Tiffany Is Golden at Home

But investors will focus on its Japan result in earnings Wednesday.
By Meredith Derby ,

If there's any doubt left that the U.S. consumer has developed a sweet tooth for luxury,

Tiffany's

(TIF) - Get Report

fourth-quarter earnings should stamp it out.

The problem is in Japan, where waning sales continue to be a sore spot. Investors will be looking for guidance on that front when Tiffany reports before the bell Wednesday.

New York-based Tiffany expects earnings in the quarter ended Jan. 31 to be 68 cents to 71 cents a share, compared with year-earlier earnings of 60 cents a share. Analysts are forecasting 70 cents a share. The company's guidance assumes a midteens percentage sales increase, a modest gross margin decline and an unchanged expense ratio. Results will be reported Wednesday before the bell.

Total sales in the fourth quarter already have proven to be strong. In a Jan. 8 quarterly update, Tiffany said U.S. retail sales increased 19% to $306.2 million in November and December combined. Same-store sales increased 16%, with a 22% increase in Tiffany's New York flagship store and a 14% increase in branch stores.

Further, the company said total international retail sales increased 18% to $217.2 million in the two-month period, which was a 7% increase in constant currencies. Comparable retail store sales rose 25% in its Asia-Pacific markets and increased 13% in Europe.

At the time, however, Tiffany reported that total retail sales declined 3% in Japan from Nov. 1 to Dec. 31, primarily due to lower unit sales of silver jewelry, which hurt gross margin. Same-store sales in Japan also fell 7%.

Analysts say Tiffany's problems in Japan are going to take time to solve. The decline can be attributed to a change in Japanese consumer preferences away from silver, and an increase in competition, according to Thomas Wiesel analyst Anne-Marie Peterson, who expects the company to earn 71 cents a share in the quarter.

David Malmgren, a portfolio manager at the money management firm Fulton Breakefield Broenniman, agreed. "I think they're wresting with three questions: Is it the sluggish

Japanese economy? Is consumer preference changing? And more specifically, is the brand suffering?" Malmgren expects the company's fourth-quarter earnings to come in at the top end of their forecast.

He thinks that, concerning Japan, Tiffany is focusing on the first two questions. "It would be interesting to hear what they say they're doing about Japan. I expect them to say their new merchandise is going to save the day," said Malmgren, who said Japan's sales make up about 26% of total company sales.

For example, new jewelry designs would be the key to tapping into the Japanese market, the analyst said. "The taste for those items is huge."

While macroeconomic factors seem to be improving in Japan, Peterson was still worried. "The weakness in Tiffany's silver jewelry category could persist and offset strength in other categories that the company is trying to build, such as higher-end jewelry and watches."

Additionally, commodity prices are continuing to increase, she said, which could pressure margins. "We do not believe that Tiffany has taken overall price increases recently to adjust for the higher commodity prices in either the U.S. or Japan, which could potentially incrementally pressure merchandise margins," Peterson said.

Malmgren added: "Japan is having a tremendously difficult time in getting their consumers out. After almost 10 years, it has to dampen people's feelings about higher-end merchandise. It's not fashionable to be wearing diamond rings when a lot of the country is unemployed."

Meanwhile, Malmgren is also looking forward to any future guidance Tiffany might provide on Wednesday. Specifically, he is wondering if full-year 2004 earnings are still seen rising 12% to 15%.

"Tiffany has strong brand recognition around the world. I would imagine that it would be a battle for high-end market share in Japan in the coming years," said Malmgren. "But I don't think it will sink them."

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