More Sparkle for Tiffany in 2002?


By Amy Tsao Let's talk about the Tiffany of brands. That would be, of course, Tiffany & Co. (TIF). Its iconic name is recognized worldwide -- and not just by the rich and famous. Scrupulous polishing of its product image has paid off handsomely for the luxury retailer. The contents of those robin-egg-blue boxes don't come cheap. Whether it's a $100 silver key ring or a $10,000 diamond-studded necklace, people of many income levels are now willing to pay for a whiff of the Tiffany mystique. No other jewelry retailer has the same broad appeal.

Like most luxury purveyors, however, Tiffany had a lackluster year in 2001, especially following the September 11 terrorist attacks. Analysts expect it to meet its scaled-back holiday sales projections, due to be announced on Jan. 8. But while the recent season will be a disappointment, long-term investors might want to consider adding shares of the New York City-based company to their portfolio because over the long-term, Tiffany could get through the current economic downturn and come out gleaming.

"It has a strong brand in what can be a lucrative business," says Eric Jemetz, senior equity analyst at New Amsterdam Partners, which doesn't hold a position in Tiffany. Jemetz figures it's a good buy. "Clearly the company has short-term issues. But to own a chunk of this brand, I don't think you can go wrong."

"NEGATIVES ARE KNOWN." With an experienced management team, a strong balance sheet, and solid growth prospects, Tiffany has a stock that looks attractively priced, many analysts believe, and is expected to move higher when the economy improves. After a one-day plunge of 21% on Sept. 17, when the markets first opened after the September 11 attacks, the stock has climbed back to year-ago levels. But at around $31 and change, it's still well off its 52-week high of $38 a share. At a price-earnings ratio of about 27 times 2002 earnings, Tiffany is trading at a reasonable valuation, considering the Standard & Poor's 500-stock index is trading at a p-e of 29.

"My rationale for a buy rating was basically that all the negatives are known," says Kristine Koerber, an analyst with WR Hambrecht & Co., who started coverage on Tiffany in November. Indeed, 2001 is expected to be the worst year the company has had in the last five years. In the third quarter, net sales dropped 10%, with a 19% decline in U.S. retail sales, and earnings fell by a third compared with year-ago levels.

With some boost from the gift-giving season, Tiffany's fourth quarter ending on Jan. 31 should show some improvement over the third quarter. The company says it expects to make between $0.49 and $0.56 earnings per share -- down from a range of $0.60 and $0.65 forecast in August, 2001 -- and flat-to-lower EPS compared with $0.56 per share in the 2000 holiday quarter. Koerber expects a double-digit percentage decline in sales (12%) and predicts $0.52 in EPS for the fourth quarter, a 7% drop from the same quarter a year ago.

BEYOND 2002. Here's perhaps the big surprise: Tiffany's margins have been improving as it sells more lower-priced goods. Sterling-silver items have been especially popular. Although the top line suffers when buyers of big-ticket items retreat, a wide range of prices allows many more consumers, who wouldn't dare dream of the priciest Tiffany baubles, to pick up the more moderately priced trinkets. Gross margins improved inched up a tiny fraction, to 57.9%, for the third quarter.

Tiffany's long-term outlook should improve along with the economy. When it does turn around, "Tiffany will definitely return to a more normalized level of growth," Jemetz says. Koerber is beginning to look beyond 2002, for which she predicts earnings of $1.18 per share, a touch better than her estimated EPS of $1.12 for 2001.

The company, which declined comment for this story, is being cautious, forecasting EPS of $1.09 to $1.16 for 2001, compared with $1.26 in actual EPS in 2000. It's forecasting single-digit percentage earnings growth in 2002. However, in 2003, Koerber expects the company could post profit growth of as much as 15% to 20% if an economic rebound gets into full swing by then. Part of that growth will come from Tiffany's plans to increase square footage at its stores 5% to 8% yearly, he believes.

JAPAN IS KEY. Tim Hathaway, vice-president and analyst at money management firm Brown Investment Advisory in Baltimore, thinks sales will rebound as tourists come back to New York, where Tiffany's flagship store has been ailing. "I'd like to get a sense that things are sequentially trending better. Even if they're still negative, better numbers will be a positive."

Performance in Japan will also be critical. In the third quarter, Tiffany said sales at Japanese stores open at least a year rose 1%, the shabbiest growth since early 1998 when Japanese sales climbed just 2%. Another mediocre quarter in Japan, its second-biggest market, could be cause for worry.

A delay in the expected economic turnaround, which isn't out of the question, would clearly hinder Tiffany's recovery. So would more of a sharper slowdown in Japan that the doldrums of the past three years.

Still, as long as Tiffany doesn't resort to diluting its brand name, it appears to be on a growth path. CEO Michael Kowalski has "managed through this environment beautifully," Hamilton says. "[He has] shown that the Tiffany business is cyclical but not as prone to being hurt in recession as most people thought." And when a recovery kicks in over the second half of next year, as most economists are forecasting, Tiffany might be positively glittering. Tsao covers financial markets for BusinessWeek Online in New York


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