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Tiffany & Co. (NYSE: TIF) reported its second quarter numbers on Aug. 28 -- revenue rose 12% annually to $1.08 billion, beating estimates by $40 million and representing the company's second straight quarter of double-digit sales growth.
Comparable-store sales grew 8%, compared to 10% growth in the first quarter and a 2% decline in the year-ago period. On the bottom line, its net income rose 26% to $145 million, or $1.17 per share, which beat estimates by $0.16. However, a big part of the beat was attributed to a lower tax rate of 20.5%, compared to 33.3% in the prior year.
Image source: Tiffany & Co.
Tiffany expects its sales to rise by the high single digits for the full year, and for its comps to grow in the mid-to-high single digits. Those forecasts compare favorably to its 4% sales growth and flat comps in 2017. It expects its earnings per share to grow 13% to 16%.
Tiffany's growth strategy
Tiffany's recent growth can be attributed to the execution of six strategic priorities introduced by CEO Alessandro Bogliolo, who took the top job last October.
These priorities include improving the company's brand message, renewing its product line, enhancing its omnichannel experiences, increasing operating efficiencies, strengthening Tiffany's competitive position, and making the company a more "aligned and agile" organization.
Tiffany's "Believe in Dreams" advertising campaign, which updates classic Tiffany designs with Paper Flowers products for younger customers, showcases those strategies. The company launched the Paper Flowers collection in North America in May, and recently expanded it to overseas markets. Bogliolo also attributed recent growth to its "Believe in Love" campaign, which highlights racial and sexual diversity.
Tiffany is also expanding its offline and online ecosystems. It increased its store count by 8% annually to 320 locations during the quarter, and introduced the "Make It My Tiffany" program at over 100 locations, which lets customers engrave custom designs on jewelry and charms.
Image source: Tiffany & Co.
The company recently updated the appearance of its Chicago Michigan Avenue store, and it plans to refresh the look of all its North American stores by this November. Renovations to the flagship store in Manhattan are slated for some time between 2019 and 2021.
On the digital front, Tiffany partnered with Alibaba, the biggest e-commerce player in China, to sell its products on Tmall's Luxury Pavilion platform for higher-end goods. It also previously launched digital pop-up stores on Tencent's WeChat, the most popular mobile messaging app in China. Those moves complement Tiffany's brick-and-mortar base of 34 retail locations across China.
How fast is Tiffany growing?
Bogliolo's growth strategies are clearly paying off, especially in the Americas and Asia. Here's how Tiffany's businesses fared by region over the past five quarters.
Year-over-year sales growth by region. Source: Tiffany quarterly reports.
While those figures are solid, they could also be peaking. If Tiffany's sales growth decelerates in multiple regions, its margins will contract as it spends more money on the six strategic priorities. Tiffany's gross margin expanded 150 basis points annually to 64% last quarter thanks to lower wholesale sales of diamonds, favorable product input costs, and leverage on fixed costs.
However, the company's operating margin declined 150 basis points to 17.8% due to its new growth initiatives. Furthermore, it expects its full-year operating margin to decline year-over-year due to a "significant" increase in sales, general, and administrative expenses.
On the bright side, Tiffany still plans to buoy its earnings growth with a fresh $1 billion buyback plan it announced earlier this year. It also pays a decent forward dividend yield of 1.7%, and it's hiked that payout for eight straight years.
Under Bogliolo, Tiffany has mounted a remarkable comeback within a short time. But at nearly $125 per share as of this writing, Tiffany's stock trades at 26x forward earnings -- high relative to its growth potential. Sales growth will likely slow over the next few quarters and paired with reduced profitability, it's hard to justify buying the stock at these levels.
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