A Potential Jewel for Your Portfolio
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When an economy experiences a slowdown, the worst hit industry is the one selling luxury goods since customers cut down on their unnecessary needs in order to fight the situation. Similarly, when economy is on the recovery stage it will easily show up on the demands for luxury products. Hence, it is very easy to predict or derive conclusions out of this industry trends since it is largely dependent on the economic situation and consumer sentiments with very few exceptions.
Recently, there has been positive news coming in from all sides highlighting an economic recovery. Employment numbers have been improving, retail numbers have registered growth and even home builder’s index has been on the rise. Retail industry has been posting sales growth in the last few months with July being exceptionally good. Amidst all this, the luxury retail industry players have been showing improvement. Tiffany (NYSE: TIF), a jeweler and a specialty retailer, is one such luxury retail player.
The Jeweler’s Tale…
Tiffany registered growth, though below expectations, on both the top line and the bottom line in its recent quarter. Though revenue increased by a meager 2%, clocking $866 million, there’s more than what meets the eye. Last year’s results were influenced by a lot of hope of economic stability which enabled people to shop more. This resulted in extraordinary performance from Tiffany with unusual jump in top line.
But an uncertain economic situation, especially in Europe, in the last few months affected results this time. Moreover, unfavorable currency fluctuations put pressure on the top line. However, these negatives were offset by strong demand in Japan and the company’s commitment to offer lower prices to customers.
Moreover, almost all the geographic segments have performed better than expected, especially Europe with same store sales up by 2%. The company has a large presence in U.S. and Europe. The Euro crisis has been really difficult for the jeweler but registering growth in such a situation is remarkable.
Another major challenge faced by Tiffany was the increase in input costs which affected margins significantly. The company could not pass on the increased costs to the customers since they were already not in the mood to spend much and were restraining themselves. A price hike would have scared away the shoppers even more, hurting sales. Hence, it was a good decision which showed up in terms of the top line increase.
However, this problem seems to be sorted going forward since diamond prices have already dropped 13% during the period which will help Tiffany save its margins as well as attract customers. The relief is expected to get better since the prices for gold and silver are also estimated to moderate given the soft demand from India. All these factors taken together can drive the jeweler’s results magnificently.
Some More Favorable Points to Ponder…
With July numbers already showing optimism, the August numbers have also been good so far. The key metric, same store sales, is an important yardstick in the retail sector which shows the health of the retailer. The metric has been really impressive, beating market estimates for retailers such as Limited Brands (NYSE: LTD), a specialty retailer. Limited registered same store growth of 8% which was remarkably ahead analysts’ expectations of 4.2%. Even discount retailers such as Target (NYSE: TGT) and Costco Wholesale Corporation (NASDAQ: COST) have posted a healthy metric of 4.2% and 6% respectively. This shows consumers’ willingness to take money out of their wallet. The improving consumer sentiments are bringing in good news for the luxury item retailer and can prove to be a driver for sales going forward.
Tiffany also announced its plans to open 28 new stores during the year which is higher than its previous decision of 24 new stores. The company is also expecting great demand which will help drive its growth. The expansion plan will be coupled with new product launches giving customers every reason to get attracted to its stores.
The Bottom Line
Tiffany is known for its stylish luxury items which are highly expensive and cannot suit everyone’s pocket. Hence, if the retailer experiences demand for its products it is definitely a time for merrymaking. Moreover, even peers such as Signet Jewelers (NYSE: SIG) have also performed well in the recent quarter witnessing improved demand for its products. The 7% surge in its revenue and a 12% increase in earnings indicated that Tiffany is not alone in the good days.
Tiffany has a track record of posting great results each quarter and the retailer continues with its winning streak till now. With gold prices stabilizing, I think there is a lot of room for growth in the industry. Slight recovery in the economic conditions is an ideal time for an investment in the company. Also, great retail numbers indicate that the time for a good investment is ripe. Additionally, its bright growth plans make it even more lucrative to the eyes of investors. I believe investors should definitely take notice of this jewel.
justhimanshu has no positions in the stocks mentioned above. The Motley Fool owns shares of Costco Wholesale and Tiffany & Co. Motley Fool newsletter services recommend Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.