Zale Corp, a leading specialty retailer of diamonds and other jewelry products in North America, announced its 2Q12 results, with sales increasing 1.1% and strong Comparable Same Store Sale (SSS) of 2.8%. Its profit jumped up 43% due to an increase in revenues and lower expenses. The company has seen its revenues increase in the past quarters as efforts to raise prices, improve core inventory, and roll out of new branded products helped bolster its business.
3Q12 results
3Q12 total revenues increased 4% to $853 million, and on a constant-exchange basis increased 5%, along with a SSS increase of 1%. Lower sales were mainly due to the slow recovery in the economy, as well as challenging comparisons vs. last year when sales increased 21% and net income increased 52%.
Segment-wise performance can be seen from the adjacent chart. It’s important to note that the company is increasing its focus on expanding its international presence, mainly in Asia.
Margins were lower due to headwinds in precious metal and gemstone prices (gross margins declined 160bps to 54.4%) and higher store occupancy and marketing costs (selling, general and administrative margin de-levered 57bps to 40.6%). Management cited a sales mix favoring higher-priced, lower-than-expected sales of silver jewelry and difficulty in pricing (it was unable to increase prices due to consumer resistance) as the main reasons for margin pressure. As a result of the above, net income declined 30% to $63 million.
Inventories increased 11%, reflecting new store openings, expanded product assortments, and higher product acquisition costs.
$345 million in cash sufficiently covers its short term borrowings of $196 million by 1.8x. Furthermore, debt levels of $978 million remain acceptable, with a Debt/EBITDA ratio of 1.14x.
Conclusion
The factor that differentiates Tiffany from others is that it is the most respected and recognized brand names in jewelry. For this recognition and growth potential, the brand commands
a premium, and currently has a PE of 20.02.
Some catalysts for Tiffany & Co. (NYSE:TIF)’s are its revenue growth, an increased focus on emerging markets as it plans to increase its global square footage by 6% per year (vs its initial focus on US and Japan), expanding profit margins, and a strong financial position with reasonable debt levels. On the downside, Tiffany’s shares have increased only 3.2% in the past year, as compared with a 25% surge at Zale. Its performance also lagged the 15% gain of the S&P Retail Index during the same period. Furthermore, there remains mixed views on the luxury sector.
I would recommend a “HOLD” on the stock, but keep a watch for its upcoming 4Q results on March 22. The stock price may remain range bound as sales continue to underperform its competitors, and the probability of a profitability inflection may be seen only in 2013.
The article Is the Blue Box In the Red Again? originally appeared on Fool.com.
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