Tiffany & Co. (NYSE:TIF) is pretty much a household name at this point. It is also a very profitable company targeting the higher-end consumer. For those unfamiliar with the company, it designs, manufactures, and retails jewelry worldwide. The company operates an American, Asia-Pacific, Japanese, European, and “Other” segment. Its jewelry products include fine and solitaire jewelry, engagement rings and wedding bands to brides and grooms, as well as non-gemstone, sterling silver, gold, and metal jewelry.
The company also sells timepieces, leather goods, sterling silverware, china, crystal, stationery, fragrances, and accessories. Tiffany & Co. sells its products through retail sales, Internet and catalog sales, business-to-business sales, and wholesale distribution, It operates about 300 stores, including 122 stores in the Americas, 72 stores in the Asia-Pacific region, 55 stores in Japan, 38 stores in Europe, five stores in the United Arab Emirates, and one store in Russia. The stock is right under its 52-week high and sits at $98.50 at the time of this writing. Can the stock shine even brighter moving forward?
Well, the company’s first quarter was stellar. It saw worldwide net sales rise 13 percent to $1 billion while comparable store sales rose 11 percent due to growth in most regions. Net earnings increased 50 percent to $126 million, or 97 cents per diluted share, up from $84 million, or 65 cents per diluted share, in last year’s first quarter, when pre-tax expenses of $9 million, or 5 cents per diluted share, were recorded for staff and occupancy reductions.
Excluding those expenses, net earnings rose 41 percent. Gross margin (gross profit as a percentage of net sales) was 58.2 percent in the first quarter, compared with 56.2 percent last year. The increase reflects favorable product costs and price increases across all product categories and regions, as well as sales leverage on fixed costs resulting from the strong increase in worldwide net sales. Selling, general, and administrative expenses increased 5 percent in the first quarter.
Excluding $9 million of staff and occupancy reduction expenses recorded in last year’s first quarter, expenses were 8 percent above last year, largely reflecting higher store-related expenses and labor costs. The operating margin improved to 20.7 percent, driven by the higher gross margin and sales leverage on fixed expenses.
Other key highlights you should be aware of include regional sales growth. In the American region, total sales increased 8 percent to $439 million. Comparable store sales rose 8 percent, primarily due to geographically broad-based growth across the U.S. In the Asia-Pacific region; total sales rose 17 percent to $261 million and comparable store sales rose 10 percent. In Japan, total sales surged 20 percent to $174 million and comparable store sales rose 30 percent.
In Europe, total sales rose 9 percent to $101 million, but comparable store sales declined 3 percent. Trends were similar in the U.K. and in continental Europe. “Other” sales increased 39 percent to $37 million, primarily due to retail sales growth, which included 18 percent comparable store sales growth in the United Arab Emirates and the opening of the first company-operated Tiffany & Co. store in Russia. Other sales also benefited from an increase in wholesale sales of diamonds. These diamonds are a result of the company’s rough diamond sourcing operations.
The company is also flush with cash. Cash, cash equivalents, and short-term investments were $381 million on April 30 versus $465 million a year ago. Short-term and long-term debt totaled $992 million at April 30, versus $974 million a year ago, and represented 35 percent of stockholders equity, versus 37 percent a year ago. Net inventories of $2.4 billion on April 30 were 6 percent above last year, largely to support anticipated sales growth.
Further, in March, it approved a new share repurchase program for up to $300 million of the company’s common stock over a three-year period, which expires in March 2017. The company spent approximately $7 million in the first quarter to repurchase 82,000 shares at an average cost of $86.95 per share; $293 million remains available for future repurchases.
Michael J. Kowalski, chairman and chief executive officer, said in a press release: “This is an excellent and encouraging start to the year. We were pleased with the strong and broad-based sales growth across most regions and product categories and our ability to leverage those improved sales into very significant growth in operating and net earnings. Strength in fine and statement jewelry sales continued, while sales of our new or expanded jewelry collections accelerated, led by our ATLAS collection.”
So just where do we go from here? Even though the stock is expensive at over 50 times current earnings, the company is growing at a healthy clip, as the stock market returns are fueling high-end retail spending among the middle class and the affluent in most regions. Further, the company has raised its guidance, which is the proverbial music to Wall Street’s ears.
Looking ahead, for the fiscal year ending January 31, 2015, management is now forecasting net earnings in a range of $4.15-$4.25 per diluted share, versus its previously- ublished forecast of $4.05-$4.15 per diluted share. Given the performance, the incredible year-year-over year growth, the regional expansion, and raised guidance, I have a buy rating on Tiffany & Co. and assign a $115 price target.
Disclosure: Christopher F. Davis holds no position in Tiffany & Co. and has no plans to initiate a position in the next 72 hours. He has a buy rating on the stock and a $115 price target.