Tiffany's Flawed Diamond Still Shines
Tiffany specializes in razzle-dazzle, but it's learning there's a benefit in being understated, too.
Tiffany & Co. shares rose 8 percent on Tuesday, after the jewelry chain reported quarterly sales declines that weren't as bad as expected. It also posted year-over-year earnings growth for the first time since 2015.
But Tiffany also warned it was "premature to say there has been a meaningful turn" in the beleaguered global luxury business.
Eager investors should also note that Tiffany's shares are expensive, trading at 21 times forward earnings, compared to a 5-year average multiple of 19.8.
And there's a laundry list of unknowns facing the company:
- Trump effect: Tiffany said security and protesters around Trump Tower had blocked the main entrance to its flagship store on Fifth Avenue, causing traffic and sales declines during the all-important holiday season. Tiffany doesn't specify how much its flagship generates in sales, saying only it accounts for less than 10 percent of total sales. Tiffany said it had no idea if and when this problem would end.
- Strong Dollar: A stronger dollar, buoyed by hopes of fiscal stimulus and higher interest rates in a Donald Trump presidency, could pressure results through foreign currency translation and lower foreign tourist spending.
- A move away from luxury: Tiffany has seen a shift away from the high-end, fine "statement" jewelry such as diamonds and other gemstones, as shoppers buy more silver and other lower-priced fashion jewelry. This has been good for its profit margins, as input costs are lower for fashion jewelry. But what will be the long-term impact on the upscale brand, now synonymous with diamonds and other high-end pieces, if it starts to become known as a place to buy silver necklaces and fashion bangles?
- Hong Kong: Tiffany has already said it believes the U.S. elections dampened its sales. Now it expects a similar distraction in Hong Kong, one of Tiffany's largest markets, as the Asian hub elects its next chief executive.
Despite all this, there is still reason to believe Tiffany's shares may stay afloat. It comes down to what Tiffany has always been good at -- branding.
For one, Tiffany has smartly conditioned investors to expect the worst: Despite improvements in the third quarter, it reiterated forecasts that sales and profits for the full year would decline from the year before. The jeweler will also soon start to benefit from easier year-over-year sales comparisons, thanks to its five-quarter-long losing streak. That will make it easier to show progress.
Tiffany's profits will also benefit as it sells more higher-margin goods such as silver and gold jewelry, raises prices, and cuts spending.
While the sparkle hasn't returned to Tiffany's sales, there's a glimmer of hope that -- for its stock price, at least -- "not bad" could be good enough.
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