Tiffany's Bottom Line Sparkles

| About: Tiffany & (TIF)

Tiffany's (NYSE:TIF) third-quarter results showed solid revenue expansion and fantastic operating leverage. Worldwide net sales jumped 7% on a reported basis and 11% on a constant-currency basis; comparable sales advanced 7%. Reported sales in the Americas region increased 4% thanks in part to growth in Tiffany's New York flagship store. In the Asia-Pacific region, reported revenue leapt an impressive 27%; comparable sales in the region jumped 22%. Negative currency impacts hurt reported sales in Japan, but underlying, constant-currency performance in the country was solid. Even in Europe, a region that continues to struggle for economic expansion, Tiffany revealed 7% reported growth thanks in part to strength in the United Kingdom.

The company's profit margin performance was also wonderful in the period, as the firm's gross margin improved 260 basis points, to 57%, which reversed the declines that occurred in 2012. Profitability was bolstered by reduced product cost pressures and price increases. Earnings from operations leapt 31% and net earnings jumped 50%, to $95 million, or $0.73 per diluted share, compared with $63 million, or $0.49 per diluted share in the year-ago period. The pace of operating-profit and bottom-line expansion in the quarter was truly sparkling.

For the year ending January 2014, management is now forecasting net earnings in the range of $3.65-$3.75 per share, up from its previous outlook of $3.50-$3.60 per share and $3.25 per share in 2012 (the new range is in line with our $3.66 per share estimate, however). The high end of the target range represents more than 15% year-over-year growth. The new forecast assumes that worldwide net sales will advance by a mid-single-digit percentage in US dollars and a high-single digit increase on a constant-currency basis. There may be upside to this sales range given that worldwide net sales and constant-currency sales have expanded 7% and 11%, respectively, through the first nine months of the year. Management is likely being conservative, as pricing strength should pave the way for nice expansion during the fourth quarter.

Valuentum's Take

There's one fundamental item that we're huge fans of at Valuentum, and that's pricing strength. Tiffany's third-quarter performance exemplified the tremendous impact on earnings that price-driven sales expansion can have (7% revenue growth translated into 31% operating earnings growth in the quarter). We fully expect the firm to continue to pull the pricing lever and earnings should benefit. From an industry standpoint, Tiffany's positive report bodes well for luxury goods firms such as Marc Jacobs, Tory Burch, and Ralph Lauren (NYSE:RL) as well as aspirational brands such as Michael Kors (NYSE:KORS) and Coach (NYSE:COH). Shares of Tiffany continue to trade within our fair value range at the time of this writing. We'd demand a greater discount to the firm's current price before considering the company in our Best Ideas portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.