A lukewarm breakfast at Tiffany's

May 28, 2006|By LEON LAZAROFF | LEON LAZAROFF,CHICAGO TRIBUNE

NEW YORK -- While gold and diamond prices have softened, the commodity surge is a big reason Tiffany & Co.'s shares are down 25 percent since topping out at an intraday high of $43.80 on Nov. 28.

The stock of the New York seller of expensive jewelry, watches and dishware has generally moved in the opposite direction of commodity prices.

Gold hit a 26-year high of $721.50 an ounce May 11; even though it has pulled back, Tiffany's stock price hasn't seen an immediate benefit.

Higher commodity prices lower Tiffany's gross margins, a measure of how efficiently a manufacturer can turn raw materials into income.

But David Schick, an analyst at Stifel, Nicolaus & Co., said that's a short-term phenomenon. Commodity cycles being what they are, Schick said, gold and diamond prices should stabilize.

As for input costs, Tiffany has become more vertically integrated in recent years by investing directly in diamond mines.

Nonetheless, Tiffany has had to raise its prices 8 percent to 14 percent in recent months, Schick said. There's a limit to how high even Tiffany can price its products, he said.

If prices were to keep pace with commodities, revenue likely would take a hit.

As it is, some analysts expect Tiffany's revenue growth to slow a bit in the current fiscal year, which began Feb. 1.

While sales rose nearly 9 percent last year, to $2.39 billion, Schick forecasts this year to produce an 8 percent gain.

Earnings are where the real drop-off will be seen, he said. After Tiffany's diluted earnings per share rose 27 percent last year, excluding a one-time gain the previous year, Schick sees its earnings up a scant 1 percent this year. That's below Wall Street's 3 percent consensus, according to Thomson Financial.

"Tiffany has held up so well the past few years on the theory that they were not as economically sensitive as other retailers," said Lori P. Wachs of Delaware Investments. "But this is the first time we've seen domestic weakness in some time."

But domestic for Tiffany is a tricky concept.

Wachs said tourists provide about 12 percent of Tiffany's U.S. retail sales.

Although they stayed away over the holiday season, the weak dollar is likely to bring them back, Wachs said.

Improving Japanese sales, about 20 percent of worldwide revenue, also should help, as well as the fall completion of an extensive renovation of its flagship store on Fifth Avenue, responsible for about 10 percent of worldwide sales.

Tiffany also has its eye on widening its customer base, courtesy of an edgier jewelry line designed by architect Frank Gehry.

Whereas Tiffany usually trades at a considerable premium to other retail stocks, shares are priced about 18 times estimated earnings for this fiscal year.

That puts them slightly higher than the S&P 500 but below the retail industry overall, according to Morningstar Inc.

When Tiffany reports its fiscal first-quarter results Wednesday, Wachs said, it will be up against "tough comparisons" from the quarter last year.

Analysts are forecasting earnings of 28 cents a share, a penny higher than the company projected. The first quarter is likely to be its most challenging of the year, Wachs added.

Leon Lazaroff writes for the Chicago Tribune.

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