Steve Regan sends: On January 11, Tiffany & Co. (TIF) reported that holiday sales results were mixed, citing a 2% decline in domestic comparable store sales. Overall, revenue increased 8% year-over-year for the period November 1 – December 31, boosted by 6% growth in comparable store sales overseas. Still, less than shiny results in the US and Japan gave bearish investors enough reason for the stock to open $2.37 off the previous day’s close of $40.32. Shares found a new 52-week low on January 14 at $32.84, a 19% discount to the price before the announcement, as uncertainties of future earnings sunk in. The realization that the highly speculated spending slow-down had reached the luxury market sent ripples through Wall Street, and other consumer goods stocks faced heavy selloffs.

James Cullen has been writing about the opportunities to buy best of breed retail stocks as fears of economic downturn become more immediate. A steep drop in the Fed Funds rate one week before the scheduled policy meeting may do little but ease fears in the short-term. Yet in the long term, aggressive rate cutting coupled with Secretary Paulson’s stimulus package could help accelerate an eventual rebound in consumer spending. Some quality beaten-up retail stocks may be poised for robust returns.

As evidenced by their recent announcement, the luxury jeweler is not immune to the consumer slowdown. High-end consumers do tighten their wallets in recession, but for a much shorter period of time than average. Tiffany has been successfully rediscovering its high-end roots over the past few years. Gains from heightened average purchases are working nicely against losses from slower traffic in stores. Many other aspects of the retailer’s business model make it a particularly attractive play in the current environment. Chairman and CEO Michael Kowalski said that Tiffany “saw healthy sales growth in engagement jewelry and silver jewelry categories” – two key areas for the firm. Engagement and wedding pieces make up 25% of sales, according to a report published by Best Independent Research in December. This sizeable portion of their operations may not be as sensitive to economic cycles, particularly considering the high luxury associated with Tiffany. Also according to Best Independent Research, silver products yield the highest margins for the jeweler. As gold prices soar and substantially tighten profits for competitors, Tiffany is successfully focusing on staple silver lines. The company plans to distribute only high-margin silver products through 170 new stores under the name “Collections,” in order to protect the rarity of the Tiffany brand.

The target growth of 15% for 2007 is still expected to be exceeded, outpacing a healthy average of 11% growth since 2002. Still, the market is discounting the jeweler to its high end specialty retail peers, fearing that growth will not continue. Yet with vast opportunities overseas and a strong financial position, it is unlikely that Tiffany deserves the more than 35% discount off its 52-week high last October. Even with potential for global recession (which has been heavily priced into the market so far this year), long-term future growth opportunities abroad comprise most of the value. Particularly in the Asia-Pacific region, where comparable store sales climbed 29% for the holiday period, Tiffany’s plan to expand presence through new product lines and retail locations has great potential. Furthermore, a $321 million share buyback in the fourth quarter expresses management’s confidence, but more importantly it points to the firm’s strong balance sheet. A habit of selling-off slow-growth assets – and often leasing them back – to finance new stores in growing markets has fueled performance and allowed for a strong cash position.

As warning signs of impending global recession become more frequent, I do not see investors rushing to buy the luxury global retailer who earns more than 50% of revenues overseas. In fact further price contraction in the next three to six months is highly probable, as uncertainty over critical Valentine’s Day sales coincides with economic turmoil. Still if the slowdown primarily occurs in the US, this strong company is unlikely to experience the same level of turmoil that other retailers are suffering. Poised for long-term global growth, backed by a strong brand, and a customer base primarily out of touch with cyclical layoffs, Tiffany & Co.’s valuation may be too sparkling to ignore.

Late in March, the company will report full year results for the year ended January 31. At that point, I will publish a full valuation and analysis of Tiffany & Co.

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