Tiffany to Outshine - Analyst Blog

We recently upgraded our recommendation on Tiffany & Company (TIF), a high-end jewelry designer, manufacturer and retailer, to Outperform with a price target of $70.00. Previously, we had a Neutral rating on the stock.

Tiffany is well positioned to support robust sales and earnings growth by leveraging capital investments made over the past several years in distribution, manufacturing and diamond sourcing processes. Moreover, with nearly half of the total sales generated internationally, we believe that the company is well diversified from a regional perspective as well.

The jewelry market was hit hard by the recent global meltdown, which triggered a shift in focus to cheaper private label brands. But as the recession eased, demand for luxury items also improved.

Tiffany posted net sales of $681.7 million during third-quarter 2010, up 14% from the prior-year quarter, signaling a renewed demand for jewelry in the Americas, Asia-Pacific, Japan and European regions. Tiffany now anticipates total net sales for fiscal 2010 to rise by 12%.

The quarterly earnings of 46 cents a share surpassed the Zacks Consensus Estimate of 36 cents, and rose 39% from 33 cents earned in the prior-year quarter. Management remained optimistic about Tiffany's performance, and forecasts fiscal 2010 earnings in the range of $2.72 to $2.77 per share, up from its previous guidance range of $2.60 to $2.65.

The current Zacks Consensus Estimate for fiscal 2010 is $2.75, which rose 13 cents, with 11 out 16 analysts increasing their projections, and 1 analyst lowering the estimate in the last 30 days.

Despite stiff competition from Signet Jewelers Limited (SIG) and Zale Corporation (ZLC), Tiffany still retains a significant position in the world jewelry market due to its distinctive brand appeal. The company now intends to expand its distribution network by adding stores in both new and existing markets.

Tiffanyis focused on opening smaller stores, offering selected collections of lower priced higher-margin product, which in turn will boost store productivity. Tiffany concentrates on improving sales per square foot through an increase in customer traffic and converting them into potential buyers through targeted advertising, ongoing sales training and customer-oriented initiatives.

Moreover, with a healthy balance sheet, Tiffany remains committed to achieve long-term objectives of at least a 15% return on equity and a 10% return on assets. The company has also been consistently enhancing shareholders' return by increasing dividends, and resumed its share repurchase program, which was suspended in the third quarter of 2008 when the economy had faltered.

Given the strong fundamentals, Tiffany holds the Zacks #2 Rank, which translates into a short-term ‘Buy' recommendation, and correlates with our long-term view.

 
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