Who's Going to Have Tiffany's for Breakfast?

Marshall is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Tiffany & Co. (NYSE: TIF) is the famous "blue box" specialty jeweler, but it's also heavily tied to the economy. However, with a rebounding economy, is now a good time to invest in the jewelry company? The other big tailwind to the stock could be a potential buyout. 

I'm like cat here, a no-name slob. We belong to nobody, and nobody belongs to us. We don't even belong to each other. - --Holly Golightly, Breakfast At Tiffany's

This quote may no longer apply to the famous specialty retailer, with Tiffany being a potential buyout candidate. Tiffany's $9.37 billion enterprise value means the company could easily be snatched up by one of the major retailers. 

Buyout potential 

Bloomberg reported back in January that Tiffany might be on the M&A radar. The most talked about potential acquirers include global luxury conglomerates, namely LVMH. The acquirer would get a strong American brand, while also being able to expand Tiffany in Asia and Europe.
PPR, another possible candidate,  is reorganizing its focus on luxury, sports and lifestyle brands. The owner of the Gucci brand has said acquisitions will account for about 20% of its goal to boost sales to $32 billion by 2020, almost doubling from 2011. 

Gamco Investors’ CIO, Howard Ward, has also noted that “sooner or later someone will make a run at Tiffany…there are some obvious foreign luxury brand companies that would be interested.”

Francesco Trapani, head LVMH’s watch and jewelry unit, noted that his company always has “a window open on M&A,” but won’t pay “stupid prices.” The question is, is Tiffany at a stupid price?  
 Key highlights
  • Tiffany actually trades in line with major peers on an EV/EBITDA basis at a mere 10.88 multiple. This compared to other major specialty retailers: Signet at 10.2 times, Movado Group at 10 times, LVMH at 9.9 times and Wesfarmers at 11.4 times.
  • Even with a 50% premium on Tiffany's current valuation, an acquisition of Tiffany's still wouldn't be the largest deal in the industry, which was in Australia, when Wesfarmers Ltd. purchased Coles for $15.8 billion in 2007.
  • What's also intriguing about Tiffany is its high-priced items. Among retailers, Tiffany generates some of the highest sales per square foot.
<img alt="" src="http://g.fool.com/editorial/images/37141/tif-sales-per-square-foot_large.jpg" />
 Source:  PCMag
  • Tiffany also has the most robust operating margin among its major peers:
<table> <tbody> <tr> <td colspan="1" rowspan="1"> </td> <td colspan="1" rowspan="1"><strong>Operating Margin</strong></td> </tr> <tr> <td colspan="1" rowspan="1"><strong>Tiffany</strong></td> <td colspan="1" rowspan="1">24%</td> </tr> <tr> <td colspan="1" rowspan="1"><strong>Luxottica</strong></td> <td colspan="1" rowspan="1">11%</td> </tr> <tr> <td colspan="1" rowspan="1"><strong>Signet</strong></td> <td colspan="1" rowspan="1">15%</td> </tr> <tr> <td colspan="1" rowspan="1"><strong>Fossil</strong></td> <td colspan="1" rowspan="1">21%</td> </tr> </tbody> </table>
The comps 

Signet Jewelers (NYSE: SIG) is a specialty retail jeweler in the United States and United Kingdom. Signet managed to post last quarter EPS of $2.12, compared to the $1.79 for the same quarter last year, on the back of 3.5% higher same-store sales and 12% higher total sales. The company sees 5%-7% higher same-store sales next quarter.

This positive performance is also a positive for Tiffany, given that these are two of the only remaining major traditional specialty retail jewelers. Signet does have sales roughly $70 million greater than Tiffany, but Tiffany has a gross margin of nearly 58%, compared to Signet’s 38%.

Signet remains debt free and has a compelling valuation. Signet is trading at a forward P/E ratio of 12.6 and PEG ratio of 1.3 compared to 18.3 and 1.7 for Tiffany.

Fossil (NASDAQ: FOSL) is a global designer, marketer and distributor specializing in consumer fashion accessories. Fossil managed to post 2012 results that included earnings of $5.39 per share, which was up 16.9% from the year-ago earnings of $4.61 per share, but lagging management’s guidance of $5.42 to $5.45 per share.

In the year 2012, Fossil’s net sales increased 11.3% to $2.86 billion, thanks to the acquisition of Skagen branded products, which contributed $93.8 million to 2012 sales. One tailwind for the stock is management’s positive guidance for 2013. Fossil expects sales to increase approximately 10% in the first quarter of 2013.

The hedge fund trade
Going into 2013, there were a total of 27 hedge funds long Tiffany, which was an 8% increase from the third quarter. The top hedge fund manager was billionaire Nelson Peltz's Train Partners, having a $58 million position that made up 2.4% of its 13F portfolio (check out Peltz's top picks).

Major competitor Signet had 25 hedge funds long the stock at the end of 2012, which is the same number from the end of the third quarter. Its top hedge fund owners include a few lesser-known names, including Select Equity Group with the largest position in the stock, and Egerton Capital with the second largest position (read more about hedge funds loving Signet).

Compared to Tiffany's 27 hedge fund owners, Fossil only had 17 going into 2013; however, Fossil's top hedge fund owner is billionaire Steve Cohen of SAC Capital, with a $147 million position in the stock (see Cohen's top consumer picks).

Tiffany tailwinds
Tiffany has a long-term objective of generating returns on assets of at least 10% and return on equity of at least 15%. The company is hitting these nicely of late, with a current ROA of 9.5% and ROE of 17%. 
Tiffany also expects total net sales growth of 6%-8% for fiscal 2013. This should be driven by total net sales increases in the high-single-digit in all regions, from mid-teens growth in Asia Pacific to a low-single-digit jump in Japan.
Tiffany has embarked on the new initiative to open smaller stores to offer lower priced higher-margin products, in an effort to boosts store productivity. This should help further boost the already robust sales per square foot. 
Don't be fooled
Even if the long debated buyout never comes to fruition, Tiffany still appears to be an impressive long-term growth stock. On the back of a rebounding economy and international expansion opportunities, the specialty retailer should perform nicely.  

Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Fossil. The Motley Fool owns shares of Fossil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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