Jewelry retail has always been considered a healthy-return business, yet not all companies in this industry enjoy the same benefits. Pricing power is especially important for a successful business model in this sector, and hence, large companies such as Tiffany & Co (TIF, Financial) enjoy a wide economic moat. Smaller competitors, on the other hand, face hefty competition and have little room to improve margins. So let’s take a closer look at the specialty retailer, which has been in business for over 150 years.
Tiffany is well known for its self-designed and self-manufactured fine jewelry, which it sells globally. The specialty retailer provides customers with a wide varietye of products, ranging from engagement jewelry, to fine china, fashion accessories and fragrances. Although the firm makes around 50% of its revenue in North America, it is very active internationally through its more than 283 retail stores. Due to its under penetration of global markets, the company is now looking to expand its store base in China, while securing key locations in Europe. This global expansion is surely bound to be beneficial, as Tiffany’s strong brand enjoys worldwide recognition.
What Makes Tiffany Special?
Pricing. When it comes to attracting customers willing to spend large sums of money on quality products, Tiffany surely has the edge over competitors. A great brand image, superb store locations, along with the wide selection of products and designs, assures customers will not only come back for repeat business, but are willing to pay a price premium. The firm’s pricing power, along with its long history in the business, ensures a wide economic moat which competitors cannot dismantle easily. The consistently strong returns on invested capital (ROIC) give faith to this competitive advantage, which should drive growth even further in coming years.
Despite growing competition, especially from online-active retailers such as Blue Nile Inc. (NILE, Financial), Tiffany has been able to maintain very high sales without reducing prices. And, its territorial presence has grown continuously, with its store base expanding at around 7% annually over the past 20 years. This solid growth trajectory is not only impressive, but reassuring, as investors can profit from growth, without incurring in unnecessary risks.
Solid, Long-Term Growth
Returns on invested capital are currently at around 22.7%, which is higher than the industry average. Although rival Blue Nile offers comparatively much higher ROICs of 156%, the company founded in 1999 is not expected to obtain a large share of the jewelry market. Operating margins barely exceeding the 3% mark are indicative of Blue Nile’s lack of flexibility, especially when compared to Tiffany’s 18.4% margin. Hence, it is not surprising that EBITDA growth for the online retailer is at -6%, relative to Tiffany’s 13.3%. The long history behind the traditional jeweler’s growth trajectory is far more reassuring for investors, despite the short-term opportunities Blue Nile has to offer.
In terms of earnings per share, Tiffany also offers a more reasonable entry point for savvy investors. Currently trading at 25 times its trailing earnings, the specialty retailer is available at a price premium of 35.8%. Although this seems like a heft price tag, it is actually quite affordable compared to the whopping 192% price premium investors must take into account when purchasing Blue Nile shares. A long-term investment in Tiffany is thus the smarter move, since Blue Nile stocks have experienced heavy trading by short-term profit seekers. Also, Blue Nile is far less reliable in terms of generating solid ROICs over coming years. Hence, I feel very bullish regarding Tiffany, as does Steven Cohen, who recently increased his stake in the firm to 1.4 million shares.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.
Tiffany is well known for its self-designed and self-manufactured fine jewelry, which it sells globally. The specialty retailer provides customers with a wide varietye of products, ranging from engagement jewelry, to fine china, fashion accessories and fragrances. Although the firm makes around 50% of its revenue in North America, it is very active internationally through its more than 283 retail stores. Due to its under penetration of global markets, the company is now looking to expand its store base in China, while securing key locations in Europe. This global expansion is surely bound to be beneficial, as Tiffany’s strong brand enjoys worldwide recognition.
What Makes Tiffany Special?
Pricing. When it comes to attracting customers willing to spend large sums of money on quality products, Tiffany surely has the edge over competitors. A great brand image, superb store locations, along with the wide selection of products and designs, assures customers will not only come back for repeat business, but are willing to pay a price premium. The firm’s pricing power, along with its long history in the business, ensures a wide economic moat which competitors cannot dismantle easily. The consistently strong returns on invested capital (ROIC) give faith to this competitive advantage, which should drive growth even further in coming years.
Despite growing competition, especially from online-active retailers such as Blue Nile Inc. (NILE, Financial), Tiffany has been able to maintain very high sales without reducing prices. And, its territorial presence has grown continuously, with its store base expanding at around 7% annually over the past 20 years. This solid growth trajectory is not only impressive, but reassuring, as investors can profit from growth, without incurring in unnecessary risks.
Solid, Long-Term Growth
Returns on invested capital are currently at around 22.7%, which is higher than the industry average. Although rival Blue Nile offers comparatively much higher ROICs of 156%, the company founded in 1999 is not expected to obtain a large share of the jewelry market. Operating margins barely exceeding the 3% mark are indicative of Blue Nile’s lack of flexibility, especially when compared to Tiffany’s 18.4% margin. Hence, it is not surprising that EBITDA growth for the online retailer is at -6%, relative to Tiffany’s 13.3%. The long history behind the traditional jeweler’s growth trajectory is far more reassuring for investors, despite the short-term opportunities Blue Nile has to offer.
In terms of earnings per share, Tiffany also offers a more reasonable entry point for savvy investors. Currently trading at 25 times its trailing earnings, the specialty retailer is available at a price premium of 35.8%. Although this seems like a heft price tag, it is actually quite affordable compared to the whopping 192% price premium investors must take into account when purchasing Blue Nile shares. A long-term investment in Tiffany is thus the smarter move, since Blue Nile stocks have experienced heavy trading by short-term profit seekers. Also, Blue Nile is far less reliable in terms of generating solid ROICs over coming years. Hence, I feel very bullish regarding Tiffany, as does Steven Cohen, who recently increased his stake in the firm to 1.4 million shares.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.
