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.

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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.

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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.

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