Tiffany Quadruples Fourth-Quarter Earnings as Luxury Shoppers Return

Tiffany & Co. (TIF) executives declared the end of the luxury-market downturn when they reported the jeweler quadrupled its fourth-quarter earnings, even as it failed to beat Wall Street's expectations.

The retailer posted net earnings of $138.2 million or $1.09 per share in the fourth quarter, up from $37.4 million or 30 cents per share during the same period the year before, but less than the $1.13 analysts estimated. Earnings for the fiscal year ended Jan. 31 were up 14.4% to $265.7 million, or $2.12 per share.

Gloomy Predictions "Greatly Exaggerated"

Reports of a year ago, predicting the death of the luxury market "were greatly exaggerated," said Tiffany CEO Michael Kowalski. Consumers appear to have been waiting for signs of economic stability before resuming their spending, he said.

Comparable sales were up 8% in the fourth quarter, but were still down 8% for the year. European sales showed the most improvement, up 14% in the fourth quarter -- with double-digit increases in all countries except Ireland and Spain -- and 9% for the year on a comparable basis. Sales in the Asia-Pacific region were also strong, but comparable sales were up only 3% for the fourth quarter and dropped 3% for the year, mainly due to continuing weakness in Japan and a strong yen. Sales in the other markets of the region were up at least 20% for each month of the fourth quarter.

Sales in the Americas were up 11% for the quarter, but down 15% for the year. Kowalski noted Canada and Latin America are performing better than expected, showing double-digit percentage growth in sales, especially the Mexican and Brazilian markets.

Kowalski said that U.S. stores saw a "substantial increase" in the number of transactions in the fourth quarter, while store traffic held to the same levels as the past year, which suggests that more foot traffic is being converted into sales. All merchandise categories saw sales increases -- from silver jewelry to diamonds -- and sales growth has been spread across all geographic regions of the country.

Tiffany was one of the first luxury retailers to spot signs of a comeback among big-ticket shoppers when it reported its holiday sales had come in far better than expected. It began turning bullish even before the holiday numbers were tallied, as the stock market rallied in late 2009.

Global Challenges Remain

But as Kowalski noted several times during a conference call with analysts, the global economy is not out of the woods yet, and Tiffany plans to keep expenses under control and expand carefully. The retailer has been testing a smaller-format store with an edited selection of merchandise with some success. Some of the 17 stores planned to open in 2010 will use this format, as well as the standard 5,000-square-foot locations. It also plans to expand online sales to Continental Europe, after seeing strong e-tailing results in the U.K.

"While the current economic environment is still fraught with challenge, there are opportunities," Kowalski said.

Tiffany's management is forecasting an 11% increase in sales during 2010 and told analysts it estimates its earnings for the fiscal year will come in between $2.45 per share and $2.50. CFO James Fernandez said gross margin rate is expected to expand at least by one percentage point during the year. Fernandez noted that Tiffany's management had expected its operations to generate $400 million in free cash flow during the past year, but ended with more than $600 million, thanks to the unexpectedly strong sales.

"The global economy still has its challenges," said Kowalski, but added that Tiffany is planning for strong sales growth in 2010. It is expecting double-digit percentage sales growth in the Americas and high-single digits in the Asia-Pacific region, even as Japan continues to languish. So far, worldwide sales growth in the first-quarter is running ahead of company forecasts, he said.