Tiffany Should Regain Its Sparkle

Tickers in this Article: ZLC, SIG, NILE, TIF

Upscale jeweler Tiffany & Co. (NYSE:TIF) reported poor fourth-quarter results last week, demonstrating that frugality trumps flashiness in the current economic downturn. However, Tiffany shares are cheap and there is a good chance the firm will regain its sparkle.   

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Less-Than-Sparkling Results
Fourth-quarter sales results were dreadful, falling 20% on a reported basis (including currency fluctuations) to $841.2 million. Same-store sales fell 23% across the globe, with the most marked decline in the U.S., which posted a 33% decline in comps as total sales fell 29%. Comparable sales (including currency fluctuations) fell 23% worldwide on double-digit declines in the other primary geographic segments, such as Asia-Pacific, the Americas and Europe. Only Tiffany Japan managed positive growth with sales up 4% and comps ahead 1%.

Reported earnings plummeted to 25 cents from 96 cents in last year's fourth quarter, but included a number of one-time charges to reduce headcount, exit underperforming businesses and close other facilities to reflect lowered sales activity at its stores. Excluding the charges, earnings would have been 85 cents, which is still down significantly from last year's pro forma figure.

Outlook
During it's fourth-quarter conference call, the company observed that the "conclusion to 2008 was the most challenging in the 21 years since Tiffany became a public company" and that "not surprisingly, it is difficult to plan in this environment." With these current conditions in mind, management is calling for an 11% decrease in sales for the coming year and earnings from continuing operations between $1.50 and $1.60. Tiffany also expects to reduce capital expenditure 33% to $100 million. (Read Analyzing Retail Stocks to learn more about these and other metrics useful for taking a closer look at investments in this industry.) 

Competitive Landscape
Given its premium status, Tiffany's competitive position is solid when compared to more middle-of–the-road rivals Zales (NYSE:ZLC) and Signet Jewelers (NYSE:SIG). All of these companies are struggling in the current environment, but Zales is having to close a number of its stores and Signet recently cut its dividend to preserve capital. Online jeweler Blue Nile (Nasdaq:NILE) is struggling the most and recently reported a 53% decline in fourth-quarter earnings.

Bottom Line
Despite the fall in sales and earnings, Tiffany's results still came in ahead of analyst projections. Better yet, given the reductions in capex, Tiffany is projecting free cash flow generation of $400 million, which works out to $3.16 per share based on year-end shares outstanding. That puts the price of its free-cash-flow multiple at a very reasonable 7.1, and leaves plenty of upside potential as free cash should eventually recover from today's depressed levels. This could lead to multiple expansion as well, giving Tiffany a number of areas to sparkle for investors. (To learn more about investing in stocks such as these, be sure to check out our Retailing Industry Handbook.)

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