How Tiffany Keeps Its Stock Shining Bright

On Tuesday, Tiffany (TIF +0.00%) will release its latest quarterly results. Given how well the stock has been doing lately, will the company be able to satisfy investors looking for continued strong performance from the jewelry-maker, or will a surprise shortfall send shares plunging?

The high-end luxury market held up far better during the recession than retail companies aiming further down the income chain, and Tiffany was one of the big beneficiaries from that trend. Concerns about a slowdown in China has had more of an impact on the jewelry company, although even Asian economic weakness hasn't held back its shares. Let's take an early look at what's been happening with Tiffany over the past quarter and what we're likely to see in its quarterly report.

Stats on Tiffany

Source: Yahoo! Finance.

Will Tiffany's challenges be a one-time event this quarter?
In recent months, Tiffany has had analysts downgrade its earnings prospects, although they've focused on short-term cuts. For the April quarter, analysts have cut estimates by 20%, but for the full fiscal-year, a $0.03 reduction in expectations amounts to less than 1%. Meanwhile, the shares have continued their upward run, rising nearly 20% since late February.

Tiffany did a good job defying the U.S. economic slowdown, and thus far, it has also defied the economic slowdown in Asia as well. Despite overall flat same-store sales and profits that rose only slight during its fourth quarter, Tiffany saw 13% higher sales in its Asia-Pacific region. In addition, the company managed to give guidance expressing optimism that its earnings would recover by the end of the current fiscal year.

One key to Tiffany's success has been its realization that its brand-value is an essential asset. Companies throughout the luxury-retail industry learned from Tiffany's mistake during the financial crisis, when it introduced lower-priced merchandise to try to draw in a wider customer base. That move backfired, and now, both Tiffany and handbag and accessories maker Coach (COH +5.04%) have figured out that discounting is almost never the right move, with Coach in particular having drawn big international growth by maintaining the integrity of its high-end brand.

Yet the concern that many people have about Tiffany is its valuation. Admittedly, red-hot Michael Kors (KORS +4.03%) sports an earnings multiple that at 35 is well above Tiffany's mid-20s level. Yet Kors has the potential for 30% growth over the next several years, while Tiffany is much more of a mature business. Meanwhile, Coach trades at a much more reasonable 16 times trailing earnings despite having similar growth potential.

In Tiffany's report, watch for the company to discuss the long-term impact of much lower prices for gold and other precious metals. If Tiffany can avoid having to pass through input-cost declines in order to stay competitive, the yellow metal's move down could support further gains for Tiffany.

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