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Tiffany Ordered to Pay Swatch Settlement, Cuts Full-Year Profit

NEW YORK (TheStreet) -- Tiffany (TIF - Get Report) cut its full-year profit outlook on Monday following a Dutch court's ordering of the high-end jewelry retailer to pay more than half a million to Swatch Group over the two companies' ongoing arbitration suit.

Shares fell 0.12% to $90.51 on Monday.

The New York-based company said in a release on Sunday that it was ordered to pay $449.5 million plus interest and legal fees (bringing the total payment up to about $480 million, according to Sterne Agee analysts) to Swatch after a Netherlands arbitration panel majority ruled in favor of the Swiss watchmaker.

Swatch is the world's largest watchmaker. The companies had established a joint venture in 2007 to create watches under the Tiffany brand together. But the arrangement, which was supposed to last for 20 years and solidify Tiffany's position in the luxury watch market, didn't pan out for either company. The deal was terminated in 2011 with both companies ending up in court, according to Reuters.

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Swatch blamed Tiffany for "systematic efforts to block and delay development of the business," while Tiffany accused Swatch of not honoring the agreement's terms, Reuters said.

Today, Tiffany only receives about 1% of sales from watches currently, Reuters said.

"We were shocked and extremely disappointed with the decision of the majority of the arbitral panel," Tiffany's chairman and CEO Michael J. Kowalski stated in the Dec. 22 release. "We firmly believe the panel's ruling is not supported by the facts of this case or the various agreements between the Swatch parties and the Tiffany parties. While we are reviewing our options with our legal counsel, I want to assure you that we do have sufficient financial resources to pay the full amount."

Tiffany plans to record a fourth-quarter charge of $295 million to $305 million after taxes that will be funded by available cash on hand and funds available under its existing debt facilities, it said.

The company reduced its earnings guidance for fiscal year ended Jan. 31 by $2.30 to $2.35 a share. Tiffany had forecasted in November that its full year earnings would range between $3.65 and $3.75 a share.

"However, we do not believe that the award will impact our ability to realize our existing business plans in the short or long term, and we are extremely pleased to be moving forward with our plans to design, produce, market and distribute our own Tiffany & Co. brand watches," Kowalski said.

Sterne Agee analyst Ike Boruchow says any weakness in Tiffany shares presents a buying opportunity, in a research note on Monday, where he reiterated his "buy" rating.

"While we are surprised at the decision in the arbitration with Swatch (regarding a former watch partnership), we believe TIF has the means to pay the total award (~$480 million including interest and fees) with cash on hand, and the announcement eliminates a long-term overhang on the stock," Boruchow writes. "With a favorable outlook for 2014 (highly visible gross margin expansion opportunity, potential U.S. recovery driven by new hires), we would be buyers on any weakness in shares."

Boruchow notes that Swatch had been asking for an award of more than $4 billion, "so the end result could have been far worse for TIF."

Tiffany has a "meaningful and highly visible opportunity to drive gross margin improvement next year, which could be amplified by potential price increases and a turnaround in the high-margin silver business," the note says. "The company had also made key hires (Design Director, head of North America), whose impacts will be felt for the first time in 2014 and could revive the slumping U.S. business."

-- Written by Laurie Kulikowski in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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