Tiffany & Co. (NYSE:TIF)., the jeweler best known for its iconic engagement rings and silver necklaces, has taken investors on a wild ride over the past year. In this article, I'll examine some key factors to see if Tiffany is as tough as a diamond or as prone to shatter as a cubic zirconia.
The big picture
The jewelry business has never been an easy one. Rising precious metals prices often squeeze profits as sales slow, making the maintenance of stable operating margins a tough challenge. The industry is directly tied to discretionary spending, and any increase in tax rates or an economic downturn hits its top line. Due to the high number of window shoppers compared to actual ones, inventory turnover is often so sluggish that jewelers are disparagingly referred to as “museums.”
Affordable luxury vs. high-end luxury
Investors should notice that many high-end luxury brands have struggled against a new wave of ‘affordable luxury’ competitors. For example, comparatively cheaper handbag retailers Michael Kors Holdings Ltd (NYSE:KORS) and Coach, Inc. (NYSE:COH) have posted far higher same-store sales growth than high-end retailers Burberry and LVMH’s Louis Vuitton. Luxury jeweler Harry Winston was also recently humbled when it sold its flagship operations to lower-end competitor Swatch.
However, Tiffany cannot be defined as either affordable luxury or high-end luxury. It uses a multi-tiered pricing system, similar to Coach, that attempts to capture the largest share of the market with both cheaper and expensive items, ignoring concerns of cheapening its own brand.
Tiffany bulls have always believed that the was company impervious to economic downturns, due to its strong performance during the previous recession. Although that original thesis - that the most affluent customers will continue purchasing jewelry in times of economic turmoil - comforted investors for some time, recent considerations show that there are far more unpredictable variables at play.
Maximizing sales per square foot
Tiffany has a unique strength that its domestic rivals can’t touch - the second highest sales per square feet in the retail industry trailing only Apple Inc. (NASDAQ:AAPL)’s Stores.
|Company||Sales Per Square Feet (2012)|
|Tiffany & Co.||$3,017|
These figures indicate that Tiffany utilizes its available real estate extremely well, maximizing the potential of each store with minimal wasted space. This helps it in urban areas, where real estate is expensive and space is limited.
Tiffany is widely considered to be the bellwether of the jewelry industry. Let’s compare Tiffany to its primary publicly traded rivals - Signet Jewelers Ltd. (NYSE:SIG), Blue Nile, Inc. (NASDAQ:NILE) and Zale Corporation (NYSE:ZLC).
|Company 1/29/2012||Market Cap||Forward P/E||5-year PEG Ratio||Debt-to- Equity||Profit Margin (ttm)||5-year ROE|
|Signet Jewelers||4.99B||12.86||1.16||N/A (no debt)||9.01%||16.04%|
|Best Value||N/A||Signet||Signet||Signet||Tiffany||Blue Nile|
Signet, which operates stores in the U.S. and the U.K., stands out as a better value than Tiffany in most match-ups, and it is the only one with a clean balance sheet. Signet’s strong profit margin and low forward P/E and PEG ratios suggest that it is an undervalued growth stock that could be a better long-term investment than Tiffany.