Fitch Affirms Tiffany's IDR at 'A-'; Outlook Stable
KEY RATING DRIVERS
Well-Positioned in Premium Jewelry Segment: Tiffany's ratings reflect its iconic brand image within the highly fragmented global luxury jewelry industry. Successful brand management has led to a consistent track record of growth and market expansion, yielding a solid competitive position and strong cash flow and credit metrics.
Tiffany is a leading designer, manufacturer and retailer of jewelry and other luxury items. In the LTM period ended July 31, 2015, the company generated $4.2 billion of net revenue and $1.0 billion of EBITDA on a base of 304 stores. Given its affluent customer base, demand for Tiffany's products is relatively more resilient than the mid-tier category in a recessionary environment. The company's top line and gross margin benefit from the ability to drive both unit and price increases.
Global Demand Supports Mid-single Digit Top Line Growth: In addition to the U.S., Tiffany has a significant international presence in countries such as Japan (13% of revenue and 19% of operating income), Asia Pacific, Europe, Canada and Latin America that contribute approximately 50% of the company's total revenues and 60% of operating income. This diversification provides stability to the company's operations. Tiffany's top line has grown at a CAGR of 9.4% over the past five years supported by average comparable store sales growth of about 6% and unit growth of over 70 stores.
The industry is expected to grow at a CAGR of 3 - 5% over the medium term driven both by unit demand and inflation and supported by the global wealth effect, as the middle class expands across greater China and other emerging markets. Tiffany is well positioned to benefit from these secular trends, and Fitch expects top line growth of 4% to 5% on a constant currency basis, supported by low single digit comps and about 1.5% to 2% contribution from new store growth. Near term, reported revenue growth has been impacted by the strong U.S. dollar and is therefore expected to be flat in 2015. Longer term, Fitch's revenue growth expectation is a modest decline from Tiffany's 10-year history, reflecting a maturing business in the U.S. and some deceleration in foreign markets like China. Fitch believes Tiffany is somewhat insulated from a broader slowdown in China (close to 15% of sales plus sales to Chinese tourists abroad) due to its luxury customer focus.
Strong Operating Metrics: Tiffany generates strong EBITDA margin of over 25%, which is best in class among Fitch-rated companies in the retail sector although at the low end of the mid-20 to mid-30 percent range at some of the large European luxury companies. While EBITDA margin is expected to decline to the mid 24% range in 2015 from 26.2% in 2014 due to currency translation and transaction exposure, Fitch expects Tiffany's EBITDA margin to improve modestly over the next 24 - 36 months on strong product mix and pricing, with the ability for some upside on manufacturing/cost efficiencies and leveraging of fixed expenses.
Reasonable and Steady Leverage Profile: Leverage is expected to increase modestly to 2.4x in 2015 from 2.2x in 2014 due to a mid-to-high single digit EBITDA decline but Fitch expects Tiffany to maintain adjusted debt/EBITDAR (using 8x rent expense) in the low 2.0x range over the following 24-36 months.
--2015 total revenue growth expected to be flat due to currency headwinds, with constant currency same store sales at +3 - 4%. Revenue growth in the medium term beginning 2016 expected to be 4 - 5%, predicated on 2% square footage growth and low single digit constant currency comps.
--Gross margin expected to rise 20bps annually on retail price increases and some fixed cost leverage.
--SG&A expense anticipated to grow 6% this year, leading to deleverage given current headwinds and grow 4 - 5% thereafter, in line with sales growth.
--EBITDA is expected to be down mid-to-high single digits in 2015 vs. 20114 due to currency, and grow 5 - 6% annually afterwards.
--Dividends are planned to increase approximately 10% per year.
--FCF expectation of $100 million in 2015 and $120 to $150 million thereafter, which will be primarily deployed towards share repurchases.
--Leverage expected to be 2.4x in 2015, declining to 2.2x over the next three years.
A positive rating action is unlikely given that the current rating fully incorporates the company's financial strengths and strong positioning as a high end retailer, as well as the inherent risks associated with being in specialty retail and having a narrow product offering.
A negative rating action could result in the event of one or more of the following: (i) worse than expected organic top-line, profitability and cash flow trends driven by weakness in its mature markets that is not adequately offset by its faster growing new markets, (ii) deterioration in its brand or market positioning in the mid-to-upper tier luxury market, and (iii) increase in leverage beyond the low 2.0x range on operational weakness or a move by management to more shareholder-friendly policies.
As of July 31, 2015, Tiffany had $771 million of cash and cash equivalents and $805 million available under all its current revolving facilities. In October 2014, Tiffany refinanced and upsized its $550 million unsecured multi-currency credit facilities ($275 million due Dec. 2014 and Dec. 2016) with $750 million credit facilities (4-year and 5-year $375 million each). Fitch expects annual FCF after dividends to be approximately $100 million in 2015 and $120 million to $150 million thereafter. Fitch expects share repurchases to be funded with excess cash.
In 2014, Tiffany also issued $250 million and $300 million of 10-year and 30-year unsecured notes, respectively, to refinance $400 million in aggregate principal amount of private placement notes due 2015, 2017, 2018 and 2019. Post the transaction, the company's next debt maturity will be in 2024, with only $84 million of debt due Sept. 2016.
FULL LIST OF RATING ACTIONS
Fitch affirms Tiffany's ratings as follows:
--Long-term IDR at 'A-';
--Senior unsecured facilities at 'A-';
--Senior unsecured notes at 'A-'.
The Rating Outlook is Stable.