Tiffany Broadcasts Luxury Has Rebounded But Investors Should Hold Off

“Let me focus on Tiffany. They are a big winner on the S&P 500 today. They had a strong quarter beating on the top and bottom line. They will open 60 more stores this year. …” – Bloomberg TV’s In the Loop 5/27/2010

Shares of luxury jeweler Tiffany & Co. (TIF) are surging nearly $3 or 6.7% on Thursday morning thanks to a stronger than expected quarterly report and more than doubling its net income.  Profit of $64.4 million, or 50 cents per share, easily outshined last year’s quarterly total of $24.3 million or 20 cents a share.  However, perhaps more importantly demand grew in all markets and sales tallied a 22% gain to $633.6 million; a year ago Tiffany’s was forced to cut costs dramatically to contend with 23% declines.  The higher sales combined with the lower cost structure allowed the company to expand gross margin to 57.8% from 55.9%.  Wall Street was expecting Tiffany’s to report profit as $.37 per share on sales of $612 million, so clearly business is improving quicker than analysts expected.

Tiffany’s results serve to confirm cautiously optimistic reports from other retailers catering to high-end discretionary purchasing including Nordstroms (JWN) and Saks (SKS).  Similarly, Signet Jewelers (SIG) reported today that earnings in their first quarter rose 98%, although the stock is only up about 1% on the news.  Signet, a mall jeweler, produced improved results thanks to increased market share from struggling competitor Zale Corp (ZLC), but in our opinion they lack the “wow” factor as TIF sales grew more than three times faster.  For Tiffany’s, there was considerably higher demand for pieces costing in excess of $50,000, and sales at its flagship Manhattan store rose 26% (admittedly compared to a very weak period).  Overall same store sales grew 15%, and Tiffany’s plans to increase their presence in the Asia-Pacific region where growth was 50% in the last quarter.  Already representing nearly one-fifth of company-wide sales, that region will be a key driver of growth over the next few years.

Management is excited by what lay ahead for the jeweler known for their trademark turquoise gift boxes.  Propelled by the mounting strength in key business trends Tiffany & Co. raised its full fiscal year guidance range by 10 cents to $2.55 – $2.60 per share.  Recently lowered costs are one key reason for the increased profit outlook, as the company neglected to raise full year sales guidance above analysts’ estimates of 11% growth.

At Ockham we currently see TIF as Fairly Valued as the price has appreciated inline with what we would expect given the fundamental improvement.  As much as business has rebounded over the last year, the stock has appreciated 65% in the last twelve months and no longer presents one of the better value propositions in the market today.  The current price-to-cash earnings and price-to-sales valuation metrics are sitting comfortably within the historically normal valuation for this stock.  At this time, it is unlikely that we will initiate a rating change on TIF in the next few weeks barring anything earth-shaking.  Essentially, Tiffany’s latest quarterly report should serve as confirmation that the luxury market is back, but it appears, at least according to our methodology, Mr. Market figured that out some time ago.

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