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Is the Blue Box In the Red Again? – Tiffany & Co. (TIF), Blue Nile Inc (NILE)

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In February 2013 Zale Corporation (NYSE:ZLC) posted shining results, with 2Q12 net income jumping 42%. Similarly, in January 2013 Blue Nile Inc (NASDAQ:NILE) posted a 4Q12 net sales increase of 21.2% and a net income increase of 17%. However, in contrast, Tiffany & Co. (NYSE:TIF) posted weaker 3Q12 results, with sales increasing by a hair’s breadth of 1% and net income declining 30%. Does this mean that the famous diamond retailer is in the red again?

Tiffany & Co. (NYSE:TIF) is specialty retailer whose principal merchandise offering is jewelry. It mainly operates through its wholly owned subsidiary Tiffany and Company. Its main product is jewelry (91% of FY11 sales), and the company operates across the Americas, Asia-Pacific, Japan, Europe and other regions.

Tiffany has seen some excruciating times when the economic recession dampened the premium buying penchant of aspiring middle-class Americans. However, after its nadir in 2009, it was able to revive its sales and posted a 14% sales increase in FY11, with 54% of the sales coming from outside the US, mainly in Asia, according to company filings.

5 year performance

The company’s weak 3Q12 results left many investor wondering if it is facing overwhelming pressures again. Lower 3Q12 results led to the company lowering its FY12 profit forecast to $409 – $435 million and EPS of $3.20-$3.40, versus the previous guidance of $454-$473 million in profit and an estimated EPS of $3.55-$3.70. Lower 3Q12 profitability was blamed on rising precious metal and gemstone prices, as well as a poor economic climate.

Apart from its weak results, Tiffany has been in the news recently. On Valentines day, Tiffany gifted Costco a lawsuit, alleging trademark infringement, counterfeiting, and false and deceptive business practices. Tiffany is suing Costco for $2 million per infringement, along with triple the amount of Costco’s profits from selling the engagement rings that were wrongly labeled ‘Tiffany’ rings.

Competition from online retailers

Brick and mortar retailers continue to face strong competition from online retailers. Due to price transparency and extensive information available on the net, consumers are armed with knowledge and stro
ng price comparisons. As a result, traditional retailers are facing increasing pressure from showrooming, as online retailers like Blue Nile Inc (NASDAQ:NILE) and Amazon.com, Inc. (NASDAQ:AMZN) have been able to lower diamond prices by up to 40%.

Furthermore, despite having lower gross margins (Blue Nile’s FY12 gross margin was 18.7%), online retailers are able to post acceptable operating margins (Blue Nile’s FY12 operating margin was 3%) due to low overhead costs. On the other hand, brick and mortar retailers like Zale and Tiffany are able to post high gross profit margins of ~50% (Zale’s profits margin in 2H12 was 51.5%, Tiffany’s 3Q12 was 55.9%), but post comparatively lower operating margins due to higher occupancy and store costs (Zale’s: 2.7%, Tiffany: 16%).

Continuing in the future, Tiffany & Co. (NYSE:TIF) is expected to experience cannibalization of its brick and mortar sales by online retailers like Blue Nile Inc (NASDAQ:NILE). Furthermore, Tiffany is also witnessing increasing competition from designers such as Ralph Lauren Corp (NYSE:RL), which have also expanded in its own luxury jewelry and watch collection.

Losing its sparkle

Tiffany posted weak quarter results, as compared to its key competitors Blue Nile and Zale Corporation.  As seen in the below chart, although Tiffany gains on size, its sales as well as margins have been declining versus its peers.

Blue Nile Inc (NASDAQ:NILE), a leading online retailer of diamonds and fine jewelry, reported sparkling 4Q12 results, with sales increasing 21% due to increased profitability from its investments made in 2012, as well as strong growth in the US and internationally.

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