Is Tiffany Still a Match Made in Heaven for Investors?

Tiffany TIF reported today that it planned to cut its 2012 guidance, as weak holiday sales and restrained spending by consumers threatened the company's current outlook. The company estimated that EPS would come in at $3.60-3.65 vs. a previous forecast of $3.70-3.80. North American sales rose 4% to $503 million while comparable sales jumped 2%. “We are in the preliminary stages of financial planning for 2012 and will provide more detailed guidance when we report our full year financial results in March,” stated CEO Michael Kowalski. “We remain confident of our ability to expand our worldwide presence, to serve the global demand for Tiffany products and to achieve a solid rate of annual growth in sales and earnings in 2012 despite economic challenges.” Tiffany has posted very strong numbers over the past year, as customers have returned to the market after holding back during the recession. However, many of the company's sales come from Europe and could be hampered given the country's economic uncertainties. According to a Bloomberg report, no U.S. retailer has more European exposure. The company also has a great deal of Asian exposure, could negatively affect Tiffany given the slowing of Chinese growth. “You are seeing more volatility in the financial markets,” stated Stifel & Nicolaus analyst David Schick. “It's not confidence inspiring for bigger ticket spending. That tells you not to expect too much in the top line for Tiffany.” Tiffany has recently made changes in its business to bolster margins. The company lowered prices on its higher end offerings, while raising prices on jewelry like engagement rings, which have a lower elasticity of demand. Middle class customers have a strong demand for low end jewelry and engagement rings, because it allows them to buy the Tiffany brand. The company has also bought manufacturing of more of its products in house, as it directly produced 60% of its merchandise as of 2010, in contrast to a 40% figure in 2007. Tiffany has also looked to cut costs to boost the bottom line. The company has drastically slashed spending on advertising, relying on its tradition and signature blue boxes to drive consumer interest and demand. The company is also looking to take advantage of lower diamond prices to increase margins. The company's products also typically have long product cycles given the lack of innovation needed to sell more jewelry, and the company has relied on many traditional designs for its product offerings. Tiffany still remains a premier luxury brand in the minds of consumers. While the company still maintains many long term competitive advantages, it faces great economic challenges in the form of its European customers. While the company has posted spectacular quarterly results by beating analyst estimates over the past year, investors would be wise to exercise extreme caution in the coming year.