5 reasons Tiffany is a timeless investment

The jeweler's stock continues to defy gravity thanks to a combination of new products and improved performance.

By InvestorPlace Aug 28, 2014 4:22PM

Credit: © Rex Features
Caption: Tiffany & Co jewelry store in Moscow, RussiaBy Will Ashworth

Tiffany & Co. (TIF) delivered a sparkling second-quarter earnings report Wednesday morning that easily beat analyst expectations.

When it comes to luxury retail, hardly anyone with the exception of Michael Kors (KORS) seems to be doing nearly as well ... so what makes Tiffany & Co. better than most?

Well, there are many reasons for Tiffany stock's strong performance, some of which are company-specific and others have more to do with competitor weaknesses.

Ultimately, successful retail is about executing a plan to near-perfection. To use a sports vernacular, Tiffany & Co. is currently operating in the zone, which makes it very hard to stop. So while Tiffany stock might be trading within 5 percent of its all-time highs, management optimism suggests there are future gains in the offing.

Here are five reasons to like Tiffany right now:

Sales growth
Tiffany & Co. put up 3 percent comparable-store sales growth in the second quarter thanks to both the Americas and the Asia/Pacific regions, which logged gains of 8 percent and 7 percent, respectively.

Luxury has been hot in Asia for a long time now, but North American gains are definitely icing on the cake; consider that in last year's second quarter, comparable sales in the region were flat. The Americas account for approximately half Tiffany & Co.'s overall revenue, so its Q2 results there are an important improvement.

New products
These are the hallmark of any growing business. Change is a part of life; Tiffany & Co. embraces this whether we're talking about its Tiffany T collection that debuted in early August or its newest Atlas collection from earlier in the year. Both of these items were mentioned by CEO Michael Kowalski in Tiffany & Co.'s earnings release.

Tiffany T is the first collection under design director Francesca Amfitheatrof, who was hired last September as the first ever female design director at Tiffany & Co. Importantly, Tiffany T is meant to be a product line that is worn often rather than kept in a box. Citi analyst Oliver Chen believes Tiffany T "should help drive fashion jewelry average unit retail as well as traffic." Translation: More people will come to the stores as a result and spend more due to Tiffany T's higher price points. That's great news for revenue.

Gross margins
They were up 240 basis points in the second quarter to 59.9 percent, higher than they've ever been in Q2. With Tiffany T onboard to drive prices higher, it's quite possible that Tiffany & Co. will deliver gross profit margins for the entire fiscal 2014 that are higher than the 59.1 percent it generated in fiscal 2011, the highest over the past decade. Management raised its 2014 EPS outlook to between $4.20 and $4.30, up a nickel at the bottom and top of the range. That’s a sure sign it's going to rip through 59.1 percent by the end of the year.

Free cash flow
As Kowalski stated in the press release, Tiffany & Co. expects 2014 free cash flow of at least $400 million. In 2013, if you add back the $480 million arbitration award that it paid to Swatch Group (SWGAY) for not following through on its partnership with the Swiss watchmaker, free cash flow last year would have been approximately $275 million -- slightly less than its $300 million outlook at the beginning of the year.

Net income in 2014 should be at least $546 million (130 million shares outstanding multiplied by $4.20 EPS), 24 percent higher than in fiscal 2011, its best earnings performance over the last 10 years. Free cash flow is going to follow suit. However, with TIF share prices as high as they are, it's unlikely that Tiffany will use much of this cash to make a dent in its $300 million share repurchase program initiated in March.

Competitors are stumbling

While KORS is still experiencing significant growth, others such as Coach (COH) aren't faring nearly as well. Tiffany stock isn't setting growth records by any means . . . but then, it doesn’t have to with timeless tradition and near-60 percent gross margins on its side.

Walk in to any Tiffany store, and you get the sense that there's something available for every price point, making it accessible to all while at the same time not appearing to be tacky or gauche unlike some luxury retailers that will remain nameless.

It's not easy pulling this off, yet Tiffany & Co. makes it seem effortless.

You can't put a price on good retail execution.

More from InvestorPlace

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Aug 29, 2014 1:54AM
I am a long term Tiffany customer, they treat you well, know the product and get customer service.  In just Jewelry/watches I have about 2 dozen pieces.  Then I have Crystal, China, Decorative Items.  Some get it, some never will.  I give dozens of gifts a year from there...never once have I had a hitch.

This is what we lost when numb nuts were hired over people who had pride in being salespeople.

This is why I do not shop Home Depot, Best Buy etc.
Aug 29, 2014 11:33AM
The Fed is printing money so keep buying stocks till bankruptcy comes.
Sep 1, 2014 9:05PM

Easy way to make money that is working for me, do a search for " Gold Trading Academy " it’s swing trading the oil market and it really works.

Aug 29, 2014 6:08PM
Enough stupid articles yet? The brand mystique of Tiffany's is predicated on an image long gone and not likely to revive in generations fully unfamiliar with it because it's well beyond their financial reach.
Aug 29, 2014 10:11AM
Folks, do not be fool by today's higher opening, like we said yesterday after the close, manipulators want to continue what they started and are taking over on and off the floor early this morning; all indexes slipping into the red slowly but surely....As long as these scumbags take control we are going to go down, that is just the way it is; that is how they make their money, by cheating and manipulating...More later.
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