NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an Issuer Default Rating (IDR) of 'A-' to Tiffany & Co. (Tiffany). Fitch has also assigned an 'A-' rating to Tiffany's senior unsecured facilities and senior unsecured notes. The Rating Outlook is Stable.
KEY RATING DRIVERS
The ratings reflect Tiffany's strong positioning in the mid- to high-tier global luxury jewelry market supporting mid-single digit top line growth, high EBITDA margins, strong liquidity and reasonable credit metrics. Fitch expects top line growth of 6% to 6.5%, EBITDA margin to improve modestly from 26% (adjusted for any one-time charges) currently, and FCF to be in the range of $200 million annually (post dividends). This should lead to adjusted debt/EBITDAR (using 8x rent expense) trending to 2.0x over the next 12-24 months from 2.3x in both 2012 and 2013.
Well-Positioned in Premium Jewelry Segment: Tiffany is a leading designer, manufacturer and retailer of jewelry and other luxury items with an iconic brand image and a strong positioning within the highly fragmented global luxury jewelry industry. In the LTM period ended July 31, 2014, the company generated $4.2 billion of net revenue and $1.1 billion of EBITDA on a base of 293 stores. Tiffany's top line has grown at a CAGR of 7.2% over the past five years supported by average comparable store sales growth of about 4% and unit growth of over 80 stores. Given its affluent customer base, demand for Tiffany's products is expected to be more resilient than the mid-tier category in a recessionary environment, although the category is not recession immune given its discretionary nature.
Global Demand Supports Mid-Single Digit Top Line Growth: Tiffany has a significant international presence in markets such as Japan (14% of revenue and 23% of operating income as of Jan. 31, 2014), Asia Pacific, Europe, Canada and Latin America that contribute more than 55% to the company's total revenues and 60% of operating income.
This diversification provides stability to the company's operations as strength in one or more regions can potentially offset some or all of the weakness in another region. For example, overall sales and EBITDA declined by 8% and 14% respectively over the two year recessionary period between 2007 to 2009. This was less than other pure U.S luxury retailers as continued growth in international markets partly offset a 20% sales decline and 33% EBIT decline in Tiffany's Americas business.
Fitch expects the global luxury industry is expected to grow at a CAGR of 5% over the medium term driven both by unit demand and inflation and is supported by the global wealth effect and tailwinds from the emerging middle class in China and other developing markets. Tiffany is well positioned to benefit from these secular trends, and Fitch expects top line growth of 6% to 6.5% supported by low single-digit comps in the U.S., Japan and Europe with 6%-7% comp growth in APAC and about 2.5% to 3% contribution from new store growth.
Strong and Improving Operating Metrics: Tiffany generates a 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. 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.
Strong Liquidity and FCF: As of July 31, 2014, Tiffany had approximately $400 million of cash and cash equivalents and $540 million available under all its current revolving facilities. Fitch expects FCF after dividends to be approximately $275 million to $300 million in 2014 (reflecting some tax benefit from the Swatch arbitration charge) and $200 million annually thereafter. Fitch expects share repurchases to be funded with excess cash.
Refinancing to Strengthen Balance Sheet: Tiffany plans to refinance and upsize its existing $550 million unsecured multi-currency credit facilities ($275 million expires in each of Dec. 2014 and Dec. 2016) with $750 million credit facilities (four-year and five-year, $375 million each). This will further strengthen its liquidity profile and support the growth in its global operations.
Tiffany is also issuing $500 million of 10-year and 30-year unsecured notes to refinance $400 million in aggregate principal amount of high coupon private placement notes due 2015, 2017, 2018 and 2019. The notes have the same fixed charge coverage covenant as the credit facilities and a consolidated indebtedness to consolidated capitalization ratio covenant of less than 0.6x. Post the transaction, it will have pushed out its debt maturities past 2020 with only $97 million of debt due Sept. 2016.
Currently, Tiffany's credit facilities and unsecured notes have upstream guarantees from Tiffany and Company, Tiffany & Co. International, and Tiffany & Co. Japan, Inc. The new bond issues and new revolving credit facilities will mirror the guarantees on the issue date. After closing both the new bond issues and the new credit facilities, Tiffany will commence measures to cause these guarantees to be simultaneously released from each of the debt agreements.
Reasonable Leverage Profile: Fitch expects Tiffany's leverage to improve modestly to 2.0x over the next 12-24 months from 2.3x in 2012 and 2013. This will be driven by EBITDA growth and steady debt levels beyond 2014.
RATING SENSITIVITIES
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: worse than expected top-line, profitability and cash flow trends on a sustained basis driven by weakness in its mature markets that is not adequately offset by its faster growing new markets, or due to a deterioration in its brand or market positioning in the mid-to-upper tier luxury market; and/or an increase in leverage beyond the low 2.0x range on operational weakness or a move by management to more shareholder-friendly policies.
Fitch has assigned the following ratings to Tiffany & Co.:
--IDR 'A-';
--Senior unsecured facilities 'A-';
--Senior unsecured notes 'A-'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=878214
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