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Tiffany Up, Zale in Red

Tiffany and Zale jewelers head in opposite directions in quarter.

Tiffany’s profits soared 99.6 percent in the quarter.

Diamonds might be a girl’s best friend, but in the second quarter they were Tiffany & Co.’s, too, as the luxury jewelry retailer’s profits soared 99.6 percent.

This story first appeared in the August 29, 2008 issue of WWD.  Subscribe Today.

Tiffany’s increasingly global footprint, demonstrated by strong diamond sales in Asia and Europe, helped the company best Wall Street’s estimates and raise its full-year guidance. The results lifted the firm’s stock $4.24, or 10.7 percent, to $43.85 in New York Stock Exchange trading.

The New York-based firm reported net income of $80.8 million, or 63 cents a diluted share, compared with year-ago profits of $40.5 million, or 29 cents, which included a $26.2 million loss from discontinued operations. Revenues for the three months ended July 31 rose 10.5 percent to $732.4 million from $662.6 million. Analysts anticipated EPS of 55 cents on net sales of $720.6 million, according to Yahoo Finance.

Excluding the effects of currency fluctuation, net sales rose 7 percent and comparable-store sales declined 1 percent.

“Tiffany’s global retail operations once again demonstrated the ability to generate strong operating earnings growth despite weakness in certain individual country markets,” said Michael Kowalski, chairman and chief executive officer, adding sales in the Americas rose 3 percent as the Asia-Pacific region was up 17 percent and European turnover jumped 35 percent.

U.S. comparable-store sales declined 4 percent in the quarter, but the retailer said recently opened stores in critical areas offset some of the poorer-performing units. Tourists drove U.S. sales, giving the New York flagship a 5 percent bounce, according to the company.

But it was abroad where the big money poured in for Tiffany.

The firm’s continued expansion throughout Asia and Europe has, and should, “contribute to increasingly consistent and resilient long-term earnings growth,” Kowalski said. The company boasted that it’s growing the worldwide store base by roughly 13 percent this year.

In Asia-Pacific, store expansion was led by South Korea, Australia and China. Overall, comps jumped 13 percent, and the company said it is planning to open 11 new stores in the region.

“Certain large pieces of Tiffany’s business are decelerating,” said Stifel, Nicolaus & Co. retail analyst David Schick, citing Japan, where comps declined 7 percent in a weak economy. But he added “there’s a classic element” to what Tiffany does that helps the retailer continue to hold a strong position around the world.

At the end of the second quarter, the retailer operated 196 stores in 19 countries, including 82 in the Americas, 95 in Asia-Pacific and 19 in Europe.

“We have the balance sheet strength to not only weather the adverse effects from short-term business cycles, but to thrive by increasing our market share against local competitors,” said executive vice president and chief financial officer James Fernandez. “We are taking advantage of adverse stock market conditions by actively repurchasing our shares.”

The company said it spent $74 million to repurchase 1.7 million shares at an average cost of $42.75 a share, leaving it with $492 million of remaining authorization in the current program.

But not everyone is as confident. Banc of America Securities analyst Dana Cohen said that while the company has been able to diversify its business into growing markets, reduce nonperforming divisions, and improve core assortments, issues remain.

With the anticipation of fewer international flight seats available in the second half, tourism will be an issue for Tiffany, according to Cohen. Advantageous currency translation, which has been boosting the retailer’s earnings by about 5 percent, will also begin to moderate, she said, as the dollar continues to rally.

Pali Capital retail analyst Stacey Widlitz was a bit more optimistic.

“There’s consumer weakness, but the good news for Tiffany is that they’re becoming a global brand,” she said.

Tiffany also had help from a greater concentration of high-end merchandise at higher price points, Widlitz said.

Quarterly and first-half gross margin increased to 57.8 and 57.4 percent, respectively, from 56.1 percent in both periods, aided by favorable changes in a geographic and product sales mix, as well as sales leverage on fixed costs. Net inventories at the end of the quarter were up 10.1 percent, due in part to store expansion.

First-half profits shot up 53.5 percent to $145.2 million, or $1.13 a diluted share, from $94.5 million, or 86 cents a share, a year ago. Net sales rose 11.3 percent to $1.4 billion from $1.26 billion.

Tiffany increased its full-year earnings guidance slightly to a range of $2.82 to $2.92 a diluted share, versus its prior forecast of $2.80 to $2.90 a share. The company said this expectation includes worldwide sales growth of approximately 9 percent based on continued strong growth in Europe and Asia-Pacific, and a return to growth in U.S. same-store sales in the fourth quarter due to an easier year-over-year comparison. Full-year operating margin is also expected to increase slightly over last year, according to the company.

Analysts are looking for earnings of $2.83 a share on revenues of $3.27 billion.