By Brian Sozzi
Tiffany & Co.'s (TIF) 1Q11 earnings release brings a conclusion to what has been one rather intriguing reporting period for retailers. Storylines were abundant, ranging from the revival of private label goods sales to sustained share gains from dollar stores to continued strength within the luxury goods industry.
Truthfully, the economic recovery has unearthed a tale of two consumer worlds. Tiffany wraps things up on an upbeat note, though we are quick to point out the story here is of a strong business model (wide moat that lends way to pricing power), execution (Tiffany store base not heavily exposed to profligate EU spending countries), and insatiable global demand by the well-to-do, rather than being the norm in the retail sector. No price war will be happening in the sector Tiffany operates in anytime soon, and as a byproduct of a nicely cultivated trade name, passing along price increases across a broadening array of product classifications becomes fairly easy.
We were quite impressed by Tiffany's quarter throughout, and it's refreshing that the market, at least initially, is not selling the news.
Japan: Outperformed guidance established on the 4Q10 earnings release for a 15% y/y decline in sales; the actual was a 7% sales gain (-3% constant currency). A bounce back in April comps appears to have caught Tiffany's management by surprise. Surely it caught us off guard, given the devastation in the country.
Weak dollar influence: The dollar's comparative weakness to counterparts abroad showed up within comps at the Americas branch store sales (+15%) and the New York flagship (+23%). It helps to operate in travel-friendly locations.
Gross margin: A rarity this earnings season, gross margin came in line to consensus at 53.30%. Let's examine the main driver of the 50 bps y/y increase, leverage on fixed costs. Although product mix was unfavorable, Tiffany looks to have sold higher price-point pieces, and the greater sales quality and price was spread over an efficient fixed asset base. That efficiency in COGS is a tidbit we frequently hear from management in our discussions on the gross margin topic.
Nuances: Strong operating margin expansion in all segments except Japan, but even there a 120 bps y/y decline underscores how Tiffany is better managing its store base; UK modest sales growth; full year guidance raise that may prove conservative in terms of EPS given the global sales run rate, pricing considerations, and leverage in the economic model.
- Sales up mid-teens percentage (+12-14% previous); all regions had their sales growth expectations marked up from the 4Q10 report.
- Operating margin guidance reiterated.
- EPS $3.45-3.55 ($3.35-3.45 previously).
- Slightly higher capex assumption ($25.0 million).
It would be tough to say to sell this premium product-selling retailer, despite the stock's luxurious relative P/E multiple, off of this type of fundamental performance and forward outlook. The sales momentum is there, leverage on costs is strong, the balance sheet is improving, and stock prices have not corrected to the point of suggesting a large-scale reversal in the luxury spending recovery is poised to slide down a cliff. We would say to investors that to own a quality name such as Tiffany, one must be willing to pay a top quality multiple.