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Tiffany Picked A Bad Time To Go Mainstream

Posted: Dec 02, 2008 11:23 AM by Ryan C. Fuhrmann

Tickers in this Article: JWN, MOV, ZLC, TIF

If you're wondering why traditionally recession-proof high-end brands have fallen prey to the current downturn in the global economy, it may have to do with a strategic shift in their target markets. For some time now middle class consumers have aspired to move upscale with their taste in automobiles, high-fashion brands and jewelry. Many brands have been more than willing to oblige and meet the consumers in the middle. BMW has its 100 series sedans; Nordstrom (NYSE:JWN) has its Nordstrom Rack stores, and Tiffany & Co. (NYSE:TIF) has its boutique stores in smaller cities emphasizing namesake silver as much as four-carat diamonds.

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These moves have certainly expanded addressable markets, but they may have also exposed purveyors of luxury goods to a more economically-sensitive clientele. In Tiffany's case, third-quarter earnings released last week did come in better than analyst's were projecting, but it tempered full-year guidance by more than 10% to a range of $2.30-2.50 per diluted share, as sales trends in key markets are looking downright depressing.

Third-Quarter Lowlights
Management's explanation was straightforward enough as it bemoaned, "Customers have adjusted their spending in reaction to economic conditions and near-term uncertainties". Total sales fell 1% to $618.2 million, with declines were most pronounced in the Americas, which accounted for 54% of total sales and saw quarterly sales fall 7% to $$331.8 million on a 14% drop in same-store sales in the U.S. This was sufficient to offset the 3% sales growth to $206 million in its Asia-Pacific segment (Japan accounts for half of sales in the region) and robust 16% in Europe, which accounted for 33% and 9% of total sales, respectively.

Expense controls helped boost net earnings 13% on a continuing basis as product mix shifted to higher-margin items, boosting gross margins to 56.3%. SG&A also fell 7% on compensation cost cuts while share repurchases helped boost earnings per share to 35 cents, though management has suspended its buyback programs to conserve cash. (To use revenue and expenses to break down and analyze a company, check out Understanding The Income Statement.)

The outlook isn't comforting as Tiffany mentioned that U.S. sales have continued to soften since November and are also struggling overseas. Until conditions improve, it will rely on cutting staff and capital expenditures. Long term, it has a goal of growing locations 8%-10%, but will scale that down to 5%-6% for the coming year, with most growth occurring in markets with burgeoning middle class consumers.

Bottom Line
Despite the near term doom and gloom, Tiffany has a first-class brand that rivals Zale Corporation (NYSE:ZLC) and Movado (NYSE:MOV) can only dream of. Net profit margins historically run in the double digits for Tiffany, implying that the near-term hit to profitability (it reported a 7% third-quarter margin) isn't permanent, though it could be more volatile given the mass-market appeal management is gunning for. Throw in global name recognition and a product that lends itself to handsome markups, and investors have an opportunity to pick up one of the best names in retailing at a very favorable 7 times (depressed) earnings.

By Ryan C. Fuhrmann

Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.

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