After a Terrible Quarter, Is Tiffany a Sell?

Source: © BrokenSphere / Wikimedia Commons.

On March 21, shares of Tiffany  (NYSE: TIF  ) fell 0.5% after the company released financial results for the fourth quarter of its 2013 fiscal year. In and of itself, this decline in share price wasn't particularly special. Rather, it's how well Tiffany's share price held up after results that should intrigue investors.

So, how exactly did the company perform, and what does this mean for the Foolish investor moving forward? Is the jeweler an attractive prospect in spite of earnings, or should investors consider Signet Jewelers (NYSE: SIG  ) instead?

Tiffany fell short on both the top and bottom lines
For the quarter, Tiffany reported revenue of $1.3 billion. Although this is 5% higher than the $1.24 billion management reported a year earlier, it fell shy of the $1.31 billion analysts hoped to see. In its report, management attributed the rise in revenue to a 2% increase in comparable-store sales, led by growth in the Americas and Europe while being negatively affected by an 11% drop in comparable-store sales in Japan.

Another contributor to the company's performance was a 5% rise in the number of stores in operation. Over the past year, the business increased its store count from 275 to 289. Most of this growth took place in the Americas and Asia-Pacific, while store count dropped in Japan and saw a modest uptick in Europe.

In terms of profits, Tiffany did even worse. For the quarter, the company saw its earnings per share come in at negative $0.81. To put this in perspective, this represents a significant decline compared to the $1.40 per share the company reported a year earlier and was a world apart from the $1.52 per share analysts thought the company would earn.

As bad as this may seem, the shortfall stemmed from an arbitration the company lost against Swatch that cost it $473 million on a pre-tax basis. After adjusting for this one-time expense, earnings per share rose 5% to $1.47, keeping in line with the company's sales growth.

How does Tiffany compare to Signet?
To understand how attractive Tiffany is, it's imperative to get a greater glimpse into its operating history to learn how it fares when pitted against rivals like Signet Jewelers. Only then can we fully comprehend the direction the business is taking and determine whether or not it offers investors a good opportunity.

 Company Revenue Growth Net Income Growth
Tiffany & Company 40% 57%
Signet Jewelers 22% 129%

Source: Tiffany and Signet Jewelers.

Over the past four years, Tiffany has seen some tremendous growth. Between 2009 and 2012, revenue rose an impressive 40%, from $2.7 billion to $3.8 billion. This is far better than Signet's performance. Over the same period, Signet saw its top line grow 22%, from $3.3 billion to $4 billion.

In terms of profits, Tiffany and Signet reversed roles during this time frame. Between 2009 and 2012, Signet's net income rose an impressive 129%, from $157.1 million to $359.9 million. This is far greater than the 57% jump from $264.8 million to $416.2 million reported by Tiffany; it was driven largely by the company's interest income that came from its in-house customer-finance programs.

Foolish takeaway
Based on the data provided, it looks as though Tiffany's quarterly performance was bad, but not as bad as it appeared initially. For this reason alone, shareholders should not rush for the exits in a panic, but they should be mindful that Signet is giving the company a run for its money.

Admittedly, Signet's revenue growth has been mediocre when compared with Tiffany's, but it has made up for this with the significant increase it enjoyed in profitability. Moving forward, the company could become even more attractive as it completes its acquisition of Zale (UNKNOWN: ZLC.DL  ) .

Aside from adding $1.9 billion in revenue to its income statement (which is up 17% from the $1.6 billion the business saw four years earlier), the deal has some additional benefits. Over the past four years, Zale's financial performance has been poor in spite of its revenue growth, with the company generating an aggregate net loss of $223.3 million.

However, with the company turning a profit of $10 million in 2013, Signet believes the $693 million acquisition will allow it to continue growing. Whether or not this expectation will come to fruition has yet to be seen. But if Signet can turn Zale toward profitability and if its core business growth can continue, it may be a more attractive prospect than Tiffany.

Is Tiffany set to be No. 1?
In spite of Tiffany's quarterly earnings, investors appear to be cautiously optimistic about the company's outlook. Does this mean that Tiffany could soar and be the No. 1 stock to own for 2014, or should the Foolish investor look elsewhere for the best of the best?

There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


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