Tiffany & Co.: Best in Class - TheStreet

BOSTON (TheStreet) -- Sales of luxury goods declined during the Great Recession, but the drop is attributable to a lack of need, not a lack of want. America remains status-obsessed, and Asian nations are going the same way.

One company that has tapped into profligate consumption is

Tiffany & Co.

(TIF) - Get Report

, seller of fine jewelry. In spite of, or perhaps because of, exorbitant prices, Tiffany's sales have rebounded dramatically even though the global economy is wheezing. In the latest quarter, net income surged 164% to $64 million and revenue increased 22%.

Tiffany's products include bracelets, rings and earrings. It also offers items for men, including watches -- subdivided into a $1,000 to $5,000 category and an over-$5,000 category -- money clips and key chains. However, Tiffany is a female-focused franchise. One successful recession tactic was a price cut of Tiffany Keys, a charm line, to the $125 to $175 range, which boosted sales without damaging brand prestige.

Tiffany adeptly executes such cuts, a precarious strategy for high-end retailers, whose businesses thrive on exclusivity. Customer service is another notable asset. The company maintains a database of past customer purchases and encourages sit-downs with sales representatives in its stores. A superior knowledge of product offerings and customer history fosters a sense of individual attention, often resulting in patron loyalty.

Such loyalty has translated to countercyclical growth. Since 2007, Tiffany has managed to increase revenue 2.3% annually, on average, and boosted earnings per share 5.9% a year. Although Tiffany suffered quarterly dips, it wrote exclusively in black ink during the recession. Broadly focused high-end retailers

Saks

(SKS)

and

Nordstrom

(JWN) - Get Report

suffered more-pronounced downturns. They experienced negative growth over the past three years.

Swelling municipal and federal deficits threaten the U.S.'s economic dominance, but cultural hegemony is squarely intact. American brands have cache in Europe, Asia and other emerging markets. Tiffany's Asia-Pacific sales expanded 50% to $122 million during the first quarter, accounting for 19% of total revenue, as comparable-store sales jumped 21%. Europe sales rebounded 25%, outpacing the 22% gain in the U.S., in part due to currency effects.

Emerging markets present a tremendous growth venue for luxury retailers. Tiffany opened its third store in Shanghai during the quarter, bringing its total count within China to 11. Interestingly, it separated geographic laggard Japan, which suffered a 2% quarterly sales dip, from its fast-growth Asia-Pacific division. Other sales, which comprise wholesaling to Russia and the Middle East, enjoyed a near tripling of revenue to $12 million.

Last week,

Capgemini

and

Merrill Lynch

, now a subsidiary of

Bank of America

(BAC) - Get Report

, released their annual World Wealth Report, a research project on the habits of the rich. The report has important implications for luxury retailers like Tiffany. It says the world's population of high-net-worth individuals grew 17% in 2009, a surprising increase considering the fragile state of the global economy.

A trend of widening disparity between rich and poor is persistent in the U.S. and accelerating overseas. Proliferation of capitalism in Asia is creating powerful and consumption-hungry middle and upper classes. Asia's tally of high-net-worth individuals is now equivalent to Europe's. The region's economic dynamism is likely to catapult its share of prosperity ahead of Europe's in the next few years.

Asia-Pacific's high-net-worth population has increased 26% since 2008, led by substantial gains of wealth in Hong Kong and India. The cumulative wealth of Asian high-net-worth individuals increased at a rate of 31% over the same period, outpacing all other regions. Asia-Pacific private consumption, excluding Japan, increased 5.3% to $4 trillion in 2009.

Tiffany is continuing its swift expansion in this region to strengthen the reach of its brand and increase profitability. It currently operates 45 Asia-Pacific stores, accounting for 20% of its total locations. It is planning to open 17 new stores in 2010, eight of which will be located in Asia, while increasing its e-commerce offerings and wholesale business, which accounts for the remainder of its emerging-markets exposure.

The gradual revaluation of the Chinese yuan will inevitably benefit Tiffany. Whether it chooses to alter pricing in response to the Chinese currency's appreciation remains to be seen. Considering appetite in the region, price reductions seem unlikely. However, the Chinese middle-class includes so-called aspirational consumers and the introduction of expensive, but not unattainable, product lines, could prove a lucrative strategy.

Tiffany's profit spreads rebounded in the latest reporting period, making it a best-in-class company. Its operating margin climbed from 12% to 17%, and its net margin extended from 4.7% to 10%. Tiffany is also a best-in-class investment. Of stock analysts covering the retailer, 16, or 73%, rate its shares "buy" and six, or 27%, rate them "hold."

Jefferies

(JEF) - Get Report

offers the loftiest price target, predicting the stock will advance 49% to $61. Asia-focused

HSBC

(HSBC) - Get Report

forecasts that it will gain 46% to $61.

Deutsche Bank

(DB) - Get Report

values the shares at $58 and

Morgan Stanley

(MS) - Get Report

predicts they will hit $57.60. Tiffany's stock trades at a forward price-to-earnings ratio of 14, on par with its peer average. Its PEG ratio, a measure of value relative to growth, of 0.8 signals a 20% discount to fair value.

As one of the few publicly traded U.S. luxury retailers, Tiffany offers exposure to a niche of global growth that few investments are able to provide. A specific product and geographic focus has helped the company outperform nearly all other luxury retailers during the past three years. And a $674 million cash hoard affirms that Tiffany has the means to expand and satisfy growing emerging-market demand.

-- Reported by Jake Lynch in Boston.

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