Tiffany Sparkles at Outperform

We recently upgraded our recommendation on Tiffany & Company (TIF - Analyst Report), a high-end jewelry designer, manufacturer and retailer, to Outperform with a price target of $73.00. Earlier, we had a Neutral view on the stock.

What Triggers the Move?

The jewelry market was hit hard by the recent global meltdown, which resulted in a shift in focus to cheaper private label brands, but as the recession eased demand for luxury items also improved. The company holds a significant position in the world jewelry market and is poised to benefit from its increased geographic reach. The company generates nearly half of the total sales internationally. We believe that Tiffany is well positioned to deliver robust sales and earnings growth.

Tiffany in the recent past has posted better-than-expected second-quarter 2011 results buoyed by improved demand for luxury items worldwide. The quarterly earnings of 86 cents a share surpassed the Zacks Consensus Estimate of 70 cents, and rose substantially from 55 cents earned in the prior-year quarter.

Tiffany, which faces stiff competition from Signet Jewelers Limited (SIG - Snapshot Report) and Zale Corporation (ZLC - Snapshot Report), posted net sales of $872.7 million during the quarter, up 30% from the prior-year quarter, on the heels of – stellar performance of stores in Americas, Asia-Pacific, Japan and European regions, healthy comparable-store sales growth and new collection launches.

Total revenue also handily beat the Zacks Consensus Estimate of $787 million. Comparable-store sales climbed 28% in the quarter under review. In constant currencies net sales jumped 24% and comps grew 22%.

Other Catalysts

Tiffany holds a significant position in the world jewelry market due to its distinctive brand appeal. The company intends to expand its distribution network by adding stores in both new and existing markets. Tiffany plans to open 17 stores in fiscal 2011 with 6 in the Americas, 3 in Europe and 8 in Asia-Pacific.

The company is focused on opening smaller stores that offer selected collections of lower-priced, higher-margined product, which in turn boosts store productivity. Tiffany concentrates on improving sales per square foot through an increase in customer traffic and converting them into potential buyers by targeted advertising, ongoing sales training and customer-oriented initiatives.

Tiffany has been consistently enhancing shareholders’ return through share repurchases and dividends. The company recently increased its quarterly dividend by 16%. This is the ninth time the company has hiked its dividend in as many years. In January 2011, the company announced a new share repurchase program of $400 million, which is set to expire on January 31, 2013.

Brighter Outlook

Another driving factor is Tiffany’s optimistic outlook. Riding on the back of stronger-than-expected second-quarter 2011 results, the company has raised its fiscal 2011 earnings guidance. Management forecasts earnings in the range of $3.65 to $3.75, reflecting a growth of 25% to 28%. Earlier, the company had projected earnings in the range of $3.45 to $3.55 per share.

Tiffany anticipates a high-teens percentage rise in total net sales for fiscal 2011. Management expects a high-teens percentage increase in sales in the Americas, an approximately 30% rise in the Asia-Pacific, about 20% in European regions, and a high single-digit percentage jump in Japan. Other sales are projected to soar by 25%.

Positive Notes Bolstering Confidence

The brand appeal, strategic initiatives and a brighter outlook bolster a sense of confidence in the stock even amid a dwindling economy. But we have to wait and watch as to how the cautious consumers react to the sparkles of Tiffany in the upcoming holiday season. As of now we have a short-term ‘Buy’ recommendation on the stock, which is well defined through our Zacks #2 Rank.

Read the full analyst report on TIF

Read the full analyst report on SIG

Read the full analyst report on ZLC