Tiffany, the venerated jeweler, turns 175 this year, but investors haven't been in the mood for celebrating, Miriam Gottfried says on online.barrons.com. Shares have fallen 20% since mid-July, to a recent $66.53, depressed by a sour economy, reduced earnings guidance and disappointing holiday sales, particularly in the U.S. and Europe. Tiffany's stumbles stand in stark contrast to recent gains at most other luxury merchants, and suggests to some skeptics that the New York company, with its famous Fifth Avenue headquarters, has lost its once-glittering way.
Look a little closer, however, and Tiffany still has plenty of polish. Its latest woes are the result chiefly of a bad bonus season on Wall Street and aggressive promotions by other jewelry chains, not a deterioration in the fundamentals of the 243-store chain. As a result, the company's shares (ticker: TIF) could be a blue-box special, poised to regain their lustre as the U.S. economy improves and Tiffany expands its store base in coming years. New product lines and marketing efforts also could propel sales and earnings, and lift the shares to the mid-$70s in the next 12 months.
"If you look around the world, the environment is getting better for Tiffany," says Brian Nagel, an analyst at Oppenheimer who rates the shares Outperform. "Compared with six months ago, the world's economies, by almost every measure, have gotten stronger, and that bodes well for consumer spending."
Historically, Nagel notes, there has been a strong correlation between the performance of the Standard & Poor's 500 and Tiffany shares. The benchmark index is up sharply this year, and Nagel expects the correlation to resume.
Tiffany trades for 16.8 times the $3.95 a share that analysts expect it to earn in the fiscal year ending next January. Applying a 10-year median price/earnings multiple of 19.5 would result in a share price of $77. Investors get to pocket an annual dividend of $1.16 a share while they wait. Tiffany, which has a long history of dividend increases, upped its payout 16% last year.
Although Tiffany's revenue and earnings more than doubled in the past 10 years, this isn't the first time the company fell short of expectations in the crucial fourth quarter. It happened in 2008 and 2009, and each time the shares rebounded quickly, hitting fresh highs. Investors attribute this resilience to the company's management team, led by Chairman and CEO Michael J. Kowalski, a Tiffany veteran of nearly 30 years. Kowalski, 60, is respected for his grasp of luxury retailing and fierce protection of the Tiffany brand. Tiffany executives declined to speak with Barron's.
Last year, investors learned of trouble in November, when Tiffany announced robust third-quarter results but lowered fourth-quarter earnings guidance. Two months later it reported a 7% increase in holiday sales, below last year's 11%, with much of the weakness attributed to lower-than-expected sales of expensive "statement" jewelry. Adjusted for currency, sales at stores open at least a year rose just 2% in the Americas in November and December, and fell 4% in Europe, although they were up a snappy 12% in Asia-Pacific. The Americas accounted for 51% of total sales in the 2011 fiscal year, with Europe chipping in 12% and Asia-Pacific and Japan, 18% each.
Tiffany also lowered its full-year earnings guidance to $3.60 to $3.65 from as much as $3.80. The company, which earned $2.93 a share in fiscal '11, on sales of $3 billion, will report full-year results March 20.
If Tiffany's expansion plans are any guide, management is bullish. In the 12 months through last October, the company opened 18 new stores, and it intends to keep growing around the world. It expects to increase its European store count by 56% in the next five years, and believes it has the potential to reach 150 stores in the U.S. over time, up from 87 now.
Board member Peter May, president of Trian Fund Management, Tiffany's fifth-largest shareholder, sang the company's praises at the Ira Sohn value-investing conference last spring. May argued the shares could rise to $100, citing a strong luxury market, Tiffany's healthy return on capital, ample free cash flow ($172 million last year) and expansion potential. A Trian spokesperson said last week that the firm remains "very pleased with the company's long-term outlook." Given Tiffany's storied past and ample strengths, and a rising stock market, this could be a good birthday, after all.
