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Wall Street, California | STOCK EXCHANGE

Tiffany's Prospects in a Downturn; Bigger Internet Player May Hook Razorfish

Stock Exchange lets readers listen in as Times staff writers James Peltz and Michael Hiltzik debate merits of individual stocks.

May 09, 2000

Tiffany (TIF)

(Jim: Buy)

(Mike: Don't buy)

*

Jim: I figure you're as qualified as anyone to discuss Tiffany, Mike, given all the time you probably spend there picking out trinkets for your wife, right?

Mike: Well, I will admit getting my hands on a few of its powder-blue gift boxes.

Jim: But did the gifts inside come from Tiffany's? Just kidding. Anyway, I love how Tiffany always makes a point of noting that some of their items still cost $50 or less, you know, as if that will draw you into the store and then you'll decide, what the heck, I'll get these $50,000 earrings as long as I'm here.

Mike: Right, but there's something to remember about Tiffany products at all price levels--this store has gross profit margins that will never be mistaken for those of a supermarket.

Jim: Gross as in obscene?

Mike: That's one way of looking at it. I'm talking about the difference between what Tiffany pays for, say, glassware and jewelry and what it sells it for. The markup. It's stratospheric, unlike the supermarkets', where, as we know, they're lucky to earn a penny or two on each dollar of sales.

Jim: Let's face it, though, there's Tiffany and there's everyone else. Fact is, this company and its brand have been synonymous with jewelry and other fine gifts for decades, and its stock has been a jewel too.

Mike: No question about it.

Jim: Tiffany's stock has soared more than ninefold since 1995, trouncing the performance of the general stock market. Clearly a big reason for that is the market itself--which has created lots of additional wealth--and the strong U.S. economy.

Mike: You can also credit the inherent imbalance in this economy, in which essentially the rich get richer at a much faster pace than middle- and lower-income people.

Jim: Wait a minute. Are we going to discuss socioeconomics or this stock?

Mike: Well, I spent some time in college delving into Marxian economics and, class warfare aside, no one will say that Marx wasn't a razor-sharp analyst of the capitalist system. Not that I'm saying there's anything wrong with the system.

Jim: Whatever. I'd buy this stock.

Mike: Even now?

Jim: Especially now. First, it's a well-managed operation whose top brass hasn't diluted its sheen by over-expanding. Tiffany opens a few stores each year, but still has only about 135 worldwide, which generate about $1.5 billion in sales.

Mike: What else?

Jim: Earnings drive stock prices, and look at Tiffany. In its fiscal year ended Jan. 31, its profit surged 62% from the prior year, and sales were up a robust 25%.

Mike: Which, of course, included a very healthy holiday shopping season.

Jim: Right, but it doesn't stop there. The other day Tiffany said its fiscal first-quarter earnings . . .

Mike: Were also very strong.

Jim: Yes, and will handily beat Wall Street's estimates yet again.

Mike: But I look at all those numbers and I wonder, how are they going to top that?

Jim: You could have said the same thing about Wal-Mart a decade ago, and look at the gains you would have missed.

Mike: True, but Tiffany is not Wal-Mart. Tiffany is not a place you seek out for shelter when the economy goes south. So, though I second the motion that this is an admirable, well-run company, I wonder how long everything will stay in place to keep Tiffany's sales growth perking along at this rate.

Jim: You have your doubts.

Mike: The party has to end sometime. I'm not saying the economy is going to crash, but certainly everybody from Alan Greenspan on down is determined to slow this economic train. And when that happens, it's not the super-rich who are going to stop shopping at Tiffany's--they will always be with us--but the less affluent, who can afford to shop there at the moment.

Jim: That is a fear. Look what happened at the start of the year. Greenspan's Federal Reserve kept nudging interest rates higher, and the stock market nose dived, wiping out a lot of wealth. And down went Tiffany's stock. It's still off 23% this year, to around $70 a share. But Tiffany's fiscal first quarter showed that the company is still performing nicely, and I see nothing on the horizon to change that.

Mike: I'm not so sure. A lot of Tiffany shoppers are feeling flush right now, but another change in the economic picture could make them feel a lot less flush--and very quickly. Plus, a year from now, Tiffany will have to top the incredible numbers it's just posted to keep the stock moving higher. That won't be easy.

Jim: No, but Tiffany's drop this year means the stock sells for about 28 times its expected 2000 earnings per share. That's not cheap for a retailer, but I'm confident Tiffany will generate the growth to justify that multiple and that the economic and stock market trends won't get so dire as to foul things up.

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