I suspect that Tiffany (NYSE:TIF) is over-hyped as a bellwether for the consumer confidence of the well-to-do, but the reality is that it's still a large and well-followed retailer. To that end, the strong comp growth here this quarter was a welcome change of pace for what has been a relatively unimpressive run in retail.

Discount Brokers Comparison: Your one-stop shop for finding the perfect broker for your investments.

First Quarter Results Come In Strong
Tiffany certainly did better than Wall Street's sell-side expected this quarter. Even so, management kept a lid on guidance – likely a prudent move given a spate of disappointing recent guide-downs and uncertainties over product repositionings.

Revenue rose 9% as reported this quarter, or 13% on a constant currency basis. Comps rose 4%, or 8% in constant currency, with was more than double most sell-side estimates for the quarter. Constant currency comps growth was led by a very strong rebound in Japan (up 21%) and ongoing strength in Asia (up 9%). Curiously, Europe's comp growth (6%) was stronger than that of the Americas (up 3%).

Margin performance was a mixed bag – generally better than expected, but not exactly strong in its own right. Gross margin declined about a point from last year, but was stronger than expected by the Street (to the tune of a four-cent beat). Tiffany gave up some of this (about one cent) on SG&A, though, and operating income growth was limited to 5%.

SEE: Understanding The Income Statement

Continuing To Polish The Silver
Tiffany's silver business continues to be a tough one for management. On one hand, a prior assortment proved quite popular and beneficial for gross margin. On the other hand, it was popular with the wrong shoppers and analysts, investors, and apparently management feared that the company was risking its brand image with these more affordable (and profitable) items.

Given what has happened at Coach (NYSE:COH) and Nordstrom (NYSE:JWN), I suppose I understand the fear to a certain extent. It's a constant balancing act for companies like LVMH (OTC:LVMUY), Richemont, and Prada to both continue to grow the business (bringing in new shoppers or getting shoppers to come back and buy more) and preserve the exclusivity that serves as a primary appeal for the brand. If everybody can buy a Tiffany bauble, there's no exclusivity in it and, for many shoppers, no point.

To that end, management is looking to use innovation and marketing to grow the silver business, but do so in a way that doesn't compromise the cache of the brand. On a related note, the Great Gatsby collection and the reintroduction of the Atlas collection may both have a lot to do with whether the company can maintain its comp growth momentum for the balance of the year.

Will Less Precious Metal Enthusiasm Help The Business?
With the exception of the lower-priced silver items, Tiffany is pretty much a “cost plus” business where passing along the incremental increases in precious metal and gemstone prices isn't all that difficult. Still, that doesn't mean that turbulent precious metal markets don't add volatility to the reported results and increase inventory risk. While Tiffany can take a long-term view that “the commodity markets taketh … and the commodity markets giveth”, Wall Street is seldom so patient.

To that end, then, I wonder if the weakness in precious metals is a welcome development. Inventory growth was limited to 7% (constant currency) this period, but if gold and silver are now less appealing as speculative playthings for investors, I suspect that may work in the company's favor.

The Bottom Line
Because of the significant year to year changes in net working capital (particularly inventory), ordinary discounted cash flow analysis doesn't work especially well for Tiffany. Specifically, the company's returns are generally both quite low and very volatile. Strip away the net working capital and concentrate on the so-called “structural free cash flow”, though, and the results start looking more predictable and consistent. Structural free cash flow does lack some rigor (in particular, it just assumes that net working capital changes “work themselves out” and balance out to zero on a net present value basis), but it makes life easier for the analyst/investor.

SEE: 5 Must-Have Metrics For Value Investors

Assuming that Tiffany can maintain a low double-digit structural free cash flow margin while growing revenue at a mid-to-high single digit rate, fair value seems to be around $74. That doesn't leave the shares looking like much of a bargain here at $80, but Tiffany is a stock that seldom trades at a bargain (though brief 20-30% pullbacks to occur almost every year). What's more, as the owner of one of the strongest global brands, there's a wider moat here than is normally the case. I'm in no hurry to chase Tiffany near a 52-week high, but I'd certainly keep an eye out for the next 20-30% pullback as a buying opportunity.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

Related Articles
  1. Personal Finance

    The Frosty, Festive World Of Investing

    From Santa Claus rallies to evergreen loans, Wall Street can be a veritable winter wonderland for investors.
  2. Options & Futures

    Going All-In: Comparing Investing And Gambling

    People often compare stocks to gambling, but how close are they really?
  3. Trading Systems & Software

    Mechanical Investing Not A Golden Key

    Direct paths to wealth are getting narrower, fewer and may be locked up tight.
  4. Stock Analysis

    Investing in Lumber Liquidators? Read This First

    Find out what investors should know before buying Lumber Liquidators shares. Learn about Lumber Liquidators' financial performance and operational outlook.
  5. Stock Analysis

    What Seagate Gains by Acquiring Dot Hill Systems

    Examine the Seagate acquisition of Dot Hill Systems, and learn what Seagate is looking to gain by acquiring Dot Hill's software technology.
  6. Stock Analysis

    The Biggest Risks of Investing in Amazon Stock

    Find out which risks are most important to Amazon's shareholders. Learn which operational risks impact share prices and which financial risks affect investors.
  7. Investing

    A Look at 6 Leading Female Value Investors

    In an industry still largely predominated by men, we look at 6 leading female value investors working today.
  8. Term

    What Is Financial Performance?

    Financial performance measures a firm’s ability to generate profits through the use of its assets.
  9. Investing News

    This is the Fastest-Growing Consumer Complaint

    There’s no way to guarantee that your Social Security number won’t fall into the wrong hands. Here are some ways to make yourself less of a target.
  10. Stock Analysis

    The Biggest Risks of Investing in FireEye Stock

    Examine the current state of FireEye, Inc., and learn about some of the biggest risks of investing in this cybersecurity company's stock.
  1. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  2. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
  3. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  4. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. How can a company execute a tax-free spin-off?

    The two commonly used methods for doing a tax-free spinoff are either to distribute shares of the spinoff company to existing ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!