Based on my annual income, Tiffany & Co. (TIF) is not a store I expect to ever buy gifts at. Nonetheless, they seem to be doing just fine without me. The high end jewelry store chain has had some mixed results in recent years, but new efforts to cater to a more "diverse" array of consumers seems to be paying off.
The company announced stellar second-quarter results on Tuesday, and Wall Street seems pleased. Tiffany's current CEO, Alessandro Boglioli, has taken a different approach to the business, selling products that younger, less affluent customers can afford, along with some extra ridiculously high-end items for those who can swing it. The strategy is working. By creating a broader consumer base the company is experiencing big jumps in revenues, and subsequent earnings. Second quarter results not only beat estimates, but painted a nice picture for the year as whole.
Tiffany shares were up 1.1% to $131.22 as of 12:20 p.m. ET. Tiffany stock was trading at $106.43 at the beginning of the year.
TIF reported revenue/sales growth of 12% leading to revenues of $1.07 billion. The bulk of the company's sales still stem from domestic markets. At $475 million in the second quarter; net sales in the Americas grew 8% year over year. Asia is quickly becoming equally relevant through rapid growth rates there. The Asia-Pacific region experienced net sales gains of 28% to $301 million. Comparable store sales growth grew 12% as Chinese consumers continue to spend more. I would urge some caution here, as there are continuing signs of the Chinese economy slowing. Nonetheless, wealthy consumers in China will keep spending. And the region is more than just China. Europe and Japan also performed well with respective sales gains of 5% and 11% in the quarter.
All the sales gains certainly translated into income improvements. Overall gross profits of $688.8 million represent a 14.8% increase from 2017. Thanks to a slower rate of increases in SGA expense, operating income increased 3.5% to $191.2 million. Lower interest expenses coupled with lower taxes allowed that operating income to provide a big boost to net earnings. The company's net income increased 25.8% to $144.7 million. That's $1.17 in diluted earnings per share; a 27% increase.
If I had to make a complaint, the company's liabilities are on the rise. They've done a good job at diminishing current or short term liabilities, but the company does have a considerable amount of debt at $881.4 million. When you couple that with increasing obligations pertaining to pensions and benefits, total stockholder's equity is declining. Total equity is down 2.7% from last year to $3.07 billion. Again, this is not a huge deal; but one must always play devil's advocate for the sake of balanced argument.
There are a couple of different factors that could drive this stock. The company has a $1 billion share repurchase program underway. There is still $750 million left to repurchase through 2022. Couple that with revised guidance, and Tiffany's seems on the right track. Net sales are expected to finish the year with a "high-single-digit percentage" gain. Net earnings are expected to be in the $4.65 to $4.80 range. That's a small increase from their previous estimates of $4.50 to $4.70. There may very well be a moment to buy this one at a lower price though. The company expects third quarter results to be below the prior year. If speculation runs awry with that, better opportunities may present themselves for some shares.
If Tiffany's conservatively hits $4.65 per diluted share for the full year, the stock is trading at roughly 28x forward earnings. Analysts have consensus estimates around $4.76. At those earnings, the valuation doesn't change much. It's still just shy of 28x forward earnings. That does feel a bit pricey to me, and could explain why the stock pared some of its gains today after an early trading spike on the earnings news. Overall, Tiffany's doesn't have an annual track record of defying the estimates. They've been in the full year estimate range for the last three years in the row. It's worth noting that the first two quarters of this year beat estimates, but the company's own guidance doesn't predict big beats. To that end, I don't see massive upside in the stock at this time. The company has certainly improved its business, but stock already went on a big 30% run this year; factoring in the new earnings potential.
The stock seem to trade at a fairly high valuation most of the time, but at this point in a bull market cycle, it feels a bit much to me. If the dividend were more than 1.7%, I might have a little more interest.