Tiffany & Co. Is Soaring; Is There Still Room to Run?

Tiffany & Co. (NYSE: TIF  ) , arguably the most prominent designer and retailer of jewelry and other luxury products in the world, has just reported earnings results for the first quarter and its stock has reacted by spiking more than 9% higher. Let's break down the results and the company's outlook on the rest of 2014 and then take a quick look at one of its largest competitors, Coach (NYSE: COH  ) , to determine if we should be buying into this rally or if we should wait for a lower entry point.

Source: Tiffany's Facebook

Blowing away the estimates
Tiffany released its first-quarter report before the market opened on May 21 and the results far exceeded analysts' expectations on both the top and bottom lines; here's a breakdown:

Metric Reported Expected
Earnings Per Share $0.97 $0.78
Revenue $1.01 billion $955.12 million

Source: Benzinga

Tiffany's earnings per share increased 49% and revenue increased 13% year-over-year, as comparable-store sales rose 9%; here's a breakdown of the sales and comparable-store sales growth by region:

Region 1Q Revenue Revenue Growth Comp.-Store Growth
Americas $439 million 8% 7%
Asia-Pacific $261 million 17% 8%
Japan $174 million 20% 21%
Europe $101 million 9%

4%

Other $37 million 39% 18%
Total $1,012 million 13% 9%

Source: Tiffany & Co.

Gross profit increased 17.1% to $589.53 million and the gross margin showed strength, expanding 200 basis points to 58.2%; this expansion was helped by lower costs of materials and the company increasing its prices across all product categories and regions.

Source: Tiffany's Facebook

These strong results and ample free cash flow enabled Tiffany to repurchase 82,000 shares of its common stock for approximately $7 million during the quarter; this was part of the $300 million share-repurchase authorization that it announced in March of this year, so the company is off to a nice start for the plan that it plans to complete by March of 2017. 

Lastly, in terms of expansion, four new stores were opened and one was closed during the quarter, bringing Tiffany's total count to 292. The company now operates 121 stores in the Americas, 72 stores in the Asian-Pacific, 55 stores in Japan, 38 stores in Europe, five stores in the United Arab Emirates, and one store in Russia.

Overall, it was a phenomenal quarter for Tiffany. However, the bullishness did not stop there, as the company then went on to update its guidance for fiscal 2014...

What will the rest of the year hold?
As a result of the great first quarter, Tiffany raised its earnings per share guidance and reaffirmed its full-year growth expectations; here's a summary of its updated outlook:

Source: Tiffany's Instagram

  • Earnings per share in the range of $4.15-$4.25, up from previous guidance of $4.05-$4.15
  • Revenue growth in the high-single-digit percentage range
  • 13 new stores and the closings of four existing stores
  • Free cash flow of at least $400 million
This new outlook would result in earnings per share growing 11.3%-13.9% from fiscal 2013 and will likely bring revenue to over $4.25 billion for the year. With this outlook and the earnings results in hand, I believe the rally in Tiffany's stock is only getting started and significant upside potential remains; for these reasons, I would be a buyer of the stock at current levels and would add to the position if shares were to come down as a result of overall weakness in the market.

An ice-cold competitor stumbles again
Coach, one of Tiffany's largest competitors in the luxury-goods market, has struggled mightily over the last several quarters and this has been a direct result of increased competition and lack of consumer demand. The company reported mixed third-quarter results on April 29 and its stock has been hit with a wave of negativity in the weeks since; here's an overview of the quarter:

Metric Reported Expected
Earnings Per Share $0.68 $0.63
Revenue $1.10 billion $1.13 billion

Source: Estimize

Earnings per share decreased 19% and revenue decreased 7.4% year-over-year, as Coach faced numerous challenges during the quarter including slowed customer traffic at its retail locations and e-commerce site.

Source: Coach

Coach's performance in North America was pitiful, with sales decreasing 18% to $648 million and comparable-store sales plummeting 21%. The company noted extreme weakness in its product mix, primarily in handbags and accessories, and this has been a consistent theme over the last few quarters. 

These weak results led to Coach's gross profit decreasing 11.2% to $781.3 million and operating income decreasing 24.6% to $262.7 million. Also, the gross margin took a significant hit, contracting 300 basis points to 71.1%, and the operating margin was hit even worse, contracting 540 basis points to 23.9%.

In summary, it was a horrible quarter for Coach and its stock reacted accordingly by falling 9.34% in the next trading session. The shares have continued lower in the weeks since and with the ongoing underperformance of the company's products, I would avoid an investment in its stock indefinitely. 

The bottom line
Tiffany has just reported an absolute blowout quarter and its shares have responded by making a sharp move higher. Even after this strong rally, I believe there is still plenty of room left to run, and the company's raised outlook on the year adds further support to this idea. Foolish investors should strongly consider initiating positions in Tiffany right now and adding to them on any weakness provided by the market to let price appreciation and Tiffany's healthy 1.5% dividend provide rich returns over the next several years.

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