"That's right. I'm just crazy about Tiffany's!" -- Breakfast at Tiffany's (1961)
One quarter's performance isn't enough to make me quite as fond of Tiffany (NYSE: TIF ) as Holly Golightly was, but second-quarter performance was at least worth a sincere "'atta girl."
Sales in the quarter climbed 11% as reported and 10% when adjusted for foreign currency movements. Worldwide same-store sales rose 4%, led by 6% growth in the United States and 6% growth in non-Japan Asia-Pacific. Even Japan, the recent mangy dog of the company's reporting geographies, turned in a bit of growth with a 1% same-store sales increase.
Another impressive result was that gross margins were flat for the quarter. This means that Tiffany didn't have to discount its merchandise to keep it moving. To counter the reportedly lighter floor traffic, the company saw higher average transaction sizes. The company also did a good job of controlling expenses and the operating margin expanded from 12.2% to 14.1% for the quarter. Earnings per share rose by 59% and even if you back out the benefit of an unusually low tax rate, the company still handily beat the high end of analyst expectations.
Looking at the company's cash conversion cycle, you see further improvement from a year ago. While Tiffany's cycle is still especially long for a retailer, the company did make progress with its inventory and payables turnover. Based on the most recently reported quarters, Tiffany has a cycle of about one year, while Zale (NYSE: ZLC ) comes in at about seven months, and Motley Fool Rule Breakers pick Blue Nile (Nasdaq: NILE ) actually has a negative number for its cycle. Just to offer a bit more context to this metric, Wal-Mart (NYSE: WMT ) boasts a cycle of just under 13 days, while Coach (NYSE: COH ) comes in at a bit more than four months.
With the stock having rebounded nicely over the past three months, it's a bit tougher to recommend. True, Japan is showing signs of life (though off of a lowered baseline) and the new Iridesse concept seems to be starting off well. What's more, debt is well-controlled, returns on assets and equity are pretty respectable, and the company has a great brand and a business that should largely be weather-proof and immune to gasoline prices.
But we're also talking about a company whose stock trades at a PEG ratio of about 1.5 -- in line with the S&P multiple and a fair bit ahead of what we're seeing in the retailing sector right now. Although I wouldn't chase away patient investors, current valuation suggests that the stock is right about where it should be.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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