Tiffany & Co. (TIF) reported earnings Friday before the market opened.  The results were not pretty which should not come as a surprise given the state of the US consumer (and to a large degree the global consumer).  Sales for the quarter ending April 30 were down 22% to $523.1 million and earnings cane in at $0.20 per share compared to $0.60 last year.  While the earnings were in line with expectations, sales came in a bit below the consensus figures.

Weakness was most pronounced in the Americas region where total sales were down 31% year over year, and comparable store sales were down 33%.  Europe on the other hand actually showed some relatively good performance.  Actual European sales were up 18% although currency issues caused some problems.  A stronger dollar caused European sales to come in with an 8% loss when converted to US currency.  The strength in Europe was largely due to new store openings.

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One issue that may be concerning to investors is the inventory balance.  Despite lower sales, inventory levels were 6% higher than last year.  Management stated that obviously a portion of this growth is due to new store openings, but a lower level of sales is likely more to blame for the increase.  With input costs rising, it will become more difficult for the company to hold high levels of inventories as they wait for the economic picture to turn.

Tiffany is sitting on a strong balance sheet primarily due to its recent offering of $400 million in debt.  While some of this capital was used to retire old debt, a good bit of it is left for “general corporate purposes.”  This capital will likely help finance new store openings as management continues to pursue a relatively aggressive growth strategy.  This strategy could pay off huge if the economic picture turns quickly and TIF has a much wider footprint of stores.  However, the gamble is pretty dangerous as a prolonged period of weak consumer spending will leave Tiffany with costly non-performing locations.

Another aggressive move (or non-move) by the company has been to stick with their upscale pricing and product offering.   While some competitors have begun offering lower cost items, Tiffany believes that this strategy would cheapen their brand and cause more pain in the long run.  Wealthy clients could potentially turn their nose up if the Tiffany brand is affordable to a larger portion of the population.

Earlier this month, Tiffany bought the handbag brand Lambertson Truex.  The move could potentially diversify revnue from the largely jewelry oriented offering.  The move could certainly be beneficial in adding incremental revenue, but it remains to be seen whether this could backfire as it deviates away from the company’s niche offerings.

Currently the stock is trading in the high 20’s and like many retail stocks it is up significantly from the March lows.  Compared to 2010 (January) expectations, the stock holds a multiple near 18 which is reasonable for a growing retail operation.  However, with the future growth of the company somewhat in question (I don’t think they will fail, but growth levels will likely be lower than some expectations), the stock seems to be a bit over-priced.

With the market trading in a relatively range-bound level after a sharp advance this spring, the potential for a quick decline could be dangerous for TIF shareholders.  If you are not involved in the stock right now, it could be a great short opportunity to offset long exposure in other areas.  Despite catering to some of the most wealthy customers around the world, Tiffany is not immune to the global recession.

FD: Author does not have a position in TIF
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