In at least one sense, it seems fitting that shares of luxury retailer Tiffany
And it does seem as though people do continue to open their wallets for Tiffany's baubles. Sales rose about 8% in the third quarter, and the company improved its margins such that it produced 19% growth in operating income. Net earnings were up an even more impressive-looking 37%, though that figure was boosted by a better tax rate.
Tiffany's other financial metrics looked reasonable as well. Accounts receivable were up but did not increase faster than sales. Inventories were actually down slightly. Also, new concepts like Little Switzerland and Iridesse both continue to grow faster than the company as a whole.
Looking at the sales metrics, there was mostly good news. Overall worldwide comp-store sales rose 5%, with 7% growth in America and 1% growth overseas. Comp sales were down 1% in Europe and up 4% in Asia-Pacific.
The big overseas item that everybody watches, though, is Japan. Comp-store sales here were flat, and I'm really not sure how investors will react to that. Given that many people seem to already be counting on improvements in Japan, I wouldn't be too surprised if some investors took a "glass half-empty" view of this no-growth performance (on a comp-store basis).
And now we have the question of valuation. Unlike colleague Rich Smith, who previewed Tiffany's earnings Tuesday, I take a more modified view of the company's cash flow. See, a simple mathematic approach (operating cash flow minus capital expenditures) misses a couple of points I find to be important. First, I'm keener on following structural free cash flow because I think it correlates better with long-term performance. Second, you can't look at Tiffany's capital expenditures without accounting for the fact that some of it is due to the ongoing growth initiatives.
Based on discounted structural free cash flow, Tiffany's stock looks overpriced by a couple of bucks. Certainly, then, it's not a buy in my book, but it's not a sell either, particularly when you consider the brand value, the scarcity value, and the fact that this company does produce pretty righteous returns on invested capital.
I won't be buying Tiffany. My retail interests lie more down the path of Blue Nile
For more diamonds in the rough:
Blue Nile has been recommended by two of our newsletters: Rule Breakers and Motley Fool Hidden Gems . PetSmart is a Stock Advisor recommendation.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
