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Fitch affirms Tiffany's IDR at BBB+, revises outlook to stable

Fitch Ratings on Oct. 8 affirmed Tiffany & Co.'s long-term issuer default rating, or IDR, at BBB+ and revised the outlook to stable from negative.

The rating agency also affirmed the New York-based jewelry retailer's senior unsecured facilities and senior unsecured notes at BBB+, while it assigned F2 ratings to the company's short-term IDR and commercial paper program.

Tiffany's rating indicates its strong position in the "relatively fragmented global premium jewelry segment," according to Fitch. It also reflects the jewelry chain's "iconic brand status, industry-leading EBITDA margins, superior real estate portfolio, relatively limited competition from alternate channels such as ecommerce and discounters, and generally strong cash flow and credit metrics."

The rating agency attributed the outlook revision to Tiffany's recent increase in sales, which improved Fitch's EBITDA growth and leverage estimates, as well as the company's "efforts to improve brand relevance to younger customers."

Fitch said the retailer's constant currency comparable sales improved recently from negative 5% in 2016 to flat in 2017 and then to 7% during the first half of 2018.

Fitch's expects Tiffany's revenue to grow around 8% to $4.5 billion in 2018 as comparable sales are forecasted to be around 3% during the second half of the year. Annual revenue growth is expected at around 3.5% beginning 2019.

EBITDA is expected to increase to $1.1 billion in 2018 and could grow around the mid-single digits annually beginning 2019. Fitch said EBITDA margins could decline modestly from 24.7% in 2017 on increased growth investments, despite strong comparable sales.

Meanwhile, the rating agency said it expects dividends to jump between 10% and 15% annually. Free cash flow will moderate to about $150 million in 2018 from $450 million a year earlier, and climb to approximately $300 million starting 2019.

In addition, leverage will remain on 2017 levels of around 2.4x based on $1.1 billion of EBITDA but may improve over the next two to three years on expanded EBITDA and flat debt.

Fitch said that it may upgrade Tiffany's rating if it produces an EBITDA of $1.5 billion on "higher-than-expected comps," which would result to leverage below 2x.

On the other hand, the rating agency may downgrade the retailer on "worse than expected" profitability, brand deterioration and leverage maintained at above 2.5x or implementation of "more shareholder-friendly policies" by the company's management.