Foolish Forecast: Tiffany's Gaudy Quarter

Bauble maker Tiffany (NYSE: TIF) will report fourth-quarter 2006 results on Monday that should be decidedly sterling.

What analysts say:

• Buy, sell, or waffle? Of the 17 analysts trailing Tiffany, 10 say hold, six say buy, and one says sell.
• Revenues. Sales at the expensive trinket maker are expected to jump 14% over last year to $978 million.
• Earnings. Profits are expected to rise 8% to $1.05 per share.

What management says:
Activist shareholder Nelson Peltz recently acquired a 5.5% stake in the jeweler, saying he believed the shares were undervalued. While not seeking a board seat, Peltz wants to boost Tiffany's brand internationally. Japan alone already accounts for 20% of the retailer's sales but has been chalking up weak results. Last quarter, sales in other parts were able to offset Japan's decline, and at $221.7 million made up 40% of all revenues.

What management does:
Sales have grown considerably at Tiffany's, helped in no small part by a boom in luxury goods. Online diamond retailer Blue Nile (Nasdaq: NILE) reported 24% growth in sales (although analysts were expecting a 25% increase), and Tiffany said holiday sales were strong. It may even exceed its profit forecasts. Yet it walks a fine line between the need to reach more of the masses to juice sales without diminishing its prestige. The line of silver jewelry it unveiled at lower price points did indeed boost sales but also cut into margins.

One Fool says:
With Tiffany trading at 24 times trailing earnings and an equally rich 21 times 2007 estimates, it seems hard to say that the stock is undervalued. It had a bad beginning with its line of "luxury goods with training wheels," and although the 18-and-under crowd is heavily influenced by the likes of high-end fashion as seen on MTV and other media outlets, the chance to boost margins significantly enough will require a lot of shaving. Then again, there's only so much growth possible at the highest end of the market.

With shares 43% higher than they were at their late-summer levels, Tiffany may have peaked until it can safely reconcile its high-end reputation with the need to market more to the low-end masses.

For related Foolishness:

• What Makes Tiffany's Heart Flutter?
• A Glittering Season for Tiffany
• Tiffany's Growing Shine
• Foolish Fundamentals: Margins

Tiffany has earned a three-star rating from Motley Fool CAPS, the new investor intelligence community. You can add your voice to the new stock rating service by joining today. It's free!

Blue Nile is a recommendation of both Motley Fool Rule Breakers and Motley Fool Hidden Gems.

Fool contributor Rich Duprey  does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.