Some stocks defy conventional fundamental analysis, and Tiffany (NYSE:TIF) is one of them. Tiffany has one of the most-recognized brands in the world, a solid history of double-digit returns on capital, and some of the best per-square-foot metrics in retail. On the other hand, the company has never been a consistent or impressive free cash flow generator, and the stock is generally a proxy for the financial health and spending of the upper class.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

A Tough Start to the Year
Tiffany definitely didn't get this year off to a great start. Revenue rose 8% and actually slightly beat expectations, but comparable store sales were soft. Overall comps were up 4%, with double-digit growth in Japan and Asia, but Europe and the Americas were flat (the former being a bit better than expected, the latter worse). That said, the year-ago comp of 15% set a high bar for this quarter.

The bigger issue was the company's margins. Gross margin fell by more than a point, as the company continues to absorb higher precious metal and gemstone prices, despite a price hike. The company also failed to impress on operating efficiency, and adjusted operating income dropped about 6%.

Will Flagging Economies Make a Bad Situation Worse?
With so much of Tiffany's incremental growth coming from China, it would be easy to assume that the economic troubles in China are starting to take their toll on Tiffany's numbers. That doesn't seem to be the case, though. Not only were Asia-Pacific same-store sales up strongly, but if shoppers were trading down to cheaper goods that should boost margins (Tiffany's cheaper silver goods are some of their highest-margin products).

Right now, it's hard to feel great about Tiffany's core markets. I suspect analysts overestimate the impact of Wall Street on Tiffany, but the reality is that U.S. sales growth is flagging. Add in the aforementioned concerns about China and the possibility of Europe getting even weaker, and it's not too hard to see 2012 getting more challenging for Tiffany.

SEE: The 4 R's Of Investing In Retail

Is the Stock Bulletproof?
Although Tiffany shares sold off with the first quarter miss (and the lowered guidance) and are retesting some important technical levels, there seems to be a lot of support out there for the company. I can understand that to a point; Tiffany has a solid supply situation, a great brand, and really not all that much competition on a global basis - companies like Movado (NYSE:MOV), Blue Nile (Nasdaq:NILE), Signet (NYSE:SIG) and Zale (NYSE:ZLC) play for different shoppers.

It's also true that the company doesn't need to blanket the world with stores in order to drive sales. Tiffany is "destination shopping" all on its own, and the company has done reasonably well with its online sales as well.

Still, I don't really buy the idea that luxury shoppers are economically insensitive. The conditions of the business environment and stock market still matter to most of these shoppers, and the shares of Tiffany and peers like LVMH (OTCBB:LVMUY) and Richemont do seem to track the S&P 500 to some extent.

The Bottom Line
Tiffany shares have never really worked from a discounted cash flow standpoint, and today is no exception. While the company does produce a good return on invested capital, that has somehow never translated into good free cash flow.

Considering a different metric, though, leads to a slightly different conclusion. On an EV/EBITDA basis, Tiffany actually looks a little undervalued relative to companies like LVMH, Hermes (OTCBB:HESAY), Coach (NYSE:COH) and Burberry (OTCBB:BBRYF). Although I think investors should approach Tiffany shares with caution given the parlous state of the global economy (especially key incremental markets like China), this is a proven company and the shares have generally been quite resilient over the long term.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

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

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  9. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  10. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center