Posted on 11/10/2003 8:56:24 AM PST by Tumbleweed_Connection
In the movie "Breakfast at Tiffany's," lead character Holly Golightly cheered herself up by window shopping at Tiffany & Co.'s (TIF) Manhattan store. A couple of years ago, the firm itself could have used a little cheering up. Sales and profit fell in fiscal 2001 and rose only slightly the next year. The main problem was demand. In a year racked by terror and recession, there just wasn't much of it for the kind of high-end merchandise Tiffany carries. But like a lot of retailers, Tiffany has recently bounced back, thanks in part to a healthier economy. "In the first half of 2003, people started to spend a little more per transaction, which is a sign of improving consumer confidence," said Tiffany spokesman Mark Aaron. Macro trends don't tell the whole story, however. The company is also reaping the benefits of internal efforts to cut costs, improve its infrastructure and diversify its revenue stream. In March, Tiffany got the first shipments of rough diamonds from the Diavik diamond mine, in which it has a stake. The company invested in the mine four years ago when it bought a 14.7% equity interest in Canada's Aber Diamond Corp., a 40% owner of the mine. As a part of the deal, Tiffany agreed to buy a minimum of $50 million in diamonds a year for 10 years, subject to its quality standards. To assure good quality control, Tiffany last month opened a diamond cutting and polishing center near the mine. "With the investment in the diamond mine, they have control over a major source of diamonds," said analyst Joan Storms of Wedbush Morgan Securities. "It's also a gross margin advantage (because) they've contracted to buy a certain amount of the diamonds at a certain cost." By doing its own diamond sourcing, Tiffany isn't subject to the swings in supply and demand in the diamond market. The agreement should start having an impact on Tiffany's numbers during the current quarter, when the diamonds start hitting Tiffany stores, says analyst Anne-Marie Peterson of Thomas Weisel Partners LLC. Tiffany has also increased its internal production of jewelry. In 2001 it opened a gold and silver making facility in Rhode Island. The company recently opened a second distribution center in New Jersey that roughly doubled Tiffany's distribution capacity. "(By) gradually bringing (more) production in house, it can do better (on price) than buying from mom and pop suppliers," Peterson said. As it's shored up its internal resources, Tiffany has also pursued external avenues of growth. Last year it added a specialty retail venue with the purchase of Little Switzerland Inc., a 21-store chain of duty-free jewelry shops that serves tourists in the Caribbean and the Florida Keys. "There's interesting growth potential for tourism in the Caribbean, and (we) think Little Switzerland is well positioned to (tap into that)," Aaron said. The chain does need some improving, however. For one thing, it's losing money, Aaron says. To help turn things around, Tiffany is moving Little Switzerland into new markets in the western Caribbean. For now it's mostly in the eastern Caribbean. On another front, Tiffany is stepping up efforts to expand its overall share of jewelry designs and styles. In March it invested in Temple St. Clair, a jewelry designer that distributes to high-end stores such as Bergdorf Goodman in New York. Temple St. Clair's designs are more contemporary and fashion-forward than Tiffany's more classical designs, Aaron says. Tiffany invested in Temple St. Clair to help it set up its own retail business. It opened one store under the designer's name in Costa Mesa, Calif., in September, and is set to open another in Short Hills, N.J., this month. Analyst Storms sees the stand-alone Temple St. Clair stores as a test. Over time, Tiffany might sell Temple St. Clair designs in Little Switzerland stores, she says. "My sense is if they acquired a couple of hallmark brands and increased the distribution through other high-quality retailers and Little Switzerland . . . they could help build them," Storms said. Still, the company's main growth vehicle remains its core Tiffany chain. In an effort to increase the number of those stores, Tiffany last year launched an initiative to open smaller, less expensive locations. Aaron figures the firm has potential for 80 to 100 U.S. stores. It currently has 50. The smaller stores offer mostly jewelry, watches and accessories and minimal table-top items such as dinnerware. The reason: Jewelry accounts for about 80% of sales, so it's showcasing the most profitable items, Aaron says. Financially, Tiffany continues to rebound from its slump a couple years ago. Fiscal second-quarter earnings rose 27% from a year ago to 28 cents a share. Sales were up 18% to $442.5 million. Tiffany is set to report third-quarter earnings on Nov. 13. First Call analysts see full-year profit rising 13% to $1.39 a share.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.