Pick Any 3 of 6 Macro Events that Lead to Tiffany Short

By: SumZero Staff | Published: March 28, 2013 | Be the First to Comment


A confluence of potential events makes TIF an attractive short opportunity. If you think that any 3 of the following 6 catalysts will occur, consider shorting TIF.

1) Broad USD strength. If we get a sustained risk-off phase in the markets (I know, that isn’t ‘allowed’ anymore, but…), Tiffany will struggle. 50% of revenues are non-USD but roughly 75% of costs are, I believe, in USD. Translation effects on revenue and margin squeeze on EBIT would pummel EPS. TIF’s FX hedges have an average length of around 6 months.

2) Japanese economic shock. TIF garners 25% of EBIT from Japan. A hit to sales in Japan would have a meaningful impact on EPS. Furthermore, a JPN currency collapse would spell trouble for TIF too (my assumption here is that TIF does not lock in 12 month forward diamond purchase prices in Yen…I have not verified this but it seems like a safe assumption to me…).

3) Brand fatigue. Hey, brands go through phases. TIF had a good run, but SSS are now lagging competitors. If this trend continues, and note that EPS growth is now negative, will investors still pony up > 20X EPS for the shares?

4) Recession in Europe (and the US?!). OK, I know the Chairman won’t allow a recession, and he is in control of the economy. So let’s just say relative stagnation in the US, and worsening recession in Europe. Jewelry is a luxury good after all, and sales should be effected by declining real incomes. Note that SSS were negative in the US in the just-completed fiscal year. Globally, SSS were an anemic +1%.

5) Stock market decline. OK, I know that the Chairman won’t allow the market to fall, ever. Heck last time there was a 2% drop they rushed out the big guns, including the Bernank himself, to talk up the markets (sort of smells like panic to me…but anyway don’t you wish you had that kind of power?). So he is firmly in control of the market, of course. But let’s do a thought experiment. Let’s say the market did fall. Since high end jewelry is often purchased out of wealth as much as out of income, high end jewelry sales should suffer, giving TIF a high beta during a significant market decline.

6) Trouble in China. Growth in the Asia ex-JPN region (unit expansion, SSS, and EBIT margin) was the biggest contributor to TIF’s EPS growth in recent years. If building enormous empty cities and collapse-prone high speed rail lines actually have consequences…or if the massive ponzi scheme that is the shadow banking system picks 2013 to implode…oh heck why do I even bother. The central planners will just fix everything. Never mind.

Income Statement Model. I’ve chosen to illustrate the effects of just one of the above 6 catalysts. I built an income statement projection where ex-FX, SSS and EBIT margin are flat in each region. (However unit expansion is somewhat lower than what management likely currently desires). Then I incorporate 3 years of 10% USD strength against the Yen and 5% against all other currencies. The result is an 8% EPS decline this year, 11% next year, and 12% the year after (30x P/E).

So, let’s say TIF EPS falls back to around $2.25. What kind of multiple will the market pay for a retailer with a pronounced trend of declining earnings? 15X? That’s $34 for a 50% return.


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