If you missed it yesterday, we took a stroll down memory lane. In 1999, we were short Trump Hotels & Casinos in our Rule Breaker portfolio, predicting the company would go bankrupt. Finally, this week it seems like that prediction has come to fruition. But back then, The Donald was not too happy about our stance, and so he invited David Gardner to his private offices in New York for a chat. This is his story.

In today's Motley Fool Take:

Is Tiffany Tarnished?

By

Bill Mann (TMF Otter)



Back in February, I noted that Tiffany & Co.(NYSE: TIF) had not repurchased any shares under its existing authorization, and I made the conjecture that the reason this was so was that management thought buying shares at such a high price would be a poor allocation of capital. They were trading at $38 at the time. In the quarter just ended, Tiffany repurchased 625,000 shares at an average price of $34.11. I agreed that Tiffany had gotten expensive -- I sold a long-held position in October 2003, when it was trading even higher.

Right now, following a fairly grim quarterly report, Tiffany shares sit at $28 a stub, down over 12% today. Well, well, well.

I would imagine that Tiffany CEO Michael Kowalski is going to go to bed tonight thinking these three words: "I hate Japan." The luxury retailer's second-quarter results outside of Japan were not bad: 11% top-line growth in U.S. sales, a 10% increase in same-store sales, phenomenal 16% sales growth in its flagship Fifth Avenue store. Overseas in Europe and Asia excluding Japan, the company had similar growth, though it was wind-assisted with currency translation gains galore. And then there's Japan, Tiffany's second-largest market: a sales decline of 2%, but that includes an 8% translation gain. In other words, in yen terms, Tiffany's Japanese results for the quarter were abysmal, and though the company was dealing with a somewhat strong comparison from last year's second quarter, in the conference call (courtesy of CCBN; registration required), Tiffany noted that it expected its Japan comps to improve by the fourth quarter.

Another weak spot for Tiffany was its direct and online sales, which declined 5% over the first six months of 2004 versus 2003. Online sales were steady, but Tiffany's decision to discontinue an award sales program caused its direct sales to submarine. This, however, was not unexpected.

The brutality of the unadjusted level of decline in Japan is troubling. We've talked about the power of Tiffany's brand before (as reflected in its 55%-plus gross margins), but the company's name evokes near-mystical power in Japan. This is also an economy that has purportedly been rebounding over the last year, so it's not as though the overall environment for luxury purchases there has degraded in the last year. Tiffany pointed to the fact that Japanese tourist spending had increased in its stores in Guam, Hawaii, and New York as possibly having an impact on sales in Japan. If this had any impact at all, I'd suspect that it was minuscule.

Another element that could trouble investors is the rapid increase in inventories, from $814 million to $1.03 billion over the course of the year -- a rate that far outstrips sales growth. There are two mitigating factors here, beyond the fact that Tiffany inventory rarely spoils: First, last year Tiffany commenced a program of direct sourcing of rough diamonds that it purchased in part from the Aber(Nasdaq: ABER) and Rio Tinto(NYSE: RTP)-owned Diavik mine in Canada. Second, the company is opening or has recently opened several new stores, including two new larger-format stores in Tokyo and Osaka, as well as its new pearl store concept, called Iridesse, of which the first two stores will open this fall in Tysons Corner, Va., and Short Hills, N.J.

I see the most recent quarter, and I see a miss. I have to admit being a little troubled by the large drop in Japanese revenues, but not so much that I'd consider it to be a harbinger of a long-term problem. Tiffany's the same as it ever was. And man, oh man, does it seem to be getting cheap.

Bill Mann owns no shares of any company mentioned in this article. He has held Tiffany shares in the past and intends to in the future. Maybe the near future.

Fool Writer to Bare All, Reveal Credit Score

You can never say Dayana Yochim doesn't sacrifice for the greater good. Inspired by discount partner TrueCredit, which offers a 3-in-1 credit report, she will write a tell-all tale and reveal every dirty, little secret she finds out about her sordid credit history. Read about it in her column from yesterday, or go straight to the source and save $10 by ordering your own credit report through Fool.com.

Hewlett-Packard Takes a Beating

By

W.D. Crotty

Hewlett-Packard's (NYSE: HPQ) third-quarter report reminds readers that the word execute has more than one meaning. At HP, heads roll when you fail to execute.

First, let's start with the good news. Revenue and earnings were up. On the surface, that is good execution (performance).

Next, there is the disappointing execution. Excluding certain items, earnings, expected to be $0.31, were $0.24 a share. Next quarter's earnings, also excluding items, were forecasted to be $0.43, but now the company is targeting $0.35 to $0.39 a share on that basis.

And here is execution on two fronts. In an earnings report littered with generally accepted accounting principles and non-GAAP numbers, the company's laser focus fell on the "unacceptable execution in Enterprise Storage and Storage." The result: Immediate management changes will be made and the company will accelerate the margin improvement (performance) plans in this business.

Given the choice between margin improvements and accelerated margin improvements, wouldn't accelerated always win? Aren't stock options supposed to encourage accelerated performance? Why do disappointing results yield an accelerated plan? Ah, sweet mysteries of life.

If you really want to be confused, look at operating margins. GAAP margins improved from 1.7% a year ago to 3.5%. Non-GAAP margins declined from 4.9% to 4.5%. Is this mixed bag good execution or bad?

Consider competitor execution (performance). Operating margins are 14.2% at Canon(NYSE: CAJ), 8.5% at Motley Fool Stock Advisor recommendation Dell(Nasdaq: DELL), and 10.2% at IBM(NYSE: IBM). Based on those comparisons, HP has a lot of accelerating to do to get to peer-level performance.

HP is not a basket case. With total debt of $7.1 billion, and cash and short-term investments of $14.3 billion, the company is flush with cash and has a strong research and development department.

If heads roll, let's hope it's in financial reporting. One set of numbers, please. Simple is better. Let management changes be based on improving operating margins. Set the targets high. Replace those who cannot perform. And if execution is poor, then please do not issue options.

And, speaking of public Wall Street executions, HP is the volume leader and down 17% to a new 52-week low.

Fool contributor W.D. Crotty does not own stock in any of the companies mentioned.

Discussion Board of the Day: TV Banter

What will you be watching this fall? Are you a fan of American Idol, or does it ring flat to you? Are you bored with summer reruns, or has reality TV kept it fresh? All this and more in the TV Banter discussion board.

Discounters Don't Quit

By

Alyce Lomax (TMF Lomax)

Despite June's concerns about a cooled-down, cooped-up consumer, there was consolation in the earnings reported by Wal-Mart(NYSE: WMT) and Target(NYSE: TGT) today. For now, it seems the bargain-hunter shopper is still alive and well and loading up on goods.

Wal-Mart's second-quarter net income increased 8.6% to $2.65 billion, or $0.62 per share, with sales higher by 11% at $69.72 billion. Although its sales were slightly lower than expected and dipped on a sequential basis, the company managed to squeeze profits from each of its divisions. Higher margins offset higher wages as the company was able to sell briskly without the help of markdowns.

Meanwhile, Target's second-quarter profits quadrupled, but before getting too excited, much of that boost related to its high-profile sale of Marshall Field's. Check this out: Its net income was $1.42 billion, or $1.54 per share, which includes a $1.11 gain related to the sale, as well as a $0.05 loss on debt repurchase.

However, if you exclude the one-time items, Target's earnings were $0.48 per share, in effect beating Wall Street's expectations by a penny. Target's total sales increased 10% to $10.56 billion.

It seems my Foolish colleague Seth Jayson was right on earlier this summer when he discounted the media frenzy over June's lowered sales outlooks for Wal-Mart and Target. His point was legit -- if consumers really are feeling squeezed by gas prices, fears of inflation, and the nagging thought that yes, it's time to pare down credit card debt, then the discounters quite likely have a climate for success.

However, Wal-Mart's chief executive still let on about concerns about high gas prices and the subsequent consumer squeeze -- though now he is of the opinion that growth in jobs and income will offset any damage. For those who might be concerned about the gender discrimination lawsuit filed against the company, Wal-Mart said that it thinks it will have a "minimal impact" on ongoing financials.

Upcoming perks for discounters of course include the imminent back-to-school supply loadup as well as Wal-Mart's "optimistic" view of the consumer. That's heartening, as the discounters are seen as a reasonable gauge of consumer feeling.

Despite the shaky June, the discounters persevered. Investors who didn't give in to the temporary nerves earlier this summer have good reason to feel vindicated. Shares of both retailers lifted today, likely buoyed by the idea that indeed, the power of the discount remains pretty mighty.

Alyce Lomax does not own shares of any of the companies mentioned.

Quote of Note

"I find TV very educational. Every time somebody turns on the set, I go into the other room and read a book." -- Groucho Marx

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For a list of all our stories from today, see our Today's Headlines page.