Tiffany: A Red Hot Little Blue Box
Tiffany’s jewelry might come in little blue boxes but its stock is red hot.
The world’s second largest luxury jewelry retailer turned in another blow out quarter this morning. Sales surged just about everywhere in the world, with the exception of Japan.
The company showed that it can pass on higher materials costs to customers willing to pay higher prices for jewelry.
The stock has been on a three year run straight up, rising over 325 percent since the lows of March 2009. And the bulls don’t think the run up is anywhere near exhausted.
At yesterday’s Ira Sohn Conference, Trian Fund Management founding partner Peter May—whose fund is the fourth largest holder of Tiffany shares—predicted the price tag of Tiffany’s stock will rally to $100.
The company is predicting world wide net sales will grow 12 percent to 15 percent this year, while operating margins improve by half a point. It is aiming at opening 21 new stores worldwide.
“As always, and despite external challenges, we stand to benefit from the growing strength of the Tiffany $ Co. brand, the expansion opportunities before us and our solid balance sheet,” the CEO said in this morning’s earnings release.
But, truth be told, Tiffany’s has not “always” been able to withstand “external challenges” all that well. It stumbled badly when the financial bubble burst—with shares dropping around 70 percent from highs in October of 2007 to the March 2009 low. (The S&P 500 was down around 56 percent during the same period.)
Tiffany’s management remained in a bubble of unreality about their prospects until well after the financial crisis popped this delusion.
In August of 2008, Tiffany raised its outlook for the year, saying it expects net earnings per of $2.82 to $2.92, versus its previous forecast of $2.80 to $2.90. They said that worldwide sales would grow approximately 9 percent, based on continued strong growth in Europe and Asia-Pacific.
Growth in U.S. sales in the fourth quarter would also be strong, they projected.
That’s not the way the fourth quarter of 2008 played out. The wealthy customers of Tiffany basically went on strike, and sales plunged 20 percent globally and 35 percent in the US. Margins contracted as the company struggled between higher cost of the basic materials—metals, gems—and consumers with tighter purse strings. Earnings expectations had to be revised downward a number of times. Eventually they came in at $2.34 per share for the year.
Will history repeat itself? That may depend on how the global economy performs.
Tiffany does around 80 percent of its business during the November to December holiday season—making it highly exposed to economic downturns that strike in the later part of the year.
Investors worried about the economy in the second half of the year and in 2012 may want to exercise caution.
Tiffany does 18 percent of its sales in Japan. It expects a single digit percentage decline in sales this year, thanks to the tsunami and its aftermath. If Japan’s economic woes prove more troubling than Tiffany’s management expects, however, this could prove overly optimistic.
Another 18 percent of Tiffany’s sales come from the rest of Asia. If China’s economy keeps on expanding, this could be great for Tiffany. A slow down—or even a crash—in China, could also be bad news for Tiffany.
Tiffany may be more exposed to the rising cost of materials than many investors realize. The high end jewelry business has relatively low margins—at least compared to lower-end jewelry. As the cost of gold, silver, platinum, diamonds and precious gem stones increases, Tiffany’s profits depend on its ability to pass on the costs to consumers.
A slowing economy or a declining stock market might make passing on the costs much more difficult. Tiffany could find itself once again wedged in a tough place between rising costs and declining customer wealth.
None of this means that Tiffany won’t climb to $100 a share. The economy could roar through the rest of the year, Japan’s crisis might spark some kind of new spirit of economic dynamism, China’s economy might be stronger than the skeptics predict, and investors could remain as enthusiastic about Tiffany’s growth prospects as Tiffany’s management is.
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