Jewelers are a classic value investment because they sell small, but expensive, products for cash. More importantly, jewelers have low operating expenses and an inventory that can last for a long time.
One value investor who believes in jewelry is Warren Buffett. In fact, Berkshire Hathaway (NYSE: BRK.B) owns three jewelers. Those jewelers are Borsheim’s Fine Jewelry, Helzberg Diamonds, and Ben Bridge Jeweler.
Buffett’s interest in jewelry got me wondering if America’s most famous jeweler; Tiffany & Co (NYSE: TIF) or Tiffany’s is a value investment. Tiffany’s sells jewelry and other luxury goods through over 300 stores around the world. In addition, Tiffany’s has extensive e-commerce and financing operations.
Is Tiffany’s making money?
Tiffany’s is making money. The jeweler reported a gross profit of $657 million on revenues of $1.049 billion on 31 July 2019.
In addition, Tiffany & Co reported an operating income of $184.3 million and a net income of $136.3 million on the same day. Importantly, Tiffany’s is generating cash.
The jeweler reported an operating cash flow of $122.8 million a free cash flow of $60.40 million on 31 July 2019. However, Tiffany’s reported a negative financing cash flow of -$134 million and a negative investing cash flow of -$49.8 million on the same day.
Consequently, Tiffany & Co had $641 million in cash and equivalents and $39.6 million in short-term investments on 31 July 2019. Thus, Tiffany had $680.6 million in cash at the end of July.
Is Tiffany’s Shrinking?
Tiffany’s has experienced three quarters of shrinking revenue growth. In particular, Stockrow gave Tiffany & Company a negative revenue growth rate of -2.55% in the quarter ending on 31 July 2019.
Moreover, Tiffany’s had a 2.91% revenue growth rate for the quarter ending on 30 April 2019. There was a 1.03% revenue growth rate for the quarter ending on 31 July 2019. Hence, Tiffany’s revenue growth shrank during the all-important 2018-2019 Holiday season.
Additionally, the $1.049 billion in revenues Tiffany’s reported on 31 July 2019 was lower than the $1.076 billion Tiffany & Co. reported a year earlier on 31 July 2018. Thus, it appears Tiffany’s business is shrinking.
Is Tiffany’s a Growth Stock?
The revenue shrinkage at Tiffany’s is odd, because its customer base; rich people, is growing.
For example, MGM Research estimates the world’s millionaire population grew from 17.331 million in 2013 to 19.604 million in 2018. Furthermore, MGM Research predicts the number of world millionaires will grow to 23.405 million by 2023.
Moreover MGM Research calculates there were 5.716 million millionaires in Europe, 6.403 million millionaires in North America and 5.645 million millionaires in Asia in 2018. MGM Research projects those numbers to grow to 6.98 million, 7.431 million, and 6.07 million by 2023.
Furthermore, America’s rich are getting richer. US Census Bureau estimates income inequality in the United States reached the highest level in over 50 years, the Associated Press claims. Correspondingly, IncomeInequality.org estimates that the average income for the richest 0.1% of Americans was $6.709 million in 2018. Meanwhile, IncomeInequality.org estimated the average income for the top 1% of Americans in 2018 at $1.855 million a year.
In theory, Tiffany & Co. has more potential customers with more money. Yet Tiffany’s revenues shrank over the past year.
Why are Tiffany’s Revenues Shrinking?
I think there could be two explanations for Tiffany’s revenue shrinkage.
First, affluent people are afraid to flaunt their wealth because of the growing hysteria about income inequality. Some observers including me; and presidential candidate Andrew Yang (D-New York), predict income inequality and technological unemployment could trigger violence.
There is research that shows increased inequality can lead to rising levels of violence, racism, and extremism, The University of Oslo reports. In particular, rioters torched a limousine at President Donald J. Trump’s inauguration in 2017, NBC News reports.
Under these circumstances, wealthy people could fear wearing flashy bling will make them targets for violence. A related fear is that Trump’s possible reelection next year could spark widespread anti-rich rioting in America.
Consequently the rich could forgo jewelry because of the fear of violence. Instead, the wealthy could invest in bodyguards, armored cars, guns, and fortified bunkers.
Is Tiffany’s Amazon Proof?
Second, Tiffany & Co could be vulnerable to Amazon (NASDAQ: AMZN) and other online retailers.
To explain, jewelry has a high markup, but it is small and easy to ship. Hence, it is easy to discount and ship jewelry, but still make money. Predictably, Amazon offers an extensive selection of jewelry.
In addition, many companies are entering the online luxury business. Jetblack; for instance, has the backing of Walmart’s (NYSE: WMT) incubator Store No. 8. Jetblack is a digital concierge service founder Jenny Fliess designed to deliver luxury goods to upper-class women.
Therefore, Tiffany & Co. is competing with Amazon and its imitators. Amazon could offer the same jewelry at lower prices in a more convenient fashion. Services like Jetblack, which Fliess intends as an Instacart for luxury items could help Tiffany’s deliver jewelry to rich women who hate to shop.
Additionally, wealthy buyers who worry about safety will avoid walking into a Tiffany’s store. Hence, they are less likely to become targets for criminals or rioters.
Is Tiffany’s a Good Dividend Stock?
I think Tiffany & Co (NYSE: TIF) is a decent dividend stock because it paid a 58₵ dividend on September 19, 2019. Additionally, Tiffany’s shares traded at $91.04 on 15 October 2019.
I believe Tiffany’s stock is overpriced but the dividend makes up for the higher price. To explain, the 58₵ dividend gives Tiffany & Co a high margin of safety. Thus, shareholders will make some money from this retailer.
Tiffany’s margin of safety is high because of its high dividend growth. In fact, Tiffany’s dividend grew by 8₵ in the past year and a half. In detail, Tiffany’s paid a 50₵ dividend in March 2019 that grew to 55₵ in June 2018 and 58₵ in September 2019.
Furthermore, Dividend.com credits Tiffany & CO with nine years of dividend growth. Overall, Tiffanny’s offered a dividend yield of 2.55%; an annualized payout of $2.32, and a payout ratio of 48.2% on 15 October 2019.
Is Tiffany’s a Value Investment?
I consider Tiffany & Co (NYSE: TIF) a value investment because of the dividend yield and the company’s franchise value.
Tiffany’s franchise value comes from its long and storied history and its reputation as a symbol of luxury. For instance, many people remember the book and movie Breakfast at Tiffany’s. Others know the company’s jewelry or its history of manufacturing medals for the U.S. Navy.
That reputation is a double-edge sword because some people could see Tiffany’s as a symbol of greed and income inequality. However, Tiffany’s can sell jewelry at a higher price because of the reputation.
In particular, that reputation could help Tiffany sell online and through digitally enhanced delivery services like Jetblack. Notably, the jeweler could reach tens of millions of customers who live nowhere near a Tiffany’s store.
However, the drops in revenue and revenue growth show Tiffany’s is vulnerable to Amazon. Therefore, I caution against buying Tiffany’s until the management shows it turn the revenue growth around.
Originally published at https://marketmadhouse.com on October 15, 2019.