Tiffany's Continues to Sparkle (News) August 17, 1999

Tiffany's Continues to Sparkle

By Louis Corrigan (TMF Seymor)
August 17, 1999

Breakfast at Tiffany's (NYSE: TIF) was delayed this morning as customers jammed the doorways to get into the regal jeweler's stock following the announcement of sparkling second quarter results. By early afternoon, the shares were up $3 3/8 to $50 1/16. That's not far from their all-time high of $53 set a month ago, shortly before the company enacted a 2-for-1 stock split (all prices split-adjusted) and raised its dividend.

Tiffany & Co. delivered yet another estimate-beating quarter, with earnings of $0.31 per share topping last year's $0.19 per share by 63% and crushing the Wall Street consensus of $0.24 per share. Sales rose a dazzling 24% to $307.1 million, with solid gains in all geographies.

U.S. sales increased 23% to $159.5 million on a 12% gain in comp-store sales while international revenues shot up 30% to $121.6 million thanks to robust 13% comp-stores gains in Japan (as measured in yen), a crucial market for the company. Tiffany also enjoyed strong comps in Europe and other markets in the Asia-Pacific region. The less important direct marketing segment grew just 5% to $26.0 million.

The rising profit margins followed from an improvement in gross margins to 57.0% from 54.8% and a reduction in selling, general, and administrative (SG&A) expenses as a percent of revenue to 43.3% from 44.7%. The company continues to enjoy operating leverage while managing to pass along any higher materials costs to consumers in the form of price increases. Earnings also benefited from a slight reduction in the tax provision to 42.0% of pretax profit from 42.5%.

Thanks to a late July follow-on offering of 1.45 million shares, Tiffany's cash has improved to $151.0 million versus $53.3 million a year ago. Inventories have increased 24.5% to $536.6 million, but that's in line with the sales gains and down on a square foot basis. Long-term debt, however, has risen to $194.8 million from $86.3 million as the company continues to expand its empire.

The most interesting change, however, is the leap in "other assets" to $132.3 million from $39.1 million a year ago. On July 19, the company announced it invested $72 million to acquire 8 million shares of Aber Resources (Nasdaq: ABERF), a Vancouver-based company that owns a 40% stake in the Diavik Diamonds Project in Canada's Northwest Territories. Diavik will start producing gem-quality diamonds in 2002. This investment is part of an agreement under which Tiffany must purchase from Diavik at least $50 million worth of diamonds a year for 10 years.

The deal benefits Tiffany by locking down both a steady supply of diamonds and a better price. Most uncut diamonds now trade through the De Beers (Nasdaq: DBRSY) Central Selling Organisation, which typically charges a 10% commission. The Aber deal will allow Tiffany to avoid this markup on a substantial amount of its diamond purchases.

The larger and more astonishing story about Tiffany is that it has managed to generate earnings as big as the Ritz throughout an especially tough period for Japan and the rest of the Asia-Pacific region. Turmoil in the financial markets late last summer and early fall seemed to spell disaster for luxury retailers that depend heavily on these Asian customers who love diamonds more than Audrey Hepburn ever did. That's why Tiffany's stock dipped to a closing low of $14 a share in early October.

But the company has now beaten estimates each of the past three quarters, and the stock has rallied 260%. Asia's economies show signs of recovery, which should more than make up for any Fed-driven dampening of the wealth effect here in the U.S. Although the best time to buy a stellar luxury goods franchise like Tiffany is during periods of massive but ill-founded economic fear, investors with a passion for pearls, diamonds, and other pretty trinkets should get to know this company.

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