Tiffany & Co. SELL

TIF : NYSE : US$78.24
SELL 
Target: US$65.00

COMPANY DESCRIPTION:
Tiffany & Co. is the parent corporation of jeweler and specialty retailer Tiffany and Company. Through its principal subsidiary Tiffany offers an extensive assortment of jewelry, as well as timepieces, crystal, sterling silverware, and accessories.

Consumer & Retail — Specialty Retail
GROSS MARGIN UPSIDE POTENTIAL NOT ENOUGH TO RAISE OUR RATING
Investment recommendation
We expect TIF will report a 65bps yr./yr. improvement in gross margin when it releases Q3 results on November 26, the second straight quarter of expansion following seven consecutive periods of declines. The company should be seeing some benefit from price increases introduced in Q1, and metal and diamond cost deflation is starting to flow through the P&L statement.

We analyzed the potential upside from sustained commodity cost deflation. Based on a composite we compiled, we believe that as this lower-cost product flows through inventories, it would add about 60bps incremental gross margin in FY14, and we are raising our EPS estimate by $0.12 to $4.01. We do not think this is sufficient for a rating change. Our FY14 EPS estimate remains $0.09 below consensus, and the $65 price target generated by our DCF model, up from $57, still indicates notable downside.
Investment highlights
 We expect weaker sales of silver product will remain a gross margin headwind. We think this higher-margin product has been a victim of stale fashion in recent quarters.
 TIF trades in line with the luxury group despite slower projected growth. We expect sales and EPS will grow at compounded annual rates of 5% and 12%, respectively over the next three years versus the group averages of 10% and 13%.

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