Upscale jewelry store operator Tiffany (NYSE:TIF) closed out its fiscal year in fine form. It reported sales and profit growth right around 20%. However, these growth figures are higher than what Tiffany is likely to report over the long haul. The stock's current valuation discounts these unsustainable growth expectations.
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Full Year Recap
Tiffany's sales jumped 18% to $3.6 billion. Each of its key operating regions reported double-digit growth, though Japan grew only 3% when stripping out the effects of currency fluctuations. On this constant exchange rate basis, the rest of Tiffany's Asian region was the strongest performer with 31% growth. The Americas and European markets grew 14 and 12%, respectively. Total worldwide comps improved a very impressive 13%, again led by Asia at 27% and followed by the Americas at 13%.

Cost controls helped send operating income up 19.1% to $708.4 million. This represented a very healthy operating margin of nearly 20% of sales. Net income grew at a nearly identical rate, rising 19.2% to $439.2 million, or $3.40 per diluted share. Management didn't provide cash flow details in its earnings press release but did detail during the conference call that free cash flow was negative at $29 million for the year. It attributed this to higher inventory levels to expand product mix and higher capital expenditure, due in good part to relocating the New York headquarters. (To know more about income statements, read Understanding The Income Statement.)

The lowered cash flow generation didn't stop Tiffany from spending $174 million to buy back shares, though total shares outstanding rose slightly during the year. The company also boosted its dividend payout. The current dividend yield is average at 1.6%.

Outlook and Valuation
For 2012, Tiffany plans to grow sales by 10% through the opening of 24 new locations and positive same store sales. It anticipates recurring earnings growth of 10 to 13%, or between $3.95 and $4.05 per diluted share.

Tiffany currently trades for more than $71 per share. On a forward earnings basis, its P/E is close to 16. Tiffany may look like a steal compared to online rival Blue Nile (Nasdaq:NILE) at 39 times earnings expectations, but it is priced higher than Signet (NYSE:SIG) at less than 12 times. Signet and Zales (NYSE:ZLC) operate more in the middle market, and Signet operates chains including Kay Jewelers and Jared in mall-based stores owned by the likes of Simon Property Group (NYSE:SPG) and General Growth Properties (NYSE:GGP).

The Bottom Line
Tiffany's stock is down quite a bit from its highs over the past year, but still trades at a rather lofty earnings multiple. The negative free cash flow and increased shares outstanding despite buying back nearly $200 million in stock count as other current investment negatives. As well, growth hasn't been overly impressive over the past decade. During this period, sales are up just over 6% annually while earnings are up less than 9%. Growth trends could perk up going forward due to international expansion, and the growth levels are still respectable. However, the earnings multiple is simply too high given the growth expectations. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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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.



Tickers in this Article: TIF, ZLC, NILE, SIG, GGP, SPG

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