Why This Jeweler Hasn't Lost Its Luster

Shares of world famous jeweler Tiffany (NYS: TIF) have sunk recently thanks to several poor earnings reports in a row. Investors fear that the little blue box doesn't pack the same punch it used to and that another recession could spell disaster for the company. Are they right, or does Tiffany still have value to offer? Let's find out.

Breakfast at Tiffany's
Tiffany's stock price has been trending downward from its 2012 high of $74.20 on March 20, the same day it missed big on its fourth-quarter earnings report. Shares continued to drop after the company released its first-quarter report on May 24. The bad news included:

• A miss on earnings-per-share estimates ($0.64 instead of the predicted $0.69).

• Lower earnings expectations ($3.70-$3.80 per share, compared to prior guidance of $3.95-$4.05).

• Weakened demand in international and domestic markets.

All of these factors combined to send shares of Tiffany down to $49.72 on June 27, a new 52-week low. Since then, shares haven't risen more than $6 higher.

How to lose a stock in 10 days
As if the May 24 earnings report wasn't already bad enough, it also showed that for the first quarter of 2012 the company's gross margin dropped 1%, its operating margin shrank 1.4%, and its net margin fell 0.7%. These may seem like relatively small declines, but they could indicate a deeper problem within the company, and investors should definitely keep an eye on these.

Another piece of the earnings report that investors should be wary of is inventories. According to the report, Tiffany increased its net inventories by roughly 27%, a sizable increase. The company noted that the additional inventory was due to "store openings and expanded product assortments," as well as "lower-than-expected sales growth."

While expansion is an excellent reason for a company to build up its inventory, declining sales are bad news, and an inventory buildup may ultimately cost Tiffany big bucks. With all the worldwide expansion the company is undertaking, costs and inventories probably won't be cut to more sustainable levels anytime soon. This may give investors more to complain about in future earnings reports, but it will also help Tiffany in the long run.

Along came Tiffany
Although Tiffany had a tough quarter, the company still has a lot of things going for it. For instance, Tiffany's dividend is one of its strongest attractions. In 2001. Tiffany distributed an annual dividend of $0.16; today that dividend has grown to $1.28. As my fellow Fool Sean Williams notes in his article, this equates to a "700% increase over 11 years, or 20.8% annually!" The company's payout ratio is 34%, which is higher than the industry average of 24%, small enough to remain sustainable, and still capable of growing.

Although Tiffany can rely on its dividend to attract income investors' attention, the company offers quite the growth story, too. One factor that may help the company recover is its exposure to emerging markets. Tiffany's management noted in the earnings call that sales in the Asia-Pacific region (i.e., China and Australia) rose 17%, with a 10% growth in same-store sales. Meanwhile, sales in Japan rose 15%, with a same-store sales growth of 12%.

Compare this with a rise in European sales of only 3% with no same-store sales growth, and you understand why, when Tiffany opens an additional 20 stores by the end of the year, only two will be located in Europe.

There's something about Tiffany

Tiffany shines brighter than its competitors in the luxury-goods space.

Source: Fool.com.

The company still has a fantastic dividend compared with Coach and Michael Kors, and with a P/E ratio of only 15, Tiffany is cheaper than its competitors. If Tiffany can gain traction in emerging markets, the company can very easily recover from its current lows and will be well positioned in case of a recession.

Tiffany hasn't had much luck these past few quarters, but the company remains strong. Poor earnings reports have brought the stock down, leaving share prices just above 52-week lows. Investors would be smart to take advantage of this buying opportunity and purchase shares of Tiffany at bargain prices.

Tiffany is a great company, but it's definitely not the only consumer-goods company that investors can make huge profits with. If you want terrific companies with low exposure to the craziness that is called Europe, check out The Motley Fool's free report about the 3 American Companies Set to Dominate the World.

The article Why This Jeweler Hasn't Lost Its Luster originally appeared on Fool.com.

Fool contributorMark Reethholds no financial positions in any of the stocks mentioned above, but he would look great in a new set of diamond earrings. Follow him on Twitter,@ChristmasReeth. The Motley Fool owns shares of Tiffany.Motley Fool newsletter serviceshave recommended buying shares of Coach and shorting Tiffany. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policy.

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