Tiffany & Co. (NYSE: TIF), or Tiffany's as it's known worldwide, turned in dazzling sales and earnings numbers for its all-important fourth quarter of 2003. It earned $110 million, or $0.74 per share, up from $89 million, or $0.60 per share, in the same quarter a year ago. For those of you playing the home game, that's a gain of 18%.
Tiffany, perhaps the most valuable luxury brand in the world, offers proof positive that the American consumer's confidence surged through last year as people began factoring in continued strength in asset prices and a recovering economy. American retail sales, which account for approximately 47% of Tiffany's total revenues, increased 20%, while international retail, 39% of the total, rose 18%. If you factor out the rapid decrease in the dollar value to many global currencies, international sales gained 7%. More illustrative is what happened in the company's largest international market, Japan, where comparable retail sales dropped 7% in the quarter before factoring in the decline of the dollar against the yen.
When all is said and done, Tiffany's quarter may have been somewhat better than what will be widely reported. While it shouldn't count on continued dollar depreciation, its decision to increase internal manufacturing and diamond sourcing should help it control raw material costs, very little of which comes from American sources. Tiffany has a 14% ownership of Aber Diamond (Nasdaq: ABER), which operates the Diavik mine in Northwest Territories, Canada, in conjunction with Rio Tinto (NYSE: RTP). In 2003, Tiffany opened a diamond-cutting facility in nearby Yellowknife ("nearby" being a relative term in northern Canada). This will decrease costs over the longer term and will give it a highly desirable ability to self-source one of its most precious raw materials: diamonds.
In this past year, Tiffany's policy of using last-in, first-out (LIFO) inventory valuation at its branches meant that the spectacular rise in gold prices and other raw material caused the company to accept a $2 million reserving charge for the quarter, $10 million for the year. Though it's a non-cash charge, it affects reported earnings and margins. For the year, gross margins sit just below 60%, but were slightly lower this year due to a larger component of Tiffany's sales coming from higher-ticket ($50,000-plus) items, which have lower margins.
Tiffany did not repurchase any shares in the fourth quarter under its previously announced buyback program. Annual repurchases were $4 million at the average cost per share of $23.05. This should tell you something very specific about management's determination of the current $38 per-share stock price: It's no bargain.
On the one hand, that's troubling. On the other, it reaffirms my admiration for Tiffany management. For a luxury company that's a brand of choice for people who want to spend enormous amounts of money, it's pretty good at pinching shareholders' pennies.
This was a great quarter to cap off a big year for Tiffany.
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Bill Mann owns no shares of companies mentioned in this article.
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