods Segment Displaying Healthy Growth
2017 and 2018 displayed strong growth in the luxury goods segment. 2018’s growth was driven
primarily by an increase in stronger domestic consumption by mainland Chinese consumers, and an
increase in tourism in Europe. Annual global sales are expected to grow to 5-6% each year to make for
a bright future in the jewellery industry. In 2019, shoes and jewellery are the top growers in the luxury
category, up 7% each while handbags and cosmetics have also displayed healthy growth. Watches were
flat while apparel declined. More than half of consumers will be considered “middle class” by 2020
according to a report by Deloitte. With characteristics such as high disposable income, and prominence
within emerging markets, such as China and India, the luxury goods market looks promising. Other
expected catalysts and threats within the industry include the impact of protectionist policies, such as
Brexit and the US’s review of existing and future trading partnerships, which will affect consumers’
purchasing powers with tariffs.
In 2018, the US luxury market experienced mild growth, impacted by uncertainties surrounding the tax
reform plan that have limited growth outlook. Yet still, Bain & Company forecasted 2-4% growth in
the region for 2019, with a rise in domestic consumption expected. Europe’s market was positive in its
growth in 2018 from the influx of tourists as a result of the weakening of the Euro, compared to all
Copyright © CityU Student Research & Investment Club 7
other major currencies. Some tailwinds in 2019 and 2020 will be Brexit and the weakening macro-
economic outlook. Bain & Company forecasts 1-3% growth in 2019. Mainland China demonstrates a
continued preference for domestic spending and willingness to buy which is expected to drive YOY
growth of 18-20% in this region. Japan is forecasted with an attractive 2-4% growth in 2019. With the
Tokyo Olympics ahead in 2020, Chinese consumers and tourist spending is expected to accelerate the
sales of this region.
According to McKinsey, there are three segments of consumers accelerating the growth of branded
jewellery. The first of these types is the “New Money” consumers who wear jewellery to show off
newly acquired wealth. The second is emerging-market customers for whom brands inspire a sense of
a high-class lifestyle. The last is young consumers who use these brands to express themselves, and as
a means of self-realization. Opportunity lies with the jewellery companies who can use unique and
distinctive designs to differentiate themselves and target each of these segments. Up-and-coming artists
can also be incorporated into their designs for fresh ideas and trendy perspectives embedded into their
jewellery.
Shift to Digital Purchases and Network Consolidation (Distribution Trends)
The industry is shifting towards a digital revolution with a rising trend towards omnichannel (brick-
mortar and online) purchases with subsequent
rises in online sales globally with objectives to
enhance consumer shopping experience. While
the in-store customer experience is still important,
the need to have a seamless interface online is
also instrumental to a store’s success. Digital
innovation, and initiatives that are creative and
dynamic will be expected, along with the use of
Figure 4 Source: CURIC
Figure 5 Source: CURIC
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Big Data and A.I. to improve personalization, understand what customers want, and support long-term
growth. One consideration in this data collection will be the increasing sensitivity of consumers to
privacy, as well as privacy laws that may be emerging in the future. Different agents must be utilized
for strategic digital storytelling, and to drive luxury purchases by excitement and pleasure of purchasing
and owning the product. We may see user-generated content gain more popularity as a method of luxury
marketing. We may also see increasing use of social media strategies to engage consumers, promotion
on digital platforms, limited edition online products, live streams, and KOL (key opinion leaders)
collaborations. An example is Gucci, who employed #GucciGram where it collaborated with Instagram
artists, and #24HourAce where Gucci hosted a video project and artists took over the company’s
Snapchat account for an hour.
McKinsey forecasts that the future of the luxury goods industry will have a few larger players trying to
assimilate into an oligopoly with industry consolidation being a key objective for these firms. Currently,
jewellery is local, unlike apparel, and only 12% of the global market is captured by 10 of the largest
jewellery brands. The rest of the market is captured by national and regional brands, such as Chow Tai
Fook in China. Branded jewellery is on the rise and expected to claim a higher share by 2020 based on
interviews conducted by McKinsey. We expect to see the absorption of small local jewellers and
unbranded jewellery by larger international groups, which will allow them to double their market share
by 2020. We will likely see prices and margins fall in order to better compete, especially if established
brands come to stiffer competition with each other. Mergers and Acquisitions that address the pressing
concerns of falling margins will change many brand compositions within the next few years. This
distribution trend will possibly involve higher prices for consumers, if it becomes an oligopoly, and
cheaper raw materials in bulk purchases as expenses reduce for companies. We may also see a more
efficient and leaner workforce as new resources and knowledge are tapped into during Mergers and
Acquisitions.
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Investment Thesis
Sustainable Market Growth through Buyout Offer and Rising Demand from the Youth
According to Statista, high-end luxury jewellery is forecast to grow up to USD31 billion in sales by
2023, fuelled by growth in the emerging middle-class market. Richemont currently leads the luxury
jewellery market. A buyout offer for Tiffany & Co. by LVMH for USD14.5 billion with USD120 a
share-in-cash was rejected, but a further counter offer for 16.2 Billion with USD135 a share-in-cash
was accepted. This transaction would make LVMH and TFI the to-be the market leader in the luxury
jewellery market with a combined USD18.4 billion in assets. The unique combination will allow TFI
to expand sales rapidly through LVMH’s presence and resources around the world.
According to Bain & Company, millennials are posed to be the luxury customers leaders and will
represent 45% of the total market by 2025. Millennials value shopping experiences to a great extent
relative to the product itself which is why delivering a good shopping experience is now a key priority
for most firms. Based on the DB estimates, Millennials already drive 60% jewellery demand in the US
Figure 6 Source: CURIC
Figure 7 Source: DB Estimates
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and 80% in China – the world's two largest markets. Furthermore, younger millennials (aged 14-24)
contribute the most both in the US and China, with 52% and 70% in value respectively. Innovation in
products, customization, collaboration, and unique collections combined with online shopping will
propel the demand of the luxury market onwards, which is aligned with millennials’ needs.
Aggressive Expansion Plan in Asia Pacific despite Decline in Sales Associated with Tourists
The growth of the luxury jewellery market in Asia Pacific has been driven by two of the largest
economies in the world – India and China. Tiffany & Co. operates around 80 stores in the Asia Pacific
region, with plans to enter the Indian market in 2020, and expand presence in Mainland China. In spite
of robust growth of disposable income in the middle class, Chinese jewellery has been lagging behind
since the US-China trade war that lead to 10% tax import on goods. Meanwhile, India failed to
capitalize on the situation as their exports have declined due to political scandals and intense custom
duty.
At the same time, India is the one of the world's largest luxury jewellery market, with revenue of
USD1.455 billion in 2019, and expected to grow by 7% annually up to 2023. The rising income and
spending ability in middle-class families makes India the fastest growing GDP, forecasted to have an
annual growth rate of 8% in 2018-2022. Tiffany & Co. and Reliance Brands are planning to enter the
Indian market through a joint venture, with plans to open new stores in Delhi and Mumbai. This joint
venture will be in a strong position to create strong earnings growth with cost synergies as Reliance
Brands have built a keen brand awareness across the luxury segment in India. In Mainland China,
earnings have been strong for the last 2 quarters as sales increase 4 times faster than in 2018, due to the
growing purchasing power of the population. Tiffany & Co. have successfully come across to Chinese
consumers through art and exhibitions, such as the “Vision and Virtuosity” exhibition. According to
McKinsey, Chinese Consumers will reach 40% of the total luxury market by 2025. Tiffany & Co. are
planning to open more stores, new collections and the Blue Box Cafe in Shanghai and Beijing. For
many luxury brands, sales are aided by rising E-Commerce opening.
Figure 8 Source: CURIC
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Gambling Towards a New Booming Market
According to Euromonitor International, men’s jewellery line sales have increased rapidly up to
USD5.8 billion in 2019. Tiffany & Co. are planning to release their first men’s jewellery product line
this year to diversify and identify new sales opportunities.
Figure 9 Source: CURIC
Figure 10 Source: CURIC
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Valuation Our DCF valuation of Tiffany & Co. gives us an implied share price of USD125.88 for the forecast
period ranging from FY 2019E-2023E. The revenue projections are driven by stable industry growth
drivers and long-term growth based expansion plans, in particular the proposed entry into the Indian
market and the benefits of integrating with LVMH in 2020 as proposed. We have applied a WACC of
5.7% and perpetual growth rate of 2.8%, which remains constant. The perpetual growth rate was
assumed to be relatively high due to Tiffany’s status as a long-term segment leader, and a stable growth
rate expected to average roughly at 6%, till 2028 and expected to remain at a similar rate for the expected
future.
With Tiffany & Co. confirmed to be acquired by LVMH, the company is expected to benefit from a
more consolidated brand image and greater expansion opportunities as part of LVMH’s brands
portfolio. These expectations are consistent with the high long-term growth prospects demonstrated by
our DCF Model. The company is also expected to raise its dividend policy in light of its forecasted next
5 years averaging consistently higher returns. However, the company is expected to face obstacles from
a bleaker overall economic outlook that may dampen consumer spending on luxury goods for at least
the next 3 years. Currently, Tiffany & Co. is trading at USD133.65 and the 52-week range is from
USD73.04 - USD133.65.
Tiffany & Co. DCF Valuation summary US 20 year Bond (risk free rate) 2.00% CAPM Cost Of Equity 6.8% Tax rate 21.0% After Tax Cost Of Debt 3.86% WACC 5.7% Perpetual growth rate (Post 2022) 2.8% Terminal value 17,383 Enterprise Value 15,297 Equity Value (Market Cap) 15,206 Diluted Shares outstanding 120.8 Fair Value Share Price USD$ 125.88
Free Cashflow Valuation
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024Total Revenues 4,031 4,250 4,105 4,002 4,170 4,442 4,531 4,622 4,714 4,832 5,122Less Total COGS + SG&A (3,727) (3,358) (3,345) (3,255) (3,360) (3,652) (3,593) (3,665) (3,738) (3,832) (4,062) Total EBIT 304.3 891.5 760.1 746.4 809.4 790.3 937.9 956.7 975.8 1,000.2 1,060.2 Less: Tax (EBIT * Tax Rate) (74) (253) (246) (231) (390) (157) (206) (210) (215) (221) (234) Less: Capital Expenditures (221) (247) (253) (223) (239) (282) (362) (370) (283) (266) (256)Add: D&A & Non-Cash Expenses 181 194 203 209 207 229 227 231 236 266 320Change in working capital and other (422) 175 (162) (318) 217 (174) (198) (341) (373) (393)Free cash flows to the firm (FCFF) 190 163 639 339 69 797 422 410 374 407 497
Years to discount 0.18 1.18 2.18 3.18 4.18Cost of capital 5.7% 5.7% 5.7% 5.7% 5.7%Discount factor 0.99 0.94 0.89 0.84 0.79
PV Free Cash Flows to the Firm (FCFF) 418 384 331 341 394
For the financial year ending 31st Jan
(in millions of USD$)
Figure 11 Source: CURIC
Figure 12 Source: CURIC
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Market Catalysts
Synthetic Diamonds and the Cannibalization of Natural Gems
Synthetic diamonds, also known as CVD or chemical vapor deposition diamonds, are lab grown
diamonds. In recent years, the demand for these diamonds has grown due to their physical and thermal
properties, as well as astonishingly cheap prices when compared to the natural diamonds in the fashion
and luxury industry. On average, a polished synthetic diamond would cost a consumer between 30-40%
less than a polished natural diamond. In 2018, the synthetic diamond market was valued at USD300
million, and by 2025 it is expected to touch USD540 million.
The effect of the synthetic diamond industry on the natural diamond market comes down to the
consumers; they will determine whether the aftermath will be limited to between 5-10% or be larger
due to the declining costs and the increase in accessibility to a wider consumer group, as mentioned in
a report by Bain & Company. As technology advancements have taken place in the synthetic diamond
market, costs have drastically fallen. For instance, the price of one Carat has dropped from USD4000
in 2008 to USD300-500 in today’s time.
If consumers perceive lab grown diamonds as identical and interchangeable with natural ones, the
negative effects on the natural diamond industry could be extensive and substantial, and it could amount
to an impact of 25-30%. However, if consumers perceive the gradual decline in the prices of lab grown
diamonds as an indicator that differentiates the value of natural and lab grown diamonds, then the effect
may be between the previously mentioned 5-10%. The lab grown diamond market may pose a risk to
the natural diamond industry by decreasing customer trust in terms of the authenticity of what they may
purchase, especially due to the penetration of lab grown diamonds into the value chain of natural
diamonds.
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M&A Analysis: Tiffany Acquisition by LVMH
Key Activity in The Segment
• Richemont acquisition of online luxury watch retailers Yoox Net-A-Porter and Watchfinder in 2018.
• Luxottica acquired one of largest optical franchisors (950 stores) of Oticas Carol in July 2017 in Brazil.
• Christian Dior acquired by LVMH in EUR6 billion deal completed in July 2017.
• Kate Spade & Co acquired by Coach, Inc. (now Tapestry Inc.) in July 2017 for USD2.4
billion
• Jimmy Choo acquired by Michael Kors (now Capri Holdings) in November 2017 for USD1.2
billion.
• Kaylan Jewellers acquired Candere (online jewelry company) in April 2017.
• Movado Group acquired JLB Brands Ltd., owner of UK Fashion Watch and Jewelry Brand Olivia Burton in July 2017 for EUR65 million.
• US Michael Kors Ltd. (now Capri Holdings) Acquired Gianni Versace (Italian) at the end of 2018 for USD2.12 billion.
• In 2018, 265 mergers & acquisitions were completed in luxury segment compared to 47 in
2017 – a 22% increase.
• 2018’s cosmetics and fragrances, and hotel sector were the most attractive segments for
M&As in 2018.
• This year (2019), cosmetics and fragrances, and apparel and accessories are the most popular
sectors for investment.
Key Insights of the M&A Activity for Tiffany
With an acceptance of the acquisition offer from LVMH from USD135-a-share Tiffany was bought at
roughly 50% higher than its closing price roughly 3 months ago. The offer that was accepted in itself is
a counter offer over 12.5% over from the initial offer price.
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Tiffany will be benefitting from synergies within their distribution and expansion cost objectives
through an incorporation with LVMH’s diverse brand and customer portfolio base spanning over its
various regional demographics.
Through integration, Tiffany & Co. will become one of the largest players in the luxury jewellery
segment, overtaking their prime competitor Richemont. With Tiffany and Co. becoming a part of the
LVMH brand range, it also faces the risks of being intertwined within the US-French trade dispute with
bleak expectations for the Trump Administration’s newly imposed tariffs on French luxury goods.
Below is a table of the comparison of Tiffany with Signet Jewellers and Birks group to act as a
meaningful comparison to its value determination.
Ratios Tiffany & Co. Pandora Signet Jewelers (SIG)
Birks Group (BGI)
EV/Revenue (Actual LTM)
3.74x N/A 0.21x N/A
EV/EBIT (Actual LTM)
22.13x N/A 4.58x N/A
EV/EBITDA (Actual LTM)
16.65x N/A 2.81x N/A
P/E Ratio (TTM)
29.12 8.51 N/A N/A
Price-to-Earnings 29.58x N/A 4.77x N/A
Price to Book Ratio (MRQ)
5.08 6.72 0.80 1.49
Price-to-Sales Ratio (TTM)
3.66 1.13 0.14 0.10
EPS (TTM) 4.59 30.91 -4.20 -0.6940
Figure 13 Source: CURIC
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Investment Risks Tiffany & Co. is currently priced at a premium, given its recent market sentiment driven bullish run
stemming from the offering and confirmation of a buyout offer of Tiffany from LVMH for USD16.2
Billion or USD135 per share.
Commodity Risk
As a jewellery company, most of the product offerings are composed of diamonds, pearls, gemstones,
and other metals. Tiffany & Co. cost production is highly dependent on the cost of its materials; thus,
a supply shock can affect its profits significantly.
Declining of Chinese Tourists Sales
Tiffany & Co. derives 41% sales from the US market, which consists of a big share of Chinese tourists
according to the company’s annual report. Furthermore, as TFI products are manufactured in the US, it
is highly exposed to the tariffs imposed when importing to China. No other European competitors
manufacture in the US. Political turmoil in Hong Kong could also negatively impact Asia Pacific sales.
Uncertainty of the Expansion Plan
With Tiffany & Co. entering India and expanding in China, the firm is likely to be subject to some
volatility in foreign exchange rates. Synergies attained from partnering with the Reliance Brand could
fail to realize and cost negative publicity in the market. Furthermore, local competition in both China
and India could impact the firm’s margin on a big scale.
Synthetic Diamonds Cannibalization
Lab grown diamonds rapidly gaining acceptance amongst most cost-conscious luxury jewellery
consumers presents a challenge to natural gem-using firms, like Tiffany, which risk major price
competition from synthetic diamond jewellery makers. The negative effects on the natural diamond
industry of such a trend could be extensive and substantial, and it could amount to an impact of
approximately 25-30%.
Copyright © CityU Student Research & Investment Club 17
Appendix
Income Statement
Balance Sheet
Fiscal Year End: 31 January 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024Net Sales 4,031.1 4,249.9 4,104.9 4,001.8 4,169.8 4,442.1 4,530.9 4,621.6 4,714.0 4,831.8 5,121.75 Cost of Sales 1,690.7 1,712.7 1,613.6 1,502.8 1,559.1 1,631.1 1,644.7 1,677.6 1,711.2 1,754.0 1,859.2 Gross Profit 2,340.4 2,537.2 2,491.3 2,499.0 2,610.7 2,811.0 2,886.2 2,943.9 3,002.8 3,077.9 3,262.6 SG&A 1,555.9 1,645.7 1,731.2 1,752.6 1,801.3 2,020.7 1,948.3 1,987.3 2,027.0 2,077.7 2,202.4 Arbitration Award Expense 480.2 - - - - - - - - - - Earnings from Operations 304.3 891.5 760.1 746.4 809.4 790.3 937.9 956.7 975.8 1,000.2 1,060.2 Interest Expense and Financing Costs 62.7 62.9 49.0 46.0 42.0 39.7 35.9 35.9 35.9 34.3 34.3 Other Expense (Income), net (13.2) (2.8) 1.2 23.8 6.9 7.1 7.1 7.1 7.1 7.1 7.1 Loss on extinguishment of debt - 93.8 - - - - - - - - - Earnings from Operations before income taxes 254.8 737.6 709.9 676.6 760.5 743.5 894.9 913.7 932.8 958.8 1,018.8 provision for income taxes 73.5 253.4 246.0 230.5 390.4 157.1 205.8 210.1 214.5 220.5 234.3 Net Earnings 181.3 484.2 463.9 446.1 370.1 586.4 689.1 703.5 718.3 738.3 784.5
TIFFANY & CO. (TIF) INC. INCOME STATEMENT
In millions, except per share amounts For year end 31 Jan 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024Current Assets: cash and cash equivalents 345.78 729.96 843.60 928.00 970.70 792.60 845.4 998.7 1,294.2 1,609.0 1,872.3 short-term investments 21.26 1.50 43.00 57.80 320.50 62.70 62.7 62.7 62.7 62.7 62.7 accounts receivable, net 188.81 195.17 206.40 226.80 231.20 245.40 249.2 254.2 259.3 265.8 281.7 inventories, net 2,326.58 2,362.11 2,225.00 2,157.60 2,253.50 2,428.00 2,492.0 2,541.9 2,592.7 2,657.5 2,817.0 Deferred income taxes 101.01 102.61 - - - - - - - - - prepaid expenses and other current assets 244.95 220.04 190.40 203.40 207.40 230.80 230.8 230.8 230.8 230.8 230.8 total current assets 3,228.39 3,611.39 3,508.40 3,573.60 3,983.30 3,759.50 3,880.1 4,088.3 4,439.7 4,825.7 5,264.5
Property, plant and equipment 855.10 899.51 935.80 931.80 990.50 1,026.70 1,162.6 1,301.3 1,348.4 1,372.6 1,372.6 deferred income taxes 278.39 323.45 382.80 301.80 188.20 215.80 215.8 215.8 215.8 215.8 215.8 other assets, net 390.48 346.26 294.60 290.40 306.10 331.00 331.0 331.0 331.0 331.0 331.0 Total Assets 4,752.35 5,180.60 5,121.60 5,097.60 5,468.10 5,333.00 5,589.6 5,936.3 6,334.9 6,745.1 7,183.9 Liabilities and stockholder's equity current liabilities:short term borrowings 252.37 234.01 221.60 228.70 120.60 113.40 113.4 113.4 113.4 113.4 113.4 current portion of long term debt - - 84.20 - - - - - - - - accounts payable and accrued liabilities 342.09 318.02 329.10 312.80 437.40 513.40 453.1 462.2 471.4 483.2 512.2 income taxes payable 31.98 39.86 27.10 22.10 89.40 21.40 21.4 21.4 21.4 21.4 21.4 merchandise credits and deferred revenue 70.31 66.14 67.90 69.20 77.40 69.90 77.0 78.6 80.1 82.1 87.1 total current liabilities 696.74 658.03 729.90 632.80 724.80 718.10 664.9 675.5 686.3 700.1 734.0
long term debt 751.15 882.54 790.00 878.40 882.90 883.40 883.4 883.4 883.4 883.4 883.4 pension/retirement benefit obligations 268.11 524.22 428.10 318.60 287.40 312.40 312.4 312.4 312.4 312.4 312.4 deferred gains on sale-leasebacks 81.87 64.47 55.10 45.90 40.50 31.10 31.1 31.1 31.1 31.1 31.1 other long term liabilities 220.51 200.68 189.00 193.50 284.30 257.10 244.7 249.6 254.6 260.9 276.6 Total Liabilities 2,018.38 2,329.93 2,192.10 2,069.20 2,219.90 2,202.10 2,136.5 2,152.0 2,167.8 2,187.9 2,237.5
Stockholders' equity: preferred stock, $0.01 par value; common stock, $0.01 par value, 1.28 1.29 1.30 1.20 1.20 1.20 1.2 1.2 1.2 1.2 1.2 additional paid-in capital 1,095.30 1,173.63 1,175.70 1,190.20 1,256.00 1,275.40 1,275.4 1,275.4 1,275.4 1,275.4 1,275.4 retained earnings 1,682.40 1,950.60 2,012.50 2,078.30 2,114.20 2,045.60 2,366.8 2,698.0 3,080.8 3,470.9 3,860.0 accumulated other comprehensive loss , net of tax (58.55) (290.46) (278.10) (256.20) (138.00) (204.80) (204.8) (204.8) (204.8) (204.8) (204.8) total tiffany and co stockholders' equity 2,720.44 2,835.06 2,911.40 3,013.50 3,233.40 3,117.40 3,438.6 3,769.8 4,152.6 4,542.7 4,931.8 non controlling interests 13.53 15.61 18.10 14.90 14.80 13.50 14.5 14.5 14.5 14.5 14.5 total stockholders' equity 2,733.97 2,850.67 2,929.50 3,028.40 3,248.20 3,130.90 3,453.1 3,784.3 4,167.1 4,557.2 4,946.3
Total Liabilites and Stockholders' Equity 4,752.35 5,180.60 5,121.60 5,097.60 5,468.10 5,333.00 5,589.6 5,936.3 6,334.9 6,745.1 7,183.9
TIFFANY & CO. (TIF) BALANCE SHEET
Copyright © CityU Student Research & Investment Club 18
Cash Flow Statement
Tiffany & co. Cash Flows(in millions)For the year ending Jan 31st 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024CASH FLOWS FROM OPERATING ACTIVITIES:Net Earnings 181.3 484.2 463.9 446.1 370.1 586.4 689.1 703.5 718.3 738.3 784.5 Adjustments Depreciation and amortization 180.6 194.2 202.5 208.5 206.9 229.0 226.5 231.1 235.7 265.8 320.1 Amortization of gain on sale-leasebacks (9.5) (9.2) (8.3) (8.5) (8.2) (8.4) (10.4) (12.4) (14.4) (16.4) (18.4) Excess tax benefits from share-based payment arrangements (14.9) (14.1) - - - - - - - - - Provision for inventories 31.7 33.6 25.4 19.2 28.9 54.4 29.9 30.5 31.1 31.9 33.8 Deferred income taxes (27.9) 37.7 (1.9) 46.1 96.8 (21.3) - - - - - Provision for pension/postretirement benefits 49.0 39.2 65.8 45.4 35.0 35.7 37.5 37.5 37.5 37.5 37.5 Share-based compensation expense 32.2 26.5 24.5 24.3 28.0 34.1 29.2 29.8 30.4 31.2 33.0 Loan impairement charges - - 37.9 12.6 3.0 - - - - - - Asset impairement charges - - - 25.4 10.0 - - - - - - Gains on sales of marketable securities - - - - (3.5) 2.3 - - - - - Changes in assets and laibilities: Accounts receivable (23.2) (17.6) (16.7) (19.2) 7.0 (30.8) (3.8) (5.0) (5.1) (6.5) (15.9) Inventories (168.3) (167.6) 63.7 54.8 (52.9) (270.5) (64.0) (49.8) (50.8) (64.8) (159.5) Prepaid expenses and other current assets (14.7) (20.9) 1.1 33.6 (28.8) (11.3) - - - - - Other assets, net (21.3) (20.2) (17.5) 0.8 (3.7) (22.2) - - - - - Accounts payable and accrued liabilities 45.4 (5.9) (13.7) (21.7) 98.8 53.7 (60.3) 9.1 9.2 11.8 29.0 Income taxes payable (70.1) 81.9 3.1 (39.3) 149.7 (104.6) - - - - - Merchandise credits and deferred revenue 4.7 (2.7) 3.0 1.5 6.2 (1.0) 7.1 1.5 1.6 2.0 4.9 Other long-term liabilities (20.5) (24.0) (15.4) (123.9) (11.1) 6.3 - - - - - Net cash provided by operating activities 154.7 615.1 817.4 705.7 932.2 531.8 880.8 975.8 993.5 1,030.7 1,049.0
CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of marketable securities and short-term investments (23.5) (40.1) (100.0) (125.5) (598.0) (154.1) - - - - - Proceeds from sales of marketable securities and short-term investments - 55.3 73.6 109.8 351.4 394.1 - - - - - Capital expenditures (221.5) (247.4) (252.7) (222.8) (239.3) (282.1) (362.5) (369.7) (282.8) (265.8) (256.1) Notes receivable funded (3.1) - - - - - - - - - - Proceeds from notes receivable 1.2 15.2 - - - - - - - - - Payments to acquire intangible assets - - - - - - - - - - - Payment for acquisition - - - - - - - - - - - Other, net - - 0.9 1.7 4.8 12.2 - - - - - Net cash used in investing activities (246.8) (217.0) (278.2) (236.8) (481.1) (29.9) (362.5) (369.7) (282.8) (265.8) (256.1)
CASH FLOWS FROM FINANCING ACTIVITIES:(Repayment of) proceeds from credit facility borrowings, net 49.9 (12.5) (11.3) 14.2 (67.8) (18.4) - - - - - Proceeds from other credit facility borrowings 89.8 19.8 24.8 76.8 39.2 49.3 - - - - - Repayment of other credit facility borrowings (69.7) (3.4) (16.0) (83.1) (96.1) (32.0) - - - - - Proceeds from the issuance of long-term debt - 548.0 - 98.1 - - - - - - - Repayment of long-term debt - (400.0) - (97.1) - - - - - - - Payment for settlement of interest rate swaps - (4.2) - - - - - - - - - Repurchase of Common Stock - (27.0) (220.4) (183.6) (99.2) (421.4) (110.0) (90.0) (45.0) (70.0) (126.4) Proceeds from exercised stock options 27.9 42.9 2.0 15.3 54.6 23.1 - - - - - Payments related to tax withholding 14.9 14.1 (1.6) (2.9) (8.7) (8.6) (6.0) (6.0) (6.0) (6.0) (6.0) Cash dividends on Common Stock (170.2) (191.2) (203.4) (218.8) (242.6) (263.8) (344.5) (351.8) (359.1) (369.1) (392.2) Proceeds from non-controlling interest - - - - - - - - - - - Distribution to non-controlling interest (0.7) (1.9) - (3.8) (0.5) (0.3) (2.0) (2.0) (2.0) (2.0) (2.0) Financning fees (7.3) (8.1) (0.2) (1.5) - (2.2) (3.0) (3.0) (3.0) (3.0) (3.0) Net cash used in financing activities (65.4) (23.4) (426.1) (386.4) (421.1) (674.3) (465.5) (452.8) (415.1) (450.1) (529.6) Effect of exchange rate changes on cash and cash equivalents (1.5) 9.4 0.5 1.9 12.7 (5.7) - - - - 1.0 Net (decrease) increase in cash and cash equivalents (159.1) 384.2 113.6 84.4 42.7 (178.1) 52.8 153.3 295.5 314.8 263.4 Cash and cash equivalents at beginning of year 504.8 345.8 730.0 843.6 928.0 970.7 792.6 845.4 998.7 1,294.2 1,609.0 Cash and cash equivalentsat the end of year 345.8 730.0 843.6 928.0 970.7 792.6 845.4 998.7 1,294.2 1,609.0 1,872.3
Copyright © CityU Student Research & Investment Club 34
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