IT CAN TAKE MILLIONS OF YEARS FOR Mother Nature to make a diamond.
Investors won‘t have to wait nearly that long for U.S.-based Tiffany, the world‘s second-largest luxury-jewelry retailer, to sparkle again. But they will have to be patient: Big spenders aren’t spending so big in the current economic climate, and the Street sees dulling sales and profits in 2009. So critics have good reason to pan the stock (ticker: TIF), which is off more than 50% this year, as its sales and profits -once fueled by flush natives and tourists- fall victim to a weakening global economy.
Yet the stock trades near a record-low forward price/earnings ratio. And with profits expected to start recovering in 2010, Tiffany jewellery offers a compelling investment opportunity, particularly since the shares already seem to reflect expectations of a very bleak year ahead.
“The shares are attractive right now, but you must be patient," says Larry Coats, chief executive officer of Oak Value Capital Management. "This is a good business, with good management, andthestocknowtrades at bargain valuations. That is what people should look for right now."
Profits are expected to fall for each of the next four quarters as sales suffer. But Tiffany has scaled back its expansion plans and is cutting costs and eliminating jobs. The company also stands to gain market share as mom-and-pop jewelry stores go out of business.
Tiffany operates 204 stores here and abroad, including a flagship Fifth Avenue shop in New York (opened in 1940). Profits at the company, which had $2.9 billion in revenue last year, could start climbing in late 2009 and keep rising in 2010 as the U.S. economy and jewelry demand revive. "Tiffany‘s brand and the quality of its merchandise will outlive this downturn," says Stephanie Hoff, an analyst with Edward Jones.
Now renowned for its "little blue boxes," Tiffany was founded in 1837 when Charles Lewis Tiffany and John B. Young opened a stationery and fancy-goods emporium in New York. It controls just over 2% of the fragmented $130 billion global retail market for jewelry. According to Barclays Capital, it gets 40% of its sales from Tiffany pendants.
In the U.S., where jewelry retailing is a $35 billion annual business, Tiffany is the No. 3 player. "They have always leaned toward the high end of the market, which provided good insulation from the twists and turns of the economy," says George Van Horn,- a senior analyst with IBISWorld, a market-research firm.
That insulation, however, has worn thin: The global financial crisis has hurt the rich. It‘s also dampened demand for luxury goods in emerging markets, which had been offsetting a drop in U.S. consumer spending. Combined with a stronger U.S. dollar and fatigued overseas economies, these developments have helped end the boom in foreign tourism to the U.S., which had helped Tiffany and other luxury retailers late last year.
Last quarter, Tiffany‘s year-over-year same-store sales fell 7%. This quarter, the company expects same-store sales in the U.S to slide 25% to 35%.
Tiffany recently slashed profit projections for the current fiscal year, which ends Jan. 30. The company now expects to earn $2.30 to $2.50 a share, versus previous targets of $2.82 a share to $2.92 a share. And in the fiscal year that starts Feb. 2, profits could be 10% below the current fiscal year‘s, according to Thomson Reuters.
In a Nov. 26 conference call, Tiffany didn‘t reveal how much cost-cutting it would do. But Kristine Koerber, an analyst at JMP Securities, expects sales, general and administrative expenses to fall 9% in the next fiscal year. The company has offered voluntaryretirement incentives to 800 U.S. employees, a recent regulatory filing says.
Meanwhile, Tiffany plans to open 13 stores in 2009, which would raise its total by 5% to 6% , versus a previous 8% to 10% target. Says Koerber: "They are right-sizing the company so that when things do turn around, there will be earnings power."
That turnaround could come in 2010, when the U.S. jewelry retail industry begins bouncing back, says IBIS‘s Van Horn.
With a record-low valuation, shares of the iconic jewelry chain could regain their value in a few years.
"One of the first to benefit will be the high end of the industry, which Tiffany dominates," notes Van Horn. "Highend consumers may not be as wealthy as [before], but they are still relatively well off. They will start spending sooner than the less affluent segment of the population."
In the fiscal year that starts on Feb. 1, 2010, Tiffany‘s profits could climb 20% to $2.62 a share, says Thomson Reuters.
Tiffany‘s shares, meanwhile, have fallen into the bargain bin. At 9.7 times forward earnings, the stock trades at a 2% discount to the Standard & Poor‘s 500, according to Thomson Reuters.
Of course, Tiffany‘s future is far from certain. Prospects hinge on the U.S. economy and stock market eventually recovering. Both could fall further, or languish for far longer, delaying its earnings recovery. Foreign economies are growing weaker. Overseas sales could get hit hard if the U.S. dollar grows stronger. And don’t count on the company repurchasing stock any time soon.
But Tiffany‘s quarterly dividend remains safe, for now.
And if Tiffany gets its bottom line pointed in the right direction, investors who are willing to wait may reap rewards that are worth the risk.
Tiffany Circle clasp necklace
Elsa Peretti Open Heart charm
