The global economic recession and the consequent decline in disposable incomes have taken its toll of the sales and margins of jewelry and specialty retailers. However, with the economy showing signs of recovery, the worst seems to be over. This article compares three companies that dominate the jewelry market - Tiffany & Co. (TIF), Signet Jewelers Limited (SIG) and Blue Nile Inc. (NILE)- with special emphasis on fourth quarter results declared by Tiffany on March 22, 2013.
Tiffany's Q4 Results
Tiffany & Co reported a slight increase in Q4 revenues as compared to the same quarter prior year- up from $1.19 billion to $1.24 billion. Profit for the fourth quarter also registered a mild increase - $179.6 million or $1.40 per share against $178.4 million or $1.39.
The slight increase in numbers may not appear impressive but the strong point is that the company was able to beat market estimates ($1.37), something that it has not been able to since last four quarters.
The company's performance assumes further importance in light of the fact that some analysts were expecting it to miss the consensus forecast by at least 2 cents a share.
The company expects a 6-8 percent increase in global sales in 2013 and net profit to anything between 6 to 9 percent that is an annual EPS between $3.43 and $3.53 against the fiscal 2012 EPS of $3.24.
Blue Nile, being a much smaller company, is apparently not in the same league as the other two companies. Also, the comparison is a bit unusual as it does not have the typical brick and mortar business model. My reason for inclusion of Blue Nile in the list is growth in its revenue and income in the last few years.
Both Tiffany and Signet are traditional specialty retail jewelers. Whereas Tiffany operates in the Americas, Japan, Asia-Pacific, Europe and other countries, Signet operates only in the U.S. and U.K. with 14 stores in the Republic of Ireland and three in Channel Islands. Blue Nile, however, has a different business model. It is an online retailer of diamonds and fine jewelry. It operates through its three websites that serve the U.S. and 16 other countries and territories.
Here is a chart that I prepared after studying the financials of the three companies.
Signet not only sells roughly $70 million more than Tiffany, it also earns that much more. This is despite the fact that Tiffany has better gross margin (57.38%) than Signet (38.27%). On the other hand, Blue Nile's revenue and income are only a fraction of Tiffany's and Signet's revenues and income. Moreover, while the two larger companies pay reasonable dividends, Blue Nile is not a dividend paying company.
However, Blue Nile has reported significant growth in the last few years. It reported 15% increase in revenue - from $348 million in FY 2011 to $400 million in FY 2012. Quarter-on-quarter revenue growth was 21.19% as against 3.77% of Tiffany and 0.80% of Signet. Also, Blue Nile's trailing twelve month return on equity is almost double - Blue Nile 34.16%, Tiffany 17.41% and Signet 16.04%.
However, Blue Nile has the lowest profit margin of the three 2.05% against Tiffany's 11.08% and Signet's 9.01%.
Blue Nile is arguably the world's largest online diamond retailer. Its strategy of offering high-quality certified diamonds/jewelry at attractive prices and providing in-depth information has stood it in good stead during the recession. However, it has abysmally low profit margin is a big concern especially considering that it is an ecommerce company. It appears that the company is spending more than it actually should on promotional campaigns. In addition, Blue Nile's valuation parameters -high forward P/E of 32.19 and PEG ratio of 2.40 - are clear indicators that it is overvalued.
Although Tiffany is considered to be the market leader, Signet scores over the bellwether company practically on valuation parameters. It is also a debt free company and its valuation measures suggest that its stock is undervalued at this price. Signet is trading at a forward P/E ratio of 12.93 and PEG ratio of 1.18 compared to 17.44 and 1.65 of Tiffany. Its low ratios suggest a significant growth potential and is a good buy for the long term.