Analyst Lindsay Drucker Mann upgraded shares to Goldman's Conviction Buy List, up from a "neutral" rating, placing a $105 price target on shares, as the next six months offer several catalysts to move the stock higher. "TIF is a top idea into year-end and early 2014 based on near-term upside to both gross margin and free-cash expectations, as well as sustained quality sales momentum. TIF's underlying EPS and cash generation power have been masked in recent years by headwinds that are now reversing," Mann wrote in her note.
"These include cost inflation, delayed price actions, and cash investments in fixed assets and inventory. We are +12% above the consensus in 4Q13 and +10% above for FY13 as the full potential of TIF's P&L shows through."
Spot prices on the commodities Tiffany's uses for its jewelry, gold, silver, and platinum have been coming down, off 30% from 2011 levels, and Tiffany is now just poised to start taking advantage of that. Tiffany raised prices on its jewelry in previous years to offset some of the increase in metals prices, so now the company is poised to benefit from both ends of the spectrum. Tiffany could see as much as 250 basis points in gross margin improvement in the fourth-quarter, and 200 basis points in all of fiscal 2014.
Not only are margins expected to rise as cost pressures come down, but Tiffany has free cash flow expectations that could really boost the stock. She notes that Tiffany's historic free-cash conversion has been around 40%, "due to spending on fixed capacity and diamond inventory." With those expenses out of the way, Tiffany could boost free cash conversion to 70% to 80% in the future, and boost free-cash flow by up to 90% in 2014, from 2013.
That could allow Tiffany to start buying back source, which it has not done so at all this year. In the ten years from 1999-2009, Tiffany spent 100% of its free cash flow buying back stock. In the past three years, Tiffany spent just 50% of its free cash flow buying back stock. Goldman expects Tiffany to generate $550 million in free cash flow for fiscal 2014, up from $300 million this year. "TIF has not been explicit about cash uses, but has expressed that after investments in growth initiatives, it expects to return cash to shareholders," Mann penned in the note.
Aside from gross margin improvement and an increase in free cash flow, the early stages of Tiffany's moving into fashion jewelry appears to be paying off. Fashion jewelry has a lower price point than most jewelry from Tiffany, typically under $1,000, versus $4,000-$5,000 on average. This initiative has a higher product turnover and growth potential, which should support comp sales. "It is still early days in TIF's new fashion jewelry initiative, and we have not embedded material success on this front in our numbers, but
we are encouraged by comments on the company's 3Q13 conference call that its recent Atlas product launch sold in September and October."
--Written by Chris Ciaccia in New York
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