A small increase in quarterly profit led to an outsize rally in Tiffany
) shares Tuesday morning, extending the stock's months-long gains. While perhaps not as pricey as a blue box-enclosed gem from the 175-year-old jeweler, the stock seems pricey, and the company's plans seem too unpolished to justify the prolonged upward swing.
Tiffany earned $83.6 million, 65 cents a share, in the first quarter, compared to $81.5 million, 64 cents a share. Excluding one-time items, Tiffany made 70 cents a share. Analysts predicted 58 cents a share.
Same-store sales, a key metric for a retailer, increased 4%. Overall revenue rose 9% to $895 million. That growth was led, unsurprisingly, by a 15% increase in sales to $223 million from the Asia-Pacific region, where venerable brands like Tiffany attract the attention of the growing amounts of wealthy shoppers. In the U.S., revenue was up 6% to $408 million.
Tiffany stock increased 32.9% this year, nearly double the S&P 500 and up eight percentage points on the S&P Retail Index. Its valuation seems stretched. And with Tiffany shares rising over 6% in early trading Tuesday, the stock now fetches a rich valuation. Shares trade at 23.1 times forward estimated earnings of $3.50 a share. A stock's price-to-earnings ratio should match its earnings growth rate. Tiffany doesn't. Analysts predict the company can increase profit by just 7.7% this year. And the plump multiple is a premium over other luxury retailers, like Ralph Lauren
) (20.2 times), Fossil
) (16.8), Nordstrom
) (15.8) and Coach
(15.7). The Tiffany premium is long-standing because the company is viewed a potential takeover target. Little recent speculation on an exact buyer makes it seem overwrought, though.
Valuation aside, there are other reasons not to take a shine to Tiffany shares. The company's expansion plans, in particular, could jeopardize future earnings. Tiffany controls 275 locations across the world, and management aims to open six more in the Americas, seven in Asia and three in Europe. Beyond that, Tiffany wants to increase its European store count by 56% in the next five years, and continues to target Asia as a particular source of growth. Unfortunately, top competitors PPR SA, the Gucci parent, and LVMH Moet Hennessy Louis Vuitton all recently reported lackluster China sales, and European shoppers remain squeezed by weak wages and deep economic uncertainty.
What's more, the smartly run ad campaign tied to The Great Gatsby -- Tiffany designed jewels for the lavishly budgeted film -- and a celebration around the company's 175th anniversary may artificially be boosting earnings.
Wall Street has long seemed unable to sense what's happening at Tiffany's Fifth Avenue headquarters. Tiffany missed earnings expectations by an average of 8.5% in 2012, with four consecutive quarters of profit that failed to impressed. The most recent quarter beat Wall Street by 33%, another sign that observers find Tiffany hard to measure. When this happens, you can expect the stock to take wild, short dives that can shake investor confidence.
Looking ahead, Tiffany reaffirmed guidance of earnings between $3.43 to $3.53 a share with sales increasing by mid-single digits. Wall Street is already looking toward the top of that range. A set up for more disappointment? Quite possibly.
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