Is Tiffany's Still a Jewel for Investors?

Tiffany's

reported Q3 earnings today, beating analyst estimates with an EPS of $0.70 vs $0.61 estimate. The company also posted sales of $821.80M vs $803.80M estimate. However, investors were focused more on the company's guidance. The company guided Q4 EPS to a range of $1.48 - $1.58 vs a $1.63 est. In the earnings conference call, CEO Michael Kowalski said that sales in the UK declined modestly in the quarter. He also warned that the cost of making higher priced jewelry hurt the company's margins. Tiffany's had been known for its ability to weather the recession without missing a beat. The company slashed prices of its discretionary, higher end pieces while raising prices on more essential jewelry, such as engagement rings. The company also took more direct control of its manufacturing processes, ensuring that it had more flexibility and ability to avoid volatility in foreign markets. In 2010, Tiffany manufactured nearly 60% of its merchandise, compared to about 40% in 2007. The company took other measures to cut costs. Most importantly, Tiffany slashed spending on advertising, relying more on its heritage and signature Tiffany blue boxes to drive interest in its products. "Notwithstanding the global economic challenges over the past year, the decisive measures we took to control spending were successful, and, combined with the considerable and growing international awareness of Tiffany & Co. brand, helped us to generate strong earnings and free cash flow," said Kowalski. Despite a strong run off its recession lows, investors are weary of rising margins and conservative guidance for the holiday season, as the stock's price dropped nearly 10% this morning. "The worry is that there is a turn in the margin and slowing down the pace of sales growth," said Morningstar analyst Paul Swinand. Swinand appeared on an interview with CNBC right before this article went to press. He believes that Tiffany has many long term competitive advantages, and will take advantage of lower diamond prices in the winter quarter. He also believes that the company's long inventory cycles (as long as 2 years for some products) could cause an inflection in gross margins. While Tiffany's share price fell significantly, it may still be a risky trade at these levels, given the company's weak guidance and current margin levels. However, the company still maintains a strong presence with wealthy American buyers, and its signature blue box is still something that many women strive to attain. While the company's outlook may not be as rosy as it was yesterday, the company's stranglehold on the jewelry industry remains as strong as ever.

If you believe that Tiffany's outlook is just a temporary setback, consider these trades:

If you believe that Tiffany will not be able to post a strong holiday quarter, or that weak margins will take a toll on revenue growth, consider these trades: