Tiffany (NYSE: TIF ) reported earnings for the fourth quarter of fiscal 2014 on Friday. Results were negatively affected by currency headwinds, and management provided a cautious outlook for the coming year. Besides, the recent acquisition of Zale (UNKNOWN: ZLC.DL ) by Signet Jewelers (NYSE: SIG ) represents a considerable risk to watch on the competitive front.
But Tiffany is still a unique industry player with indisputable brand power, and the company is exceptionally well positioned for growth in Asia during the years ahead. Should you invest in this shinning jewelry brand?
Global sales increased by 5%, to $1.3 billion, during the quarter ended on Jan. 31. Currency fluctuations had a considerable negative effect during the quarter. Sales in constant currencies increased by a much stronger 9%, and comparable-store revenues reflected healthy demand for the company´s products with a 6% increase versus the same quarter in the prior year.
Sales grew in all of the company's regions when excluding currency fluctuations. Sales in the Americas increased by 7%, Europe showed a 7% increase on a currency-neutral basis, revenues in Japan expanded by 8% when eliminating the impact of a depreciating yen, and constant exchange rate revenues in the Asia-Pacific region were especially strong with an 11% increase during the quarter.
Tiffany was hurt by an adverse arbitration ruling over a legal battle with Swatch, which resulted in a net loss of $104 million during the quarter. Even when excluding this cost, earnings per share came in below analyst´s expectations. The company reported adjusted earnings per share of $1.47 during the quarter, an increase of 5% versus $1.4 in the same quarter in the prior year, but lower than the $1.52 forecasted on average by Wall-Street analysts.
For the year ending on Jan. 31 2015, management is expecting earnings per share in the range of $4.05 to $4.15 per diluted share, and sales in U.S. dollars to grow by a high single-digit percentage, with all regions expected to achieve growth in their total sales and comparable-store sales.
All in all, currency headwinds appear to be a considerable drag for Tiffany lately, but performance remains quite strong on a global basis when adjusting for foreign exchange fluctuations. This is particularly true in the promising Asian market, where market penetration is materially lower than in developed countries, and the company has abundant room for expansion.
Management seems to be playing it safe by providing conservative guidance for the coming year. This is the prudent thing to do considering recent currency headwinds and the harsh economic environment affecting many companies in the consumer sector lately. However, it allows for considerable room to over-deliver if conditions turn out to be better than expected in the middle term.
Risks and opportunities
Signet has recently announced the acquisition of Zale for $1.4 billion, so two major competitors are joining forces. This is a relevant risk to watch for investors in Tiffany.
The combined company will have a huge geographical presence, covering not only the U.S., but also Canada and the U.K. Signet owns more than 1,400 stores in the U.S. and nearly 500 in the U.K., while Zale owns a total of 1,680 stores and has the leading market position in Canada with its 146 Peoples Jewellers locations, and 53 stores operating under the Mappins Jewellers brand.
In addition, there will be other important advantages for the company after the fusion, such as cross-selling opportunities, better utilization and optimization of the brand portfolio, product-sourcing synergies, economies of scale, and increased financial resources, among other things.
Investors need to monitor the competitive dynamics in the industry in order to make sure that Tiffany can still dominate the high end of the pricing spectrum. However, the company is solid enough to defend its position in the face of increased competitive pressure.
Tiffany is arguably the most valuable brand in the jewelry and accessories business. A differentiated image, strategic high-quality retail locations, and exclusive designs provide extraordinary competitive strengths for the company. This level of quality and differentiation commands higher prices for products in the little blue box, which produces superior profitability for the company over time. Tiffany has operating margins in the area of 20% of sales, while Signet´s operating margin is near 14%, and Zale has a substantially lower operating margin in the area of 2.5%
Competitive strengths are crucial when it comes to evaluating a company´s ability to generate above-average returns over time, and Tiffany has what it take to continue standing out among its peers during the coming years.
When leaving currency fluctuations aside, Tiffany continues performing strongly on a global basis, and opportunities for growth look particularly exciting in the Asia-Pacific market, where demand is especially encouraging lately. Increased competitive pressure is a risk to watch, but no reason to stay away from this rock-solid jewelry store with shinning competitive differentiation.
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