A Spring Rally for Tiffany

Shares jump 10% after the luxury jewelry chain reports strong fourth quarter earnings and boosts its outlook for the year

Retail stocks, which have been wilting lately amid a lackluster U.S. economy, enjoyed an early springtime rally after Tiffany & Co. (TIF) reported stellar earnings for the fourth quarter and issued a rosy outlook for the coming year. The news lifted its stock up more than 10% to a seven-year high on Mar. 24.

Tiffany's fourth quarter adjusted earnings per share beat analysts’ expectation, as the second-largest luxury jewelry seller said its bottom line was helped by strong sales overseas, especially in Asia Pacific and Europe as well as sales in more profitable items. Sales of engagement rings and designer jewelry both went up.

Net income in the fourth quarter ended Jan. 31 fell 16% to $118.3 million, or 89 cents a share, from a year ago, while sales grew 9.8% to $1.05 billion. Excluding one-time items, the company posted $1.27, vs. $1.07 a year ago, fourth quarter EPS from continuing operations, topping analysts’ estimate of $1.21.

Tiffany raised its earnings forecast for the year, and expects growth of 11% to 15% in diluted earnings per share for fiscal year 2009 (ending January). It sees adjusted EPS of $2.75-$2.85, above the Street’s forecast of $2.49. Tiffany also sees net sales growth of about 10% for the year.

Tiffany shares jumped 10.5% to 42.65 on Mar. 24. In its category, Zale (ZLC) rose 3%, while online jeweler Blue Nile (NILE) shot up 12%. The broader S&P Retail Index rose 3.6%.

After the surprising results and rosy outlook, some analysts remain skeptical about Tiffany’s earnings outlook for the year, citing the bleak economic environment and rising commodity prices globally. "We believe the U.S. business is likely to disappoint this year, especially in the NYC market where Wall Street layoffs are sure to have a negative impact and the benefit from foreign tourists is likely to diminish," wrote Paul Lejuez, an analyst with Credit Suisse in a research note on Mar. 24. "We would be sellers of the stock into today's strength."

And some analysts indicated that the company’s earnings growth could largely be a result of the company's change in accounting method. The New York-based jewelry retailer announced on Monday that it plans to move from "last in first out" inventory (LIFO) to the average cost accounting method, a shift that’s likely to "artificially help earnings" in fiscal year 2008, according to Lejuez of Credit Suisse. LIFO counts cost of goods based on the prices of the latest purchased raw materials, and could hurt profit margins when prices rise.

Prices for metals, including platinum, gold and silver, have gone up quickly the past few months, fueled by inflationary concerns and speculations around the world. Platinum prices, for example, have surged more than 70% in February from previous-year period.

Platinum is a key component in about 45% of Tiffany’s U.S. sales, Lejuez noted. Gold and silver are also heavily used in Tiffany's jewelry products. "We believe Tiffany will face additional pressure on its cost of goods sold throughout the year," he wrote in a report last month.

Some analysts also believe that the sluggish economies in the company's major markets, notably the U.S. and Japan, would make it harder for Tiffany to pass the rising costs to consumers and thus make it a challenging year for the company. The combined U.S. and Japan market accounted for 76% of sales at Tiffany.

Tiffany's international sales last year rose 19%, largely helped by a weakening dollar as overseas sales numbers were translated to more dollars than before. On a constant exchange rate basis, sales rose 7%. Total international sales accounted for 41% of Tiffany's worldwide net sales.

Still, some analysts continue to be upbeat about Tiffany’s strong brand, pricing power and overseas presence. "We think strong brands like TIF, Coach (COH) and Nike (NKE) benefit in uncertain economic periods, as consumers are attracted to strong brand heritage, boding well for sales and EPS gains in calendar year 2008," wrote Marie Driscoll, a retail industry analyst at Standard & Poor’s Equity Research. She kept a strong buy recommendation on Tiffany shares. (S&P, like BusinessWeek, is owned by McGraw-Hill Companies (MHP)).

"I think they are holding up okay compared to others, and with their strong brand recognition, they are in a better position to pass on some of the cost to consumers," said Kimberly Picciola, an equity analyst with Morningstar (MORN).

The approximately 40% of sales from international markets "offers some downside protection from the weak economic trends," said Kristine Koerber, an analyst with JMP Securities LLC, in a research note.

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