While the U.S. economy has been stagnant since the 2008 financial crisis, it seems affluent consumers are doing fairly well. Just look at the success of Tiffany & Co. (NYSE:TIF).
In its latest quarterly report, the company posted a 33% increase in profits to $90 million, or 69 cents per share. Revenues were up 30% to $872.7 million, and comparable-store sales were up a sizzling 22%.
As a result, Tiffany’s stock price got a nice pop, increasing 9.35% on Friday. Then again, the company has a good track record with keeping shareholders happy. Keep in mind that the average annual return was 18.69% for the past five years.
Can the company keep up the momentum? Or is it too late to get some gains?
Let’s take a look at the pros and cons:
Pros
Foreign influence. As should be no surprise, Tiffany is seeing lots of strength from markets in the Asia-Pacific area (up 55% for the quarter). But even in North America and Europe, there is lots of strength. Yes, a big part of this is from wealthy tourists, especially from China and Russia. Even Japan is making a comeback as the country recovers from the horrible earthquake. Quarterly sales in the country were up 21%.
High-end demand. Items with prices above $250 are seeing nice increases in sales. But interestingly enough, the strongest demand is for those products from $20,000 to $50,000. No doubt, these carry significant profit margins.
Supply chain. Over the past decade, Tiffany has invested heavily in its infrastructure. This has involved putting together strong supply agreements as well as implementing information technology systems. The company has even invested capital in diamond mines to tie up supplies.
Cons
Commodities prices. So far this year, the price of rough diamonds is up almost 40%. And based on tight supplies, there is likely to be more upward pressure. Of course, gold, silver and platinum also have been surging. These commodities also seem likely to post further gains for the rest of the year.
Economy. If there is a severe recession in the global economy, then Tiffany certainly will have tremendous problems. It is easy to defer luxury purchases. Thus, with budget problems in the U.S. and Europe, there are danger signs that the world economy could be vulnerable to a shock.
Dependence and competition. Roughly 8% of total sales for Tiffany come from its New York flagship store. This certainly is a risk factor. At the same time, the company faces competition from companies like DeBeers, Saks (NYSE:SKS) and Nordstrom (NYSE:JWN). There also is pressure from online operators, such as Blue Nile (NASDAQ:NILE).
Verdict
Tiffany’s brand has proven to be resonant across the globe. After all, the company has a top-notch group of designers that always seem to come up with compelling products.
Besides, so long as wealth creation continues in emerging markets — especially in China — the future looks bright. For example, Tiffany’s increased its full-year earnings guidance from $3.55 to $3.65-3.75.
In the current turbulent market, this kind of strength is definitely worth noting. In other words, the pros outweigh the cons for the stock.
Tom Taulli is the author of various books, including “All About Commodities.” He does not own a position in any of the stocks named here.
