Don't let today's softness in the share price of Tiffany & Co
For the year, Tiffany's sales increased 11% overall, but there was some variation by geography, with the U.S. increasing sales by 9% and the international business by 12% (13% if you don't factor in exchange rates). The strongest performances were turned in by non-Japan sales in Asia and European sales, which both increased by 23%. Despite signs of consumer spending in Japan increasing, the region saw sales decline by 1%, but grew by 4% when you ignore the movements between the yen and the dollar. Same-store sales followed a similar geographic pattern, with the strongest growth in Europe and Asia.
Net income, on the other hand, was essentially flat with last year, because of a higher tax rate and a decline in margins. Earnings per share increased by 3%, because of the company's share repurchases over the past year. The increase in taxes is largely because of the company's decision to repatriate money from foreign operations last year at a temporarily lower rate. Earnings before taxes, which ignores the tax rate movements, increased by 8.6%.
The margin movement is fairly easy to understand as it comes down to sales mix. The first, and smaller, part is customers purchasing lower-margin, but higher-priced, products. The larger part comes from the company purchasing diamonds in bulk. Tiffany then uses the diamonds it selects in its jewelry offerings and sells off the remainder at low margins. When these sales increase, it pulls margins down slightly. This is different from Blue Nile
The margin impact should be temporary as Tiffany's expects improvements in gross margins to deliver a 0.5-percentage point increase in operating margin next year. Tiffany's balance sheet also remains plenty strong given its ability to generate cash flow and its potential for cash flow growth from Asia, primarily China. The company also continues to do a pretty good job allocating its earnings to benefit shareholders by regularly increasing its dividend and buying back shares on a consistent basis.
It's the growth potential outside of the U.S. and the company's allocation of capital that keep me coming back to Tiffany. If the shares were to revisit anything near their 52-week low of $29.50, I'd consider it a very attractive opportunity.
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At the time of publication, Nathan Parmelee had no financial position in any of the companies mentioned. He was ranked 43rd out of 25,049 Motley Fool CAPS players. The Motley Fool has an ironclad disclosure policy.