After initiating coverage on 17 retail stocks last week, Wells Fargo Securities senior analyst Ike Boruchow was flooded with calls from investors regarding his investment thesis and an “underperform” rating for shares of Tiffany & Co. Inc.
Earlier this month, Paul Lejuez, equity analyst at Citi Research, offered a different perspective on the luxury firm. In his initiation of coverage, Lejuez has the company pegged with a “buy” rating and a $98 price target.
At midday trading, shares of the company were down 0.7 percent to $78.08. Tiffany’s 52-week low is $74.28 and its high is $110.60.
In a follow-up research note to the coverage initiation report, Boruchow said the firm’s “bearish stance on the shares is largely predicated on macroeconomic factors.” The analyst said there are “multiple top-line headwinds in the U.S.” that include the foreign exchange rate impact on tourism spending as well as the negative effect of recent stock market volatility. And then there’s China.
Boruchow said gross margin drags related to “transactional foreign exchange impacts — as commodity cost benefits wane” – is troublesome. He also cited overall weakness in the Chinese luxury market, as recently reported by brands such as Burberry, Hugo Boss and Kering, among others.
“One of the key macroeconomic developments over the summer was the collapse of the Chinese stock market, which is down about 40 percent since mid-June,” Boruchow said in the report. “This likely results in a negative wealth effect for Chinese residents who we believe account for up to 20 percent of [Tiffany]’s global demand — including tourism sales outside of China.”
As a result of these factors, Boruchow said there is “considerable risk” in the near term. “While the company is still one of the strongest brands in retail today, we believe these macroeconomic forces may be too much to overcome,” he said, adding that recent data from Forward Keys had shown outbound travel bookings from China “had been growing [more than 20 percent] prior to June, but have turned negative since the stock market collapse.”
For the holiday shopping season, Forward Keys expects travel bookings to Europe and the U.S. from China to show a 30 to 40 percent year-over-year decline, which is “boding very poorly for tourism sales in these regions,” Boruchow said, adding that “the wealth effect from the stock market collapse is not confined to China, and will likely impact all of [Tiffany]’s key operating markets.”
Lejuez’s take is quite different. “Tiffany is an iconic global brand with an opportunity to double its sales base over the long-term,” he said in his note. “Although [earnings per share] declined in [the first and second quarters], the stronger U.S. dollar played a major role, which should become less of a factor in the fourth quarter and beyond.”
The analyst sees global same-store sales remaining strong, and expects Tiffany to generate “significant free cash flow.” As such, the “risk/reward” is favorable for investors. As for the longer-term view, Lejuez said revenues can “nearly double” while gross margins “will likely reach new peak levels this year, but we see them going higher.”
