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Stock: Tiffany & Co.Recommendation: BUYTeam #10:
Owen GilmoreJerry JiangZiv Israel
November 5-7, 2014
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Jack Ferraro, MBA70
RECOMMENDATION: BUY
Current Price: $98.00
Target Price: $126.40
Est. Timing: 2+ years
Upside: 29%
IRR: 11.6%
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EBITDA Multiple Method
Weighted average cost of capital: 8.0%
Net present value of free cash flow $1,651
Terminal multiple 10.7x
Terminal value $18,234Present value of the terminal value 15,258
Implied perpetuity growth 3.5%
Enterprise value $16,909
Plus: Net cash ($658)
Equity value $16,251
Diluted shares: 128.6
Equity Value Per Share $126.37
Price Target $126.40
Implied upside 29.0%
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Tif fany & Co .
Founded by Charles Lewis Tiffany in 1837,
incorporated in 1868, and went public in 1987
Multinational luxury jewelry retailer that sells jewelry,
sterling silver, watches and other luxury items Well-known for their brand and diamond jewelry
Items sold in high-quality, luxury mall and streetlocations
Sales also generated through the internet and catalogs
Tiffany publishes the Blue Book to showcase theirhigh-end jewelry
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Tif fany & Co .
Geographic sales:
Americas contribute less than 50% of Tiffanys salesand continue to trend down
Greater China currently represents roughly half thesales in the Asia-Pacific region
Limited exposure to Europe and Emerging Markets
Geographic FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
Revenues
Americas 55.7% 52.1% 51.0% 49.6% 48.5% 47.8%
Asia-Pacific 12.7% 15.7% 17.8% 20.5% 21.4% 23.4%
Japan 18.7% 18.9% 17.7% 16.9% 16.8% 14.4%
Europe 9.6% 11.3% 11.7% 11.6% 11.4% 11.7%
Other 3.2% 2.0% 1.8% 1.4% 1.9% 2.8%
Total Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Capital IQ
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CURRENT CAPITALIZATION / TRADING STATS
Source: Yahoo Finance
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HISTORICAL STOCK CHART
Source: Yahoo Finance
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COTINUE
D
ORGANIC
GROWTH
1) Strong Revenue Growth from AsiaConsumers
2) Continued Improvement in GrossMargins
3) Remain a Leader in Product Innovation
INVESTMENT THESIS
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THESIS #1 Grow th f rom Asian Consumers
289 stores worldwide
as of the end of FY13
Plans to open 13 new
stores in FY14, with fivealready completed
Tiffanys adding five stores in the Asia-Pacific region,representing a 7% increase in store locations
H1 sales jumped in Asia-Pacific, up 15% (~$66M)
Due to increases in number of jewelry units sold and anincrease in the average price per jewelry unit
Source: Yahoo Finance; Company financials
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THESIS #1 Growth from Asian Consumers
We see stratospheric savings rates, extreme pricesensitivity and aversion to credit-card interestpayments On the other, there is the Chinese fixationwith luxury goods and a willingness to pay as much as120% of ones yearly income for a car.
A Diamond is Forever, glorifies eternal romance. InChina obligation, a familial covenantrock solid, likethe stone itself.
Tiffanys is already well entrenched in the region
1 Wall Street Journal
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THESIS #1 Growth from As ian Consumers
Industry forecasting slowing revenue growth in China(and across rest of Asia-Pacific)
However, has had stronger growth in the Asia-Pacific
region than other US and China jewelry manufacturers
While revenue growth should
slow, expect Tiffanys will
continue to experience better
growth than peers
Source: IBIS World
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THESIS #2 Improved Gross Marg ins
Tiffanys brand and products command high
gross margins historically in high 50s
Healthy trends in recent years Gross margins improved from 57% to 59.1% for 12m
ended 1/31/13 and 12m ended 7/31/14, respectfully
Company sparing closes stores that generate lowrevenue and replaces with better ones which reducecosts and improve margins
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THESIS #2 Improved Gross Marg ins
Tiffanys able to expand gross margins with a variety offactors
Has consistently been able to increase prices across all
geographic regions without significantly volume drops
Source: Oppenheimer Equity Research
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THESIS #3 Produc t Innovat ion
Leadership in product innovation has continued
Atlas Collection was relaunched
in fall 2013
First debuted in 1995 and inspiredby the Greek god, Atlas
Tiffany T Collection launched in fall 2014
Designed by Francesca Amfitheatrof, Tiffanys newlyhired design director
Strong, graphic form of the Tiffany T
Source: tiffany.com
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THESIS #3 Produc t Innovat ion
Tiffany T Collection
50+ styles
Range of metals (yellow, white, rose gold)
Diamonds accents included in some items Price ranges from a few hundred dollars up to $20,000
Key design director hire and ability to successfullylaunch new (and relaunch old) product lines shows
Tiffanys commitment to continuing their leadership inproduct innovation
1 Oppenheimer Equity Research
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VALUATION
Tiffanys slightly expensive based on its historical
TEV/LTM EBITDA multiple
Currently 12.4x vs average of 10.6x
Source: Yahoo Finance
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COMPS (Luxu ry Retai lers)
TIF P/E ratios near midpoint of company comparables
P/E range 11.6x 32.8x
NameMktCap
(M US$)
Price
(loc)
YTD
(%)PE FY0 PE FY1 PE FY2 PB FY0 PB FY1 PB FY2
14ROE
(%)
15ROE
(%)
Net Debt/
Eq.
EV/EBITDA
T12M
EV/EBITDA
FY1
EV/EBITDA
FY2ROIC T12M
TIFFANY & CO 12,575 97.30 4.8 22.7x 22.4x 19.6x 4.3x 4.1x 3.6x 18.1 20.0 23.3 22.2 11.7 10.5
SIGNET JEWELERS 9,669 120.50 53.2 24.2x 21.9x 18.2x 3.6x 3.4x 2.9x 14.8 16.3 (8.9) 16.7 13.4 11.5
SWATCH GROUP-BR 24,953 448.80 (23.7) 13.5x 15.5x 13.9x 2.5x 2.3x 2.0x 15.5 15.3 (12.3) 8.9 10.0 9.0 18.9
DOMINION DIAMON 1,159 15.59 2.2 32.8x 15.3x 20.2x 0.9x 0.8x 0.8x 5.0 3.5 (15.0) 3.9 3.0 3.6 (0.0)
RALPH LAUREN COR 14,825 169.04 (4.3) 19.9x 19.8x 17.2x 3.7x 3.6x 3.3x 18.3 19.6 (24.4) 10.4 10.2 9.2 15.6
COACH INC 9,152 33.26 (40.8) 11.6x 17.7x 16.3x 3.8x 3.6x 3.3x 19.7 21.8 (30.1) 7.2 8.7 8.0
BURBERRY GROUP 10,717 1,517.00 0.1 20.6x 19.6x 18.0x 5.8x 4.8x 4.2x 26.6 25.0 (33.3) 10.5 10.8 9.9 30.4
HERMES INTL 32,707 249.00 (5.4) 31.6x 30.1x 26.7x 8.9x 7.7x 6.4x 27.8 25.8 (35.1) 18.1 17.3 15.3 31.7
LVMH MOET HENNES 85,681 135.65 2.4 20.2x 19.8x 17.6x 2.5x 2.4x 2.2x 12.5 13.5 20.3 10.2 10.5 9.5 10.5
KERING 24,779 157.85 2.8 23.6x 16.6x 14.3x 1.9x 1.8x 1.6x 10.3 11.8 30.8 12.0 12.0 10.6 7.3
PRADA S.P.A. 15,727 47.65 (30.9) 22.5x 23.0x 20.3x 4.7x 4.2x 3.7x 19.1 19.1 (11.0) 11.7 12.0 10.7 20.2
CHRISTIAN DIOR 32,189 142.05 3.7 17.9x 16.9x 13.7x 2.2x 2.3x 2.0x 14.2 12.3 26.9 6.8 7.0 6.6 9.6
MICHAEL KORS HOL 14,944 72.70 (10.4) 19.1x 17.5x 15.1x 6.7x 5.6x 4.1x 36.8 30.6 (52.9) 11.8 9.9 8.5
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DISCOUNTED CASH FLOW
Discounted Cash Flow Analysis for Tiffany & Company
Dollars in millions, except for shares
Period Ending Jan 13,FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 2015e 2016e 2017e
Revenues $2,849 $2,710 $3,085 $3,643 $3,794 $4,031 $4,481 $4,964 $5,460EBITDA 628 579 759 897 861 975 1,190 1,440 1,702
Less: D&A (136) (139) (148) (146) (164) (181) (203) (215) (228)
EBIT $492 $440 $611 $751 $697 $794 $987 $1,225 $1,474Operating Margin 17.3% 16.2% 19.8% 20.6% 18.4% 19.7% 22.0% 24.7% 27.0%
Less: Taxes $134 $124 $179 $226 $227 $73 $345 $429 $516
Tax-effected EBIT $359 $316 $432 $525 $470 $720 $642 $796 $958
Plus: Depreciation and Amortization $136 $139 $148 $146 $164 $181 $203 $215 $228
Less: Net Capital Expenditures 154 75 127 239 220 222 242 265 290
(Increase)/decrease in working capital (276) 269 439 251 184 100 100 100Free Cash Flow to the Firm (FCFF) $340 $656 $184 ($7) $163 $496 $502 $646 $796
Earnings per share (diluted) $2.14 $2.91 $3.45 $3.28 $1.42 $4.65 $5.85 $7.11
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Perpetuity Growth Method EBITDA Multiple Method
Weighted average cost of capital: 8.0% Weighted average cost of capital: 8.0%
Net present value of free cash flow $1,651 Net present value of free cash flow $1,651
Terminal growth rate 3.5% Terminal multiple 10.7x
Terminal value $18,234 Terminal value $18,234Present value of the terminal value $15,258 Present value of the terminal value 15,258
Implied EBITDA multiple 10.7x Implied perpetuity growth 3.5%
Enterprise value $16,909 Enterprise value $16,909
Plus: Net cash* ($658) Plus: Net cash ($658)Equity value $16,251 Equity value $16,251
Diluted shares: 128.6 Diluted shares: 128.6
Equity Value Per Share $126.37 Equity Value Per Share $126.37
Current share price: $98.00 Price Target $126.40
Implied upside 29.0%
DISCOUNTED CASH FLOW
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DISCOUNTED CASH FLOW - Sens i ti v it y Ana lys is
Perpetuity Growth Method
Weighted Average Cost of Capital
7.00% 7.50% 8.00% 8.50% 9.00%
2.50% $128.47 $115.13 $104.21 $95.10 $87.39
Terminal 3.00% $144.19 $127.63 $114.37 $103.52 $94.48
Growth 3.50% $164.41 $143.26 $126.80 $113.63 $102.85
Rate 4.00% $191.36 $163.35 $142.33 $125.98 $112.89
4.50% $229.10 $190.14 $162.30 $141.42 $125.17
## = Expected Return on Investment is 25%+
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DISCOUNTED CASH FLOW - Downs ide
Discounted Cash Flow Analysis for Tiffany & Company
Dollars in millions, except for shares
Period Ending Jan 13,FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 2015e 2016e 2017e
Revenues $2,849 $2,710 $3,085 $3,643 $3,794 $4,031 $4,316 $4,627 $4,959EBITDA 628 579 759 897 861 975 1,091 1,211 1,342
Less: D&A (136) (139) (148) (146) (164) (181) (203) (215) (228)EBIT $492 $440 $611 $751 $697 $794 $888 $996 $1,113
Operating Margin 17.3% 16.2% 19.8% 20.6% 18.4% 19.7% 20.6% 21.5% 22.5%
Less: Taxes $134 $124 $179 $226 $227 $73 $311 $349 $390
Tax-effected EBIT $359 $316 $432 $525 $470 $720 $577 $647 $724
Plus: Depreciation and Amortization $136 $139 $148 $146 $164 $181 $203 $215 $228
Less: Net Capital Expenditures 154 75 127 239 220 222 242 265 290
(Increase)/decrease in working capital (276) 269 439 251 184 100 100 100
Free Cash Flow to the Firm (FCFF) $340 $656 $184 ($7) $163 $496 $438 $497 $561Earnings per share (diluted) $2.14 $2.91 $3.45 $3.28 $1.42 $4.15 $4.69 $5.28
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DISCOUNTED CASH FLOW - Downs ide
Perpetuity Growth Method EBITDA Multiple Method
Weighted average cost of capital: 8.0% Weighted average cost of capital: 8.0%
Net present value of free cash flow $1,278 Net present value of free cash flow $1,278
Terminal growth rate 3.2% Terminal multiple 9.0x
Terminal value $12,032 Terminal value $12,032
Present value of the terminal value $10,069 Present value of the terminal value 10,069
Implied EBITDA multiple 9.0x Implied perpetuity growth 3.2%
Enterprise value $11,346 Enterprise value $11,346
Plus: Net cash* ($658) Plus: Net cash ($658)
Equity value $10,688 Equity value $10,688
Diluted shares: 128.6 Diluted shares: 128.6
Equity Value Per Share $83.11 Equity Value Per Share $83.11
Current share price: $98.00 Price Target $83.10
Implied upside (15.2%)
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DISCOUNTED CASH FLOW - Sens i ti v it y Ana lys isDowns ide
Perpetuity Growth Method
Weighted Average Cost of Capital
7.00% 7.50% 8.00% 8.50% 9.00%
2.20% $84.50 $76.13 $69.20 $63.37 $58.39
Terminal 2.70% $94.17 $83.93 $75.62 $68.73 $62.94
Growth 3.20% $106.40 $93.55 $83.37 $75.11 $68.27
Rate 3.70% $122.32 $105.70 $92.93 $82.82 $74.61
4.20% $143.94 $121.53 $105.01 $92.32 $82.28
## = Expected Return on Investment is 25%+
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INVESTMENT SUMMARY
Tiffany & Co. presents an attractive opportunity
Strong Asia-Pacific revenue growth, driven byincreased units sold and greater revenue per unit, willbecome significant top-line contributor
Improving gross margins will lead to improved netmargins and strong free cash flow
Tiffanys leadership in product innovation createsopportunities for new revenue lines
Tiffany & Co. strong BUY with 29% upside (11.6% IRR)
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Risk: Continued market volatility and market declines inNorth America currently a strong market at 48% of revenues
Mitigant: Diversification outside the US
Risk: Commodities price volatility
Mitigant: Focus on retaining ability to pass through higher input
costs to the consumer
Risk: Strengthening US dollar
Mitigant: Hedging (although can be expensive)
INVESTMENT RISKS/MITIGANTS
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APPENDIX
Tiffany & Co.
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MANAGEMENT TEAMName/Position Background
Michael Kowalski CEO &Chairman of the Board
Frederic Cumenal -President
Caroline Naggiar CMO
Mr. Michael J. Kowalski has been the Chairman and Chief Executive Officer of Tiffany & Co.since January 2003 and February 1999 respectively. Mr. Kowalski served as the President ofTiffany & Co. from January 1996 to January 2003, Executive Vice President from March 1992to January 1996 and Chief Operating Officer from January 1997 to February 1999. He hasbeen a Director of Tiffany since January 1995 and The Bank of New York Mellon Corporationsince July 1, 2007. He serves as a Director of Jewelers of America and PSB Group Inc.
Mr. Frederic Cumenal has been President of Tiffany & Co., since September 24, 2013 and isresponsible for the businesses in Asia, Japan, Europe and Emerging Markets at Tiffany & Co.Mr. Cumenal served as Executive Vice President of Tiffany & Co. from March 10, 2011 toSeptember 24, 2013. He served as Chief Executive Officer & President of Champagne Moet &Chandon SA. He has been Director of Tiffany & Co., since September 24, 2013.
Ms. Caroline D. Naggiar serves as Senior Vice President of Tiffany & Co. and has been itsChief Marketing Officer since 2007. Ms. Naggiar was assigned additional responsibility for thePublic Relations department in 2007 and served as Senior Vice President of Marketing ofTiffany & Co. since February 1998. She joined Tiffany & Co. as Vice President of MarketingCommunications in June 1997.
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HISTORICAL MULTIPLES
Tiffanys slightly expensive based on its historical
TEV/LTM EBITDA multiple
Currently 12.4x vs average of 10.6x
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INDSUTRY ANALYSIS (FIVE FORCES)Threat of new Entrants: Low
Brand highest asset toTiffanys
Threat of Substitute Products:
High
Consumers concernedabout conflict diamonds
More expensive to acquireconflict free diamonds
Bargaining Power of
Buyers: Moderate to Low
Superior pricing power Ability to pass higher
input cost to consumers
Rivalry Among Existing Firms:High
High industry growth rate Competitors expanding
globally
Bargaining Power ofSuppliers: High
Products usecommodity inputs
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Tiffany & Company 12m ended 12m ended 12m ended 12m ended 12m ended 12m ended 12m ended
Dollars in millions, except per share data 1/31/2009 1/31/2010 1/31/2011 1/31/2012 1/31/2013 1/31/2014 7/31/2014
Income Statement FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 LTM 2015e 2016e 2017eAmericas $1,586.6 $1,410.8 $1,574.6 $1,805.8 $1,840.0 $1,926.9 $2,023.21 $2,124.37 $2,230.59
(11.1%) 11.6% 14.7% 1.9% 4.7% 5.0% 5.0% 5.0%
Asia-Pacific 363.1 426.3 549.2 748.2 810.4 944.7 1,228.1 1,535.1 1,842.1
17.4% 28.8% 36.2% 8.3% 16.6% 30. 0% 25.0% 20.0%
Japan 533.5 513.0 546.5 616.5 639.2 578.6 590.1 601.9 614.0
(3.8%) 6.5% 12.8% 3.7% (9.5%) 2.0% 2.0% 2.0%
Europe 273.1 306.3 360.8 421.1 432.2 469.8 516.8 568.4 625.3
12.2% 17.8% 16.7% 2.6% 8.7% 10. 0% 10.0% 10.0%
Other 92.6 53.3 54.2 51.3 72.5 111.2 122.4 134.6 148.1
(42.5%) 1.7% (5.3%) 41.4% 53.4% 10. 0% 10.0% 10.0%
Total Revenue $2,848.9 $2,709.7 $3,085.3 $3,642.9 $3,794.2 $4,031.1 $4,214.8 $4,480.5 $4,964.4 $5,460.0
Revenue Growth (4.9%) 13.9% 18.1% 4.2% 6.2% 4.6% 11.1% 10.8% 10.0%
Cost Of Goods Sold 1,202.4 1,179.5 1,263. 0 1,491.6 1,631.0 1,690.7 1,725.0 1,792.2 1,936.1 2, 074.8
Gross Profit $1,646.4 $1,530.2 $1,822.3 $2,151.4 $2,163.3 $2,340.4 $2,489.8 $2,688.3 $3,028.3 $3,385.2
Gross Profit Margin 57.8% 56.5% 59.1% 59.1% 57.0% 58.1% 59.1% 60.0% 61.0% 62.0%
Selling General & Admin Exp. $1,018.1 $950.8 $1,063.0 $1,254.3 $1,302.4 $1,365.9 $1,413.4 $1,498.3 $1,588.2 $1,683.4
Depreciation & Amort. 135.8 139.4 147.9 145.9 163.6 180.6 191.5 203.0 215.2 228.1
Other Operating Exp., Total $1,153.9 $1,090.2 $1,210.9 $1,400.2 $1,466.1 $1,546.5 $1,605.0 $1,701.3 $1,803.3 $1,911.5
Other Operating Exp., Total 40.5% 40.2% 39.2% 38.4% 38.6% 38.4% 38.1% 38.0% 36.3% 35.0%
Other Operating Exp., Total Growth (5.5%) 11.1% 15.6% 4.7% 5.5% 3.8% 6.0% 6.0% 6.0%
Operating Income $492.5 $440.1 $611.4 $751.1 $697.2 $793.9 $884.8 $987.1 $1,225.0 $1,473.7
Operating Income Margin 17.3% 16.2% 19.8% 20.6% 18.4% 19.7% 21.0% 22.0% 24.7% 27.0%
Interest Expense ($29.0) ($55.0) ($54.3) ($48.6) ($59.1) ($62.7) ($67.7) ($68.0) ($68.0) ($68.0)
Other Non-Operating Expense, net 0.1 4.6 7.0 5.1 5.5 5.7 5.7 0 0 0
Other Unusual Expenses (97.8) 0.4 (16.6) (42.7) 0 (482.1) (472.7) 0 0 0
Income Before Taxes (EBT) $365.8 $390.0 $547.5 $664.9 $643.6 $254.8 $350.1 $919.1 $1,157.0 $1,405.7
Income Tax Expense 133.6 124.3 179.0 225.8 227.4 73.5 109.4 321.7 404.9 492.0Effective Tax Rate 36.5% 31.9% 32.7% 34.0% 35.3% 28.8% 31.2% 35.0% 35.0% 35.0%
Net Income $232.16 $265.75 $368.46 $439.14 $416.17 $181.31 $240.73 $597.39 $752.03 $913.69
Net Income Margin 8.1% 9.8% 11.9% 12.1% 11.0% 4.5% 5.7% 13.3% 15.1% 16.7%
Diluted Shares 124.7 124.3 126.6 127.4 126.7 127.8 128.6 128.6 128.6 128.6
Change in Share Count -0.3% 1.8% 0.6% -0.5% 0.9% 0.6% 0.0% 0.0% 0.0%
Recurring EPS $2.14 $2.91 $3.45 $3.28 $1.42 $1.87 $4.65 $5.85 $7.11
EPS Growth 36.2% 18.4% -4.7% -56.8% 32.0% 227.5% 25.9% 21.5%
Consensus EPS (Capital IQ as of 11/6/14) $4.34 $4.95 $5.69
My estim ates vs. Consensus 7.0% 18.1% 24.9%
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Discounted Cash Flow Analysis for Tiffany & Company
Dollars in millions, except for shares
Period Ending Jan 13,FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 2015e 2016e 2017e
Revenues $2,849 $2,710 $3,085 $3,643 $3,794 $4,031 $4,481 $4,964 $5,460
EBITDA 628 579 759 897 861 975 1,190 1,440 1,702
Less: D&A (136) (139) (148) (146) (164) (181) (203) (215) (228)
EBIT $492 $440 $611 $751 $697 $794 $987 $1,225 $1,474Operating Margin 17.3% 16.2% 19.8% 20.6% 18.4% 19.7% 22.0% 24.7% 27.0%
Less: Taxes $134 $124 $179 $226 $227 $73 $345 $429 $516
Tax-effected EBIT $359 $316 $432 $525 $470 $720 $642 $796 $958
Plus: Depreciation and Amortization $136 $139 $148 $146 $164 $181 $203 $215 $228
Less: Net Capital Expenditures 154 75 127 239 220 222 242 265 290
(Increase)/decrease in working capital (276) 269 439 251 184 100 100 100Free Cash Flow to the Firm (FCFF) $340 $656 $184 ($7) $163 $496 $502 $646 $796
Earnings per share (diluted) $2.14 $2.91 $3.45 $3.28 $1.42 $4.65 $5.85 $7.11
Perpetuity Growth Method EBITDA Multiple Method
Weighted average cost of capital: 8.0% Weighted average cost of capital: 8.0%
Net present value of free cash flow $1,651 Net present value of free cash flow $1,651
Terminal growth rate 3.5% Terminal multiple 10.7x
Terminal value $18,234 Terminal value $18,234
Present value of the terminal value $15,258 Present value of the terminal value 15,258
Implied EBITDA multiple 10.7x Implied perpetuity growth 3.5%
Enterprise value $16,909 Enterprise value $16,909
Plus: Net cash* ($658) Plus: Net cash ($658)
Equity value $16,251 Equity value $16,251
Diluted shares: 128.6 Di luted shares: 128. 6
Equity Value Per Share $126.37 Equity Value Per Share $126.37
Current share price: $98.00 Price Target $126.40
Implied upside 29.0%