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Tiffany Shorts Battered as Valuation Premium Surges

Christian Munoz, center, assists a customer at the Tiffany & Co. flagship store on Fifth Avenue during the second annual Fashion's Night Out in New York. Photographer: Ramin Talaie/Bloomberg
Christian Munoz, center, assists a customer at the Tiffany & Co. flagship store on Fifth Avenue during the second annual Fashion's Night Out in New York. Photographer: Ramin Talaie/Bloomberg

Tiffany & Co. short sellers are exiting bets against the world’s second-largest luxury jewelry retailer as a rebound in consumer spending pushes shares to a record high.

The New York-based company has more than tripled since March 2009 to an all-time high of $63.68. At the same time, short sellers slashed their bearish wagers to 8.3 percent of shares outstanding from a 52-week high of 15.5 percent on Sept. 20, according to data compiled by Data Explorers, a New York-based research firm.

Investors pushed up bets Tiffany would decline as slumping consumer confidence and fear of a relapse into a global recession convinced them the stock was overvalued, only to see the strategy backfire when the company raised its profit forecast in November. The gain boosted the stock’s price-earnings ratio to the highest level in seven years versus the Standard & Poor’s 500 Index’s multiple, Bloomberg data show.

“The short sellers must have been in pain,” said Scilla Huang Sun, who manages about $4 billion as head of equities at Swiss & Global Asset Management in Zurich. “A lot of people thought that high-end consumer stocks would not be the right place, but Tiffany is one of the few great brands in jewelry, and luxury-brand stocks are benefiting from cyclical trends and from wealth creation, especially in emerging markets.”

Economic Recovery

Huang Sun’s Julius Baer Multistock - Luxury Brands Fund has 4 percent of its assets in Tiffany, the eighth-highest proportion for any fund, according to data compiled by Bloomberg. Huang Sun has added to her position in the $100 million fund during the past two years, betting the company would benefit from an economic recovery, she said.

Consumer spending is rebounding in the U.S. after declining during the recession, with personal consumption rising four straight months, according to the Commerce Department. Consumer spending in Brazil, Russia, India and China may surpass U.S. purchases in 15 years and companies that sell to emerging-market shoppers are some of the best investments “of our lifetime,” Goldman Sachs Asset Management Chairman Jim O’Neill said in a Dec. 3 report.

Tiffany shares jumped 5.3 percent on Nov. 24, the most since July, as the company raised its full-year earnings forecast after new stores and sales of handbags drove a 27 percent increase in third-quarter profit. Income excluding some items will be as much as $2.77 a share in 2010, compared with the average analyst estimate of $2.64 a share at the time, the company said.

At a Premium

The earnings report helped convince investors to buy shares trading at a price-earnings ratio 57 percent higher than the multiple on the S&P 500. When the premium reached 63 percent on Nov. 30, it was the highest since November 2003, when the stock began a 44 percent drop through August 2004. The jeweler lost 70 percent between July 2007 and March 2009 when the premium over the benchmark U.S. equity index was close to the current level.

Mark L. Aaron, a spokesman for Tiffany, declined to comment on bets against the company’s stock.

The stock rose 1.8 percent after the Thomson Reuters/University of Michigan preliminary index of consumer sentiment advanced in December to 74.2, the highest since June, from 71.6 at the end of last month.

Shares Sold Short

The proportion of Tiffany shares sold short was 8.3 percent on Dec. 7, putting it in the top decile in the S&P 500, which has an average of 3.1 percent, according to Data Explorers. Short sales in online competitor Blue Nile Inc. amounted to 37 percent of shares, second-highest in the Russell 2000 Index. Blue Nile is down 10 percent this year, compared with Tiffany’s 48 percent surge. Short sellers profit from price declines by selling borrowed securities and replacing them with stock bought at lower levels.

While Tiffany rallied to a record this month, consumers’ willingness to pay more for its products may wane as rivals such as Blue Nile offer similar wares at lower prices, according to Harry Rady, who manages $270 million as chief executive officer of Rady Asset Management LLC in La Jolla, California.

“The concern is that they have too much overhead from all their stores and that they’re vulnerable to online competitors,” said Rady, who runs a long-short fund that is betting against Tiffany. “The world is transitioning to the Internet, where competitors can buy the same product for a quarter of the price and diamonds are a commodity in the end.”

Blue Nile

Blue Nile, the Seattle-based retailer founded by Mark Vadon in 1999, had 417,429 unique visitors to its website in October, up 13 percent from a year earlier, while saw an increase of 6.3 percent to 732,445, according to, an online data research company based in Boston.

Tiffany is outperforming because it has expanded its online business while using its brand to introduce new designs such as charm bracelets and key-themed jewelry, said Dorothy Lakner, a retailing analyst at Caris & Co. in New York.

“It’s not the old Tiffany anymore where you had to walk up to the case and ask for the price. They’ve also become a lot more transparent,” said Lakner, who has had a buy rating on the stock since November 2009. “You can talk about price points but it’s not about price, it’s about design and quality. There’s just an irreplaceable cache to the brand.”

New Items

The jeweler, led by Chief Executive Officer Michael Kowalski, introduced its first handbag collection in 20 years in September to extend the Tiffany brand. Other new accessories include men’s briefcases, wallets and business-card holders. It ran 225 stores at the end of the third quarter, 10 more than a year earlier, with six being added in the Asia-Pacific region.

The Federal Reserve’s attempt to stimulate growth in the world’s biggest economy has helped drive up the price of commodities such as gold and silver, which Tiffany buys to make jewelry. Gold and silver futures have climbed 26 percent and 70 percent, respectively, in 2010. This is hurting Tiffany because it failed to build enough inventory, said Jeff Middleswart, director of research at Behind the Numbers, which recommends investors to bet against Tiffany.

“They simply cannot fully offset this with price increases,” said Middleswart, whose Dallas-based company identifies short-selling opportunities for hedge funds. “How does Tiffany triple the price of a ring to reflect gold rising from $400 to $1,400?”

Gold futures last traded for $400 an ounce in 2004. They advanced to a record high of $1,432.50 on Dec. 7.

Huang Sun said she’s not concerned about the rising cost of commodities.

“A big part of it can be passed on to the consumer with a time lag,” said Huang Sun, whose luxury brand fund has performed better than 64 percent of peers over the past year. “The branded companies are less affected than pure commodity jewelers. They can command a premium because of brand and design.”

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