TSC 21: Tiffany Blue Box Barometer Looks Bullish - TheStreet

TSC 21: Tiffany Blue Box Barometer Looks Bullish

The luxury jewelry retailer shows signs of strength. This bodes well for high-end consumer spending.
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(Editor's Note: The demand for Tiffany's little blue boxes is as significant to the economic recovery as the demand for the cardboard boxes Smurfit-Stone Container (SSCC) makes for corporate America. That's why Tiffany, like Smurfit, is a component of TheStreet.com 21, a new index of 21 companies designed to be a leading indicator of the economy's direction for the rest of the year and beyond. We will profile Tiffany and the rest of the index's components in the coming weeks. Click here for an introduction to the TheStreet.com 21, and click here for a chart listing the components and their reason for inclusion.)

The outlook for

Tiffany

(TIF) - Get Report

is a great barometer of consumer sentiment -- if the average consumer is Holly Golightly from

Breakfast at Tiffany's

.

Make no mistake: The Ms. Golightlies and the rest of the Tiffany clientele represent a vital facet of the economy, and the bursting of the stock market bubble has been rough at the high end. Who can afford those $50,000 rings that were scooped up so freely during the halcyon late 1990s?

That's the question facing the U.S.' biggest luxury jewelry retailer, and in turn the broader economy, in the coming months. Tiffany posted better-than-expected earnings in May, noting a pickup in demand despite challenges ranging from SARS and the Iraq war to uncertainty in its two big markets, the U.S. and Japan. Some Tiffany watchers think the road ahead will be even better as the economy improves and the stimulus from President Bush's tax cuts and the

Federal Reserve's

easing of interest rates loosen wealthy consumers' purse strings.

"There are good indications that high-end retail is picking up now," said Gary Farber, hedge fund manager at Nightingale & Farber. (Farber holds no position in Tiffany.) "People felt guilty spending money with the country at war. Now that the country's in better shape, the guilt about buying more expensive things diminishes."

The Blue Box Barometer

Gauging the consumer component of the economy has become a tricky endeavor. Consumer confidence numbers have plunged since 1999, yet consumer spending has remained strong -- making the once-essential data point an outdated barometer for consumer spending.

"Don't look at those sentiment indications," said Richard Hastings, chief economist and retail sector analyst at Cyber Business Credit. "I don't think those tell us all that much about consumer liquidity. If you want to know how much consumers can spend right now, look at all the different buckets of money they can dip into."

Because Tiffany staunchly refuses to discount its goods, be they $100 gift items or its $40,000 diamond necklaces, the company offers a pure gauge for the high-end sales bucket. Consider it the Blue Box Barometer -- the number of its signature blue boxes it hands out speaks volumes about the elite class' sentiment.

The Bouncing Blue Box
Tiffany's sales staggered a bit in the downturn, but look poised to climb again. (Sales figures are in millions of dollars.)

*Projected
Sources: Bloomberg, First Call

Wall Street was heartened by the company's results for the quarter ended April 30, which were announced in mid-May. Net income rose 9.6% to $35.9 million, or 24 cents a share, beating results by a penny a share and topping year-earlier results by 2 pennies. The company affirmed its outlook for fiscal 2003 per-share earnings of $1.33 to $1.38, "based to some degree on U.S. economic conditions improving later in the year," the company said in its earnings conference call.

Tiffany's stock has climbed this year on signs -- and hopes -- that the economy will continue to recover. Shares have climbed more than 40% in 2003.

Recently, Tiffany has been breaking out sales data for its products on the basis of price points, and the "statement jewelry" category -- items worth more than $50,000 -- is instructive when gauging the wealthy consumer's confidence. "Despite the current environment, we continued to see increased demand for jewelry in the $50,000-and-over category," said Mark Aaron, vice president of investor relations, during the May call.

However, the "statement jewelry" average price has slipped since the bull market peak, according to the company's fourth-quarter conference call: In 2000 the average "statement" item was $75,000. In 2001 and 2002 it slipped to $68,000 and $62,000, respectively. Some analysts fret about possible softness at the highest of Tiffany's high-end products in the current quarter. "As far as this quarter goes, consumers are still shopping there, but they're not seeing as many purchases over the $50,000 price point. Maybe those people who buy $75,000 rings are buying $40,000 rings," said Kristine Koerber, an analyst at W.R. Hambrecht.

Strength in big-ticket sales is key for Tiffany's outlook. "In the second quarter, I'll be looking at how their highest price point is doing," said Haruki Toyama, a portfolio manager at Mosaic Funds, which holds a stake in the jewelry retailer. "I think

the decline in statement item prices has bottomed in the recent two or three quarters."

When the company releases fiscal second-quarter earnings -- the date has not yet been supplied, but mid-August is likely -- Wall Street expects Tiffany to come in with a profit of 24 cents a share, up 2 cents from last year's quarter. Because sales were off during the year-ago quarter, analysts expect comparisons to be easy. And they don't expect any downside surprises.

"They've typically preannounced if they're going to miss the quarter substantially, and we haven't seen that," said Koerber. "Management is doing a better job with expectations; they're being conservative, because no one really knows."

Tiffany does offer the potential for a modest upside surprise, because nearly all of Wall Street is of the same mind on second-quarter earnings, with profit estimates ranging from 24 cents to 26 cents a share.

A Read on the Rich

Depending on what the company says about business going forward, Tiffany's results could bode well for the nascent recovery in the U.S. -- as well as Japan.

Ever since its founding in 1837, Tiffany's has served America's ever-growing wealthy class, with its famed flagship store in Manhattan accounting for 10% of the company's total sales. But when examining sales for hints of a stateside recovery, analysts note that the U.S. accounted for just 60% of the company's total revenue in 2002. Japan, meanwhile, accounted for 26% of sales in fiscal 2002.

Though Japan's decade-long economic slump has been a worry, signs of life in the world's No. 2 economy add to bullish sentiment toward Tiffany. Since April 28 the Nikkei has skyrocketed 30%, and early signals from Tiffany's business have been heartening.

"The boost in the Nikkei and in consumer sentiment in Japan look like positives for Tiffany going forward," said Rich Eisinger, co-manager of the Mosaic Mid-Cap fund and a colleague of Haruki Toyama. Eisinger said that Tiffany's stock was a bargain in the mid-$20s this spring, but that it remains a strong stock at its current levels in the low to mid-$30s. "We're in this stock for the long haul."

Over the last three months, Tiffany has embarked on an ambitious plan to rejuvenate its position in Japan, which has been challenged by increased competition, now that names like Boucheron, Cartier and Harry Winston have moved into Tokyo's high-end Ginza district. Tiffany's flagship Japan store in Ginza accounts for 10% of total Japanese sales. The company has boosted its advertising spending in Japan, promoting its new line of Mark watches. In June, the company also purchased the land and building housing its Tokyo flagship store for $140 million.

"Tiffany has begun to see encouraging signs from its Japanese business. For example, the company has experienced renewed strength in sales of higher prices, statement jewelry," wrote Bear Stearns analyst Dana Telsey on June 2. "In our view, the fact that Tiffany is having success selling higher-priced goods in Japan is an encouraging sign that the brand still has tremendous cachet in that important market."

Year-over-year sales from Japan should be easy to top, given the 13% same-store sales decline from fiscal 2002's second quarter. However, the weakening U.S. dollar against the yen may crimp sales growth on a constant exchange rate basis.

When Tiffany reports second-quarter earnings, investors will want to keep an eye not only on Japanese sales but also on the rest of the company's international operations. In October 2002, Tiffany bought Little Switzerland, a Caribbean-based retailer of high-end goods to tourists, extending its reach even further.

Senior Writer Stephen Schurr contributed to this article.