Tiffany & Co. (NYSE:TIF) reported third quarter results late last week that were downright impressive. The stock fell as the market was apparently looking for stronger trends, and may be worrying about Tiffany's growth prospects over the longer haul. Given the firm's track record and lofty valuation, investors have an argument for being a bit skeptical.
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Third Quarter Recap
Sales jumped 21% to $821.8 million. Backing out the benefits of positive currency fluctuations, the top line advanced a still-respectable 17%. Sales in every key geographic region advanced in the double digits, and was the fastest in the Asia-Pacific region (22.3% of total sales), rising 44%. Europe (11.3%) was the next best with an advance of 19% and followed closely by the Americas (47.2%), which advanced 17%. Rounding out the reportable regions, Japan (17.8%) rose 12%. Total company comparable sales jumped an impressive 19% on a reported basis, with every region, again, reporting double-digit growth and Asia leading the way with a 40% jump.

Operating earnings jumped 49.8% to $135.8 million for an impressive operating margin of 16.5%. Gross profit improvement nearly matched the sales jump at 19.4%, but the main boost to profitability came from modest SG&A expense growth of 9.5%, which served to leverage the sales increase into much higher operating profit growth. Modest income tax expense growth further boosted the bottom line to $89.7 million for year-over-year growth of nearly 63%. Diluted earnings per share came in at 70 cents. (Find out how to put this important component of equity analysis to work for you. For more, see Analyzing Operating Margins.)

Outlook
For the full year, Tiffany expects to see sales advance "by a high-teens percentage." Analysts currently project sales growth in excess of 19% and total sales of $3.7 billion. The company anticipates earnings growth between 26 and 30%, or in a range of $3.70 and $3.80 per diluted share. This represents an increase of a nickel from its previous guidance.

The Bottom Line
Despite the strong quarterly trends and boost to full-year profit projections, the stock fell more than 10% after the release of the financial results. They recovered slightly to end the week, but still remained about 20% from their highs earlier in the year. Despite the slide, the forward earnings multiple is still rather rich at close to 18. This is a rather lofty multiple given Tiffany has only managed to grow sales about 6% annually, and profits 8.5% per year over the past decade. Profit growth over the past three and five year periods is slightly stronger, though sales growth has been weaker.

The nearer-term trends have indeed been impressive, but reflect a recovery from the depths of the credit crisis as much as a fundamental shift to higher operating growth. Upscale retailing rivals including Nordstrom (NYSE:JWN), Saks (NYSE:SKS) and Coach (NYSE:COH) have also benefited from the recovery, but Nordstrom stands out given its growth track record and forward growth prospects. Tiffany remains the strongest operator in the jewelry space, with distant competitors Blue Nile (Nasdaq:NILE) and Zales (NYSE:ZLC) at the lower end of the market, but its valuation is currently unattractive for prospective investors. (For related reading, see How Gold Performed In 2011.)

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At the time of writing Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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