Tiffany Bulls Bet Jolie Mimics Will Boost Shares: Options

Options that rise with Tiffany & Co.’s stock are getting more precious.

Bullish contracts surged to the most expensive level in more than six years relative to bearish ones amid optimism consumers will snap up items like the diamond earrings worn by Angelina Jolie at the British Academy Film Awards last month. The world’s second-largest luxury-jewelry retailer attracted American shoppers even amid unusually cold weather, boosting November and December sales by 4 percent.

“The holiday trends have been good,” Dorothy Lakner, a an analyst at Topeka Capital Markets, said by phone from New York. “February was the worst month from a weather standpoint, but this business is occasion-based. If people are going to get engaged, they’re going to make that trip to the store.”

Tiffany emerged relatively unscathed from a Christmas season that saw companies from Best Buy Co. to United Parcel Service Inc. struggle with sales as winter weather forced consumers to cut down shopping or go online. The jewelry retailer will continue to thrive in 2014, helped by an expansion in Europe and China and a focus on richer consumers, Lakner said. Tiffany reports fourth-quarter earnings tomorrow.

The stock jumped 62 percent last year, when it named Francesca Amfitheatrof as its new design director and reaped sales from its Ziegfeld collection of 1920s-inspired jewelry created for the 2013 film adaptation of F. Scott Fitzgerald’s “The Great Gatsby.”

That should help New York-based Tiffany report a 16 percent increase in earnings for the year through Jan. 31 to $3.77 a share, analysts predict. The company projects profit of as much as $3.75 a share.

Record High

The options market is implying a one-day stock move of 5.5 percent after the earnings report tomorrow, compared with the average 2.5 percent gain or drop following the last eight releases. Tiffany has advanced 14 percent since a low on Feb. 3 and earlier this month reached its highest price since it sold shares to the public in 1987.

Mark Aaron, a spokesman for Tiffany, declined to comment on the options trading.

Tiffany will open a new store on the Avenue des Champs-Elysees in Paris in June, vying with brands such as Cartier and Louis Vuitton on France’s most-famous street. The outlet will be a showcase for Tiffany’s expansion in Europe. The company will also benefit from rising affluence in China, Topeka’s Lakner said.

“They have plans to focus much more specifically on more affluent consumers globally,” she said. “From an operational and merchandising standpoint there’s a lot going on.”

Metals Drop

Tiffany’s 2013 earnings also gained from lower precious metal prices, Lakner said. Silver tumbled 36 percent in 2013 while gold plummeted 28 percent, their worst year since 1981. That was also the first annual drop for gold since 2000. Both precious metals have rebounded at least 6 percent in 2014.

Investors must wait for Tiffany’s new management to provide clarity on the company’s overhaul plan before making bets on the stock, Liz Dunn, an analyst at Macquarie Group in New York, said. The company has also become expensive after jumping this month to its highest price-to-earnings multiple since 2011, she said. Tiffany named Ralph Nicoletti as its chief financial officer yesterday, replacing James Fernandez from April.

“The new leadership is really going to shake up the culture quite a bit and it’s not without its near-term risks,” Dunn said by phone from New York yesterday. She has had a neutral rating on the stock since April 2012. “There’s a lot of concern about China’s luxury market. Tiffany views greater China as their biggest growth opportunity, so resilience in that business and a robust outlook for China will be important.”

China Corruption

The Chinese government’s crackdown on corruption has cut into the sale of high-end goods, from Gucci bags and Ferraris to spirits served at Chinese banquets. Spending on luxury goods increased about 2 percent in 2013, the slowest pace since 2000 and down from 7 percent last year, according to the consulting firm Bain & Co.

Still, options traders have been paying up for bullish bets on Tiffany. Calls betting on a 10 percent rally cost 2.37 points less than bearish contracts hedging against a 10 percent decline yesterday. The measure fell on March 11 to the lowest since September 2007.

The Chicago Board Options Exchange Volatility Index, the measure of Standard & Poor’s 500 Index options prices, fell 2.4 percent to 14.76 as of 12:52 p.m. New York time. Europe’s VStoxx Index lost 6 percent to 18.13 at the close.

Tiffany’s heritage, history and profitability may also make the company a potential takeover target, according to Allegra Perry, an analyst at Cantor Fitzgerald Europe.

“Jewelry is going through a moment right now,” Perry said in an interview. “There’s a big opportunity for someone to buy this company.”

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