Tiffany (TIF) Loses its Luster

Luxury jeweler Tiffany & Co. (TIF: Charts, News), best known for its iconic silver and diamond rings, bracelets and necklaces, lost its luster this week after its shares crashed over 10% on Tuesday following a profit warning that sent aftershocks rippling through other luxury retailers, such as Coach (COH: Charts, News) and Zales (ZLC: Charts, News) and Blue Nile (NILE: Charts, News). Throughout 2011, analysts and investors had been impressed by the resilience of Tiffany's core business, which posted strong sales and earnings growth throughout the first three quarters of the year, despite ongoing European troubles and American unemployment.

However, Tiffany crashed into a brick wall when it warned that its holiday sales would come in weaker than expected, with CEO Michael Kowalski stating, "After achieving very strong and better-than-expected sales and earnings growth in the first three quarters of 2011, sales weakened markedly in the United States and Europe during the holiday season, reflecting restrained spending by consumers for fine jewelry."

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Sales growth was hardly catastrophic, but wasn't enough to impress investors accustomed to far stronger earnings. Total sales across all regions increased 7% to 952 million in November and December, primarily aided by a 19% increase in the Asia-Pacific region and a 13% increase in Japan, which had been a major area of investor concern following the catastrophic earthquake and tsunami in March. Anemic 4% growth in the United States and flat 2% same-store sales growth, however, offset these positive results. Tiffany has traditionally had better luck selling to tourists in its American locations, especially at its New York flagship store, but even sales at that prime location slid 1%. The company's European operations posted a flat revenue gain of 1%, but same-store sales dropped 4%. Online and catalog sales were surprisingly weak as well, dropping 4% from the previous year. The company cut its full fiscal year earnings estimate from $3.70 to $3.86 per share, which it posted in November, to $3.60 to $3.65 per share. Analysts had expected earnings of $3.75 per share.

Tiffany's weakness has spooked investors in luxury and "affordable luxury" stocks, whom believed that these brands were relatively recession-proof due to their appeal to an upper class niche market. In fact, upper class spending has steadily increased since the market bottom of the global financial crisis back in March 2009, which contributed to Tiffany's past five consecutive quarters of growth. Tiffany uses a tiered pricing system which appeals to both middle class and upper class shoppers, which products ranging from $100 to $65,000. Tiffany shareholders should be wary of the company's international exposure, which could be its salvation or its doom. The company currently earns over half of its revenue from international markets, especially Asia and Europe, where respective concerns about growth and debt loom large in the headlines. This is a steady increase from the 38% it earned from the same markets five years ago. Bullish analysts believe that this is the company's strength, and that the company will follow in the footsteps of other domestic peers which have used strong international sales to offset stagnant domestic numbers. The company's international locations are also smaller and in more densely populated areas, earning far more per square foot than its international counterparts. Bearish ones believe that America may strengthen in 2012 as international markets stagnate, reversing a multi-year cycle. In addition, a strong greenback could devastate the company's international earnings, which are reported in U.S. dollars. A weak euro could further decimate its already weak European earnings. Meanwhile, operating margins vary wildly across its business segments. In the Asia-Pacific region, the company posted 28% and 21% in Europe, but only 17% in the Americas.

Shares of Tiffany are currently a tough call for either bulls or bears. It could easily swing quickly in either direction. However, with a forward P/E of 14 and a PEG ratio of 1.1, the technicals clearly favor the bulls. Investors should keep a close eye on European and Asian markets as well as luxury consumer sentiment.

Other News About TIF
Tiffany's US holiday sales growth weakens
Tiffany posts disappointing Christmas results.
Is All Well for Tiffany?
Can Tiffany stay afloat after hitting an iceberg? Other Stocks in the News
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The Twinkies maker goes bankrupt.
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Published on Jan 12, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2020. Content published with author's permission.

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