Luxury stock Tiffany & Co. (NYSE:TIF) has plenty going for it. It is, of course, one of the world’s premier brand names. The signature blue box is a gift that will cause any woman to swoon. The stores are fantastic, with great salespeople that are courteous and helpful. If you want to buy jewelry, there always will be cheaper places to get it (particularly diamonds), but whatever you purchase simply will not have that Tiffany-brand sparkle.
The pricing issue, however, is one reason I think Tiffany might be facing tough times ahead.
Diamonds used to be an appreciating asset. The legendary De Beers kept a stranglehold on the market, creating a de facto monopoly, while simultaneously inventing the greatest marketing ploys in modern history. All this elevated the value of an inherently worthless little mineral into gazillions of dollars of wealth.
Now, however, more and more diamond mines have been discovered, more players have entered the market, and the Internet has made diamond purchasing easier than ever — which has kept a lid on prices. We saw this when Blue Nile (NASDAQ:NILE) reported awful Q4 earnings last month. Thus, Tiffany’s pricing power has been impacted. Its brand name can only carry it so far. That’s why we saw it introduce new lines of products, including lower-cost items like men’s wallets.
Tiffany’s earnings reports in 2010 and 2011 told us that wealthy people were the first to begin spending their money again after the financial crisis. Wealthy people go for the brand; they don’t go downtown to the diamond district to purchase something. This trend continued for a while, but now it has started to stumble.
Tiffany’s latest earnings report was good, but storm clouds are rolling in.
The bright side: Last year as a whole was great for Tiffany, with sales up 18%. Regional comp sales were all in the low double-digits, and 27% in Asia. Net income rose 19%.
But don’t just look at the full year. TIF’s fourth-quarter earnings report had a few red flags. High-end jewelry sales were weak compared to the rest of the year, and global sales only increased by 8% vs. 21%, 30% and 24% in each of the first three quarters of the year. Tiffany’s Q4 net income actually fell by 3.3% compared to last year, and free cash flow was negative to the tune of $30 million.
I also didn’t like the fact that total TIF shares outstanding increased by 680,000 (less than 1%) — but that came on the heels of spending $200 million to buy back stock. I don’t like a company spending that much money just to keep the stock from being diluted.
Going forward, Tiffany expects less torrid sales and earnings growth, with numbers more around 10%-12% in both categories. Nobody expects the company to be able to maintain 20% earnings and sales growth, particularly when those increases were in comparison to the financial crisis era. Still, it does suggest that rich folks might have moved on to other ways of spending their money. Tiffany is responding by opening smaller stores and offering lower-priced products, as well, so it’s good to see the company isn’t resting on its laurels.
Tiffany’s financials are solid with almost as much cash as debt, so it’s not like I’m saying the luxury stock is going out of business. But 13% earnings growth on this year’s earnings of $4 per share suggest a fair value of $52 — and Tiffany is trading at 35% above that price. That’s way too expensive to buy in, and I suggest selling the stock and booking your profits.
When things become clearer for the company — or if TIF suffers a big stock haircut — then I’d get back in, as Tiffany is a class operation.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.