Is Tiffany Still a Worthwhile Investment?

tiffany.com

Tiffany (NYSE: TIF) has dealt with some bumps in the road over the years, but it has always bounced back, delivering in a big way for its investors. Therefore, don't pay much attention to its fourth-quarter loss. This was due to an arbitration ruling and will not have a long-term impact on the company. In fact, if you exclude the arbitration ruling, then fourth-quarter net earnings increased 6% on a year-over-year basis. Also excluding the arbitration ruling, full-year net earnings increased 15%.

These results had a lot to do with a strong brand, many high-end customers doing well, and a lack of promotions. Tiffany targets the high-end consumer, many of whom rely on investments for improving their net worth. With real estate and stock markets performing well, this leads to more discretionary income, some of which is spent on luxury brands like Tiffany. Regarding Tiffany not having to resort to promotions, this keeps margins expanding and the bottom line ascending.

Given the company's brand strength, fiscally strong customers, and knack for profitability, the long-term outlook for Tiffany is good. The only near-term threat would be a steep correction in the broader market, which would lead to substantial declines in high-income consumers' discretionary spending levels.

However, Foolish investors are more concerned with the underlying business and long-term outlook. What's tricky here is that while Tiffany is still likely to be a long-term winner, it's possible that one of its peers is just as appealing due to a recent move.

Growth everywhere
In retail, it's imperative to observe comps, or same-store sales. This is the true indication of whether or not demand for a retailer's products remains high. In Tiffany's case, that would be a resounding yes.

In the Americas, Tiffany delivered a comps improvement of 6%, primarily thanks to growth in all sub-markets. In the Asia-Pacific segment, comps increased 4%, thanks largely  to growth in Greater China. In Japan, comps improved 8% excluding a constant exchange rate. Note: It's difficult for a company to deliver 8% comps growth in Japan. While fiscal stimulus leads to unpredictability in financial markets, the population is aging rapidly, and underlying deflation is in full swing -- as it has been for years. In Europe (still a weak consumer environment), comps improved 2%.

Additionally, gross margin improved 1.4 points to 60.5%, thanks to reduced cost pressures, increased prices, and an improved sales mix. Looking ahead, Tiffany expects all regions to continue to see comps growth. Tiffany also expects an improvement in gross margin as well as revenue outpacing selling, general, and administrative expenses -- often the sign of a healthy company.

If you're really looking for a negative, then you can find two potential concerns. One, jewelry is highly discretionary. Two, the stock is trading at 60 times earnings, making it susceptible to downside moves if bad news were to surprise the Street. It might seem impossible that one of Tiffany's peers could be even remotely as impressive, but a contender might exist. That's for you to decide.

Inorganic growth still counts
In February, Signet Jewelers (NYSE: SIG  ) announced that it would acquire Zale (UNKNOWN: ZLC.DL  ) . Within three years, this combination is expected to lead to a total of 3,600 locations and $6.2 billion in sales. This acquisition is a big reason why Zale's stock is up 33% year to date. 

Zale has seen top-line "growth" of exactly zero over the past five years, and it sports a somewhat concerning debt-to-equity ratio of 2.3. If  you're not yet invested in Zale, then there's a good chance you missed it (as in the stock's most upside potential.) Downside risk is likely to outweigh upside potential simply because it's still possible the deal doesn't go through.

As far as Signet Jewelers is concerned, fourth-quarter sales increased 4.8% year over year, and full-year sales improved 5.7%. Just like Tiffany, Signet Jewelers delivered a strong comps performance in the fourth quarter, with comps sales increasing 4% in the Unites States and 5.7% in the United Kingdom.

There's one potential negative here. With Signet Jewelers acquiring Zale for $21 per share, if the acquisition proves to be a failure, then it will put financial strain on Signet Jewelers. This could potentially limit the company's growth potential due to increased debt and responsibility. However, there's no reward without risk. 

The Foolish bottom line
Tiffany and Signet Jewelers both offer long-term potential but for different reasons. While Signet Jewelers could offer the most growth potential going forward due to the planned acquisition, there's still no telling what effects the deal will have on the merging businesses. With Tiffany, you don't have to worry about this issue. However, future growth potential might not be as high. Any investment decisions should be based on your own research. And if you're looking for even more investment potential, then continue reading.  

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