Overseas Demand Adds Luster to Tiffany

First-quarter profits top estimates despite weak U.S. sales.
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Updated from 7:43 a.m. EDT

Tiffany's

(TIF) - Get Report

first-quarter profit beat Wall Street's expectation as strong sales in overseas markets overshadowed a soft performance at its U.S. stores.

The jeweler earned $43.1 million, or 30 cents a share, in the quarter, compared with $40.1 million, or 27 cents a share, a year earlier. Analysts had forecast earnings of 28 cents a share for the latest quarter, according to Thomson First Call.

Shares of Tiffany recently were up 88 cents, or 2.7%, to $33.38.

First-quarter sales rose 6% from last year to $539.2 million, slightly below the mean analyst estimate of $546.8 million. Excluding the effects of foreign currency translation, sales rose 9% from a year ago. Same-store sales, or comps, rose 5%.

In the U.S., Tiffany's retail sales rose 2% to $260.6 million on a 1% decline in same-store sales. On a conference call with analysts, the company's chairman and chief executive, Michael Kowalski, said top-line softness was felt at Tiffany's stores throughout the country. Its flagship store in New York City suffered a 7% decline in sales as demand from foreign tourists waned.

"

The flagship store was under renovation

during the quarter," notes Pali Research analyst Stacey Widlitz. "The first floor was half the size that it usually is, so that was pretty significant."

Tiffany's domestic performance for the quarter contrasted sharply with its strong gains abroad. Its international sales jumped 13% on a 16% same-store sales gain. Comps at its Japan stores rose 12%, while comps at its Europe division were up 24%.

"We are very pleased with the geographically broad-based strength in our international stores and are encouraged with Tiffany's results in Japan," the company said. "U.S. retail sales results were disappointing, but it should be viewed relative to a strong 14% increase in last year's first quarter."

Tiffany's gross margin improved to 55.8% from 53.9% in the previous year, largely because of its product and regional sales mix. The company warned that rising commodity costs pose a threat to its performance.

"Sharply higher precious metal and diamond costs continue to pressure gross margin, although the company periodically adjusts retail prices to mitigate such effects," Tiffany said.

"More concern over increasing metal prices is keeping the stock down," says Widlitz. "That's certainly an issue. It's hard to keep increasing your prices in line with what commodities are doing. That's impossible, and it puts a cloud over the stock, but it's probably going to be short-term in nature."

Widlitz holds a buy rating on Tiffany shares, which have shed about 15% of their value in 2006. She views Tiffany as a bet on the high-end consumer, and she believes the company will be able to weather the headwinds facing consumer spending this year.

For 2006, Tiffany backed its previous forecast for earnings per share of $1.77 to $1.82. Analysts, on average, are expecting earnings of $1.80 a share. The company forecast sales growth of nearly 10%.

"Our forecast assumes gradually improving trends in the U.S. and solid international sales growth so that we achieve midsingle-digit comparable store sales growth in the U.S. and Japan for the full year," the company said. "Continued increases in precious metal costs will likely have some adverse effect on gross margins, but we expect full-year gross margin to approximate the prior year."