Should You Buy Tiffany After Earnings?

Tiffany´s latest earnings report is reflecting considerable currency headwinds, but the company is still performing strongly on a global basis and positioned for substantial growth in the Asia-Pacific region during years to come.

Mar 21, 2014 at 4:30PM

Tig Photo

Source: Tiffany

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?

Solid performance
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.

Bottom line
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.

The best stocks to own forever
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 

Andrés Cardenal has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information