Pat McKeough responded recently to Member of the Inner Circle who asked about the shares of one of the world’s most famous luxury brands. Tiffany & Co. has been discerning in the management of its well-known products, controlling expenses and taking advantage of lower diamond costs and the growing taste for fashion jewelry. While international sales were sluggish in the most recent quarter, the company benefits from its expanding presence in the rich Asia/Pacific market. Tiffany also raised its dividend with the July payment, for a yield of 2.3%.

Q: Pat: I`m thinking of buying shares of Tiffany & Co. Your thoughts, please.

A: TIFFANY & CO. (symbol TIF on New York; www.tiffany.com) is a leading international retailer, designer, manufacturer and distributor of fine jewelry and gift items. These include watches, clocks, sterling silverware, china, crystal, stationery and fragrances.

As of April 30, 2017, the New York City-based company operated 310 stores (124 in the Americas, 84 in Asia-Pacific, 54 in Japan, 43 in Europe, and five in the UAE), compared to 308 stores a year earlier (124 in the Americas, 81 in Asia-Pacific, 55 in Japan, 43 in Europe, and five in the UAE). It also sells its products through its websites.

In the three months ended April 30, 2017, Tiffany’s revenue rose slightly, to $899.6 million from $891.3 million. Earnings rose 6.2%, to $92.9 million, or $0.75 a share, from $87.5 million, or $0.69 a share.

Tiffany continues to benefit from good expense controls, lower input costs, in particular diamond prices, and a consumer shift toward fashion jewelry. (Fashion jewelry primarily consists of non-gemstone gold and silver jewelry and typically offers much-higher profit margins than traditional diamond products.) Those pluses offset challenging sales conditions in the quarter, with global same-store sales falling 3% from a year earlier. In particular, tourist spending in the U.S. and Japan remained slow, and the overall economy in Europe was sluggish.

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The company’s balance sheet is sound: it holds cash of $960.0 million, or $7.07 a share. Its long-term debt of $880.5 million is just 8% of its $11.0 billion market cap.

With the July 2017 payment, Tiffany raised its quarterly dividend by 11.1%, to $0.50 from $0.45. The shares now yield 2.3%.

The company’s outlook is positive: its shift to the popular fashion jewelry category continues to pay off; the global economy is improving; a decline in tourism in the U.S. appears to have levelled off, which should stabilize customer traffic at Tiffany’s flagship location in New York City; and the European economy (with the exception of the U.K.) seems to be gaining momentum.

The company has now hired the former head of youth fashion-label Diesel as its new chief executive officer. Alessandro Bogliolo will focus on attracting younger consumers with new designs and online shopping.

Tiffany also continues to make inroads in the attractive Asia/Pacific region, where its brand has a strong luxury reputation, and where consumer spending, especially in China, remains strong.

Inner Circle recommendation: Tiffany & Co. is okay to hold.

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