It’s been a stellar week for luxury jewelry maker Tiffany & Co. (NYSE:TIF) as an impressive earnings beat took TIF stock more than 20% higher. Investors cheered the company’s successful turnaround efforts after the first quarter results showed a significant increase in sales and improving margins despite major investments in e-commerce and marketing.
However, although the company looks to be on solid footing after a few rocky quarters, don’t be tempted to chase the rally. Instead, it might be wise to wait for the share price to come back down to earth before taking a position.
While I think TIF stock’s meteoric rise over the past few days was excessive, I’m willing to give credit where credit is due. Tiffany’s had an excellent first quarter, and the data it presented suggested that CEO Alessandro Bogliolo’s strategic decisions are paying off.
Same-store sales rose a whopping 7%, with overall sales in the Americas increasing 9% and Asia-Pacific sales posting an impressive 28% rise.
Many are attributing those gains to Bogliolo’s decision to roll out a fresh, new line of jewelry called “Paper Flowers” and the company’s increased focus on selling to cost-conscious millennials. Tiffany’s has also started to branch out into small homeware items like wine openers and pocket diaries.
Not only did Tiffany’s post impressive sales figures, but the firm’s margins also improved, rising to 63% from 62.1% in the year-ago quarter. That was a big win for TIF because the company has been spending more on building out its e-commerce arm and improving in-store presentations, which many believed might weigh on margins.
Challenges Still Ahead for Tiffany & Co.
Yes, things looked pretty rosy for TIF stock in the first quarter, but 20% is a huge leap that investors shouldn’t chase. I wouldn’t be surprised to see investors start to take profits now that the share price is near $130. So even if you do believe in Tiffany’s growth story, I would wait for a better entry point.
Not only that, but TIF still has its fair share of challenges ahead. So far, Bogliolo’s efforts have paid off in a big way, but that doesn’t mean there won’t be bumps in the road. For one, the firm’s push into diversifying its product range has been a smart decision.
But it’s worth noting that the firm already has a massive assortment of merchandise, and adding to that range could complicate things. Even though margins were solid this quarter, I wouldn’t be surprised to see the firm’s costs start to catch up with it in the quarters ahead — especially if the firm continues to grow its online presence.
Investors should also consider that Tiffany’s is still highly dependent on department stores because 75% of the company’s shops are based in department stores, which have seen traffic decline significantly over the past few years. That means that if department store shopping continues to fade away, TIF will need to aggressively pursue e-commerce. This move will eventually erode margins.
Finally, there’s the question of whether Tiffany’s strength as a fashion brand can last. A big part of TIF’s business is selling engagement jewelry, but jewelry-buying habits have started to shift. More and more women are buying their own jewelry, which is a big part of the reason for Bogliolo’s efforts to refresh the brand.
However, it’s worth keeping in mind that fashion is notoriously fickle, whereas engagement jewelry tends to be more timeless. That means that as Tiffany’s other fashion brands start to account for a larger percentage of the firm’s overall revenue, the firm will be at the mercy of current trends.
Bottom Line for TIF Stock
TIF’s first quarter results showed that the company’s turnaround has definitely taken hold. The figures confirm that Bogliolo has done a great job of realigning the firm’s priorities and refreshing Tiffany’s image.
However, its current rally was a bit excessive, and I don’t see it flying much higher anytime soon as the firm’s growth trajectory has been fully priced in. Somewhere around $110 is a more reasonable entry point for TIF stock investors, so I’d wait for a pullback before jumping on board.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
