{"id":25690,"date":"2011-11-30T13:30:28","date_gmt":"2011-11-30T18:30:28","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2011\/11\/30\/tiffany-wal-mart-and-the-two-americas-part-ii\/"},"modified":"2011-11-30T13:30:28","modified_gmt":"2011-11-30T18:30:28","slug":"tiffany-wal-mart-and-the-two-americas-part-ii","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/11\/30\/tiffany-wal-mart-and-the-two-americas-part-ii\/","title":{"rendered":"Tiffany, Wal-Mart and the Two Americas, Part II"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

\"\"<\/a>At the end of \u00a0August I wrote about the diverging fortunes of the \u201cTwo Americas\u201d and used the relative performance of high-end jeweler Tiffany & Co (NYSE: $<\/span>TIF<\/a>)<\/strong> and the Everyman\u2019s store Wal-Mart (NYSE:$<\/span>WMT<\/a>).<\/strong> (See \u201cTiffany, Wal-Mart and the Two Americas<\/a>\u201d<\/strong>).\u00a0 While Tiffany had been enjoying massive sales and profits gains\u2014and this despite rising costs for the company\u2019s gold and diamond inputs\u2014Wal-Mart had posted nine consecutive quarters of declining domestic sales.\u00a0 Wal-Mart\u2019s core demographic\u2014middle and working-class Americans\u2014were suffering, while the global wealthy were doing just fine.<\/p>\n

While I was not bearish<\/em> on Wal-Mart (after all, if any retailer can survive a rough economy it would be the colossus from Bentonville), I recommended that investors carve out room in their portfolios for an allocation to the luxury goods sector.\u00a0 In addition to Tiffany, I offered Coach (NYSE: $<\/span>COH<\/a>)<\/strong> and LVMH Moet Hennessy Louis Vuitton ($<\/span>LVMUY.PK<\/a>)<\/strong> as suggestions.<\/p>\n

Alas, investors would have been better off just buying Wal-Mart.\u00a0 As you can see in Figure 1<\/strong>, Wal-Mart has been the best performing stock of the group.<\/p>\n

\"\"<\/a><\/p>\n

Figure 1: WMT, TIF, COH and LVMUY<\/p>\n<\/div>\n

My, what a difference three months can make.\u00a0 Wal-Mart finally broke its chain of declining quarters when it announced earnings earlier this month, and Tiffany issued a disappointing outlook on Tuesday that sent its shares down more than 11 percent intraday.\u00a0 The entire luxury sector fell in sympathy on fears that the Eurozone crisis would sap demand for expensive baubles and trinkets.<\/p>\n

So are investors right to be concerned?\u00a0 Has Europe killed the bull market in bling?<\/em><\/p>\n

If Tiffany\u2019s earnings release is any indication, the answer is an emphatic \u201cno.\u201d<\/p>\n

Sales were up 21 percent and earnings per share up a whopping 63 percent for the quarter ended October 31.\u00a0 Sales in the Americas were up 17 percent, and\u2014importantly\u2014sales in Asia were up 44 percent on strong demand from China.\u00a0 <\/strong>Even in Europe, the epicenter of the crisis, same-store sales were up a respectable 6 percent after adjusting for currency moves.<\/p>\n

Patrick McGuiness, Tiffany\u2019s CFO, said in the conference call that fourth-quarter sales were \u201cmeeting expectations\u201d but that he was \u201ccertainly not implying that Tiffany will be completely insulated\u201d from the economic shockwaves emanating from Europe.\u00a0 Analysts had expected fourth quarter earnings of $1.63 per share, but McGuiness indicated that earnings would likely be 5 cents lower at $1.58.<\/p>\n

It\u2019s hard to look at these numbers and see justification for an 11 percent correction, but such is life in marketland.\u00a0 Markets are forward looking, and when too much optimism is baked into the stock price disappointments like these happen.\u00a0 On the flip side, when too much pessimism is baked into prices, even trivially good news can send a stock\u2019s price soaring.\u00a0 Consider Research in Motion\u2019s (Nasdaq: $<\/span>RIMM<\/a>)<\/strong> announcement Tuesday that it would open its corporate networks to iPhones and Android phones; shares shot up by more than 8 percent\u00a0 before backing off slightly.<\/p>\n

The luxury sector is a long-term macro play on the rise of the nouveau riche in emerging markets<\/strong>\u2014again, note the 44 percent rise in Tiffany Asian sales last quarter.\u00a0 China alone already accounts for 10-20 percent of all global luxury sales (estimates vary by market study), and emerging market as a group account for nearly half.\u00a0 These percentages will only increase with time, and European crisis or not this trend isn\u2019t going to change.<\/p>\n

That said, luxury stocks are volatile and investors should expect a roller coaster ride until there is some sort of definitive resolution in Europe and the system is stabilized.\u00a0 A recession in Europe due to tighter credit is not the end of the world.\u00a0 Recessions come and go, and life goes on (as do luxury sales).\u00a0 The disorderly breakup of the Eurozone is a very different story, however.\u00a0 As we saw in 2008, even the rich snap their wallets shut when market conditions get bad enough.<\/p>\n

Cooler heads will prevail.\u00a0 When confronted with the possibility of European disintegration, German chancellor Angela Merkel will drop her objections and allow the European Central Bank to provide whatever liquidity is needed to stabilize the Italian bond market.\u00a0 But if her past actions are any guide, she will take it to the brink.\u00a0 So in the meantime, expect the market to be choppy as investors try to handicap the odds of a deal.<\/p>\n

My advice to investors in the weeks ahead is to buy on the dips.\u00a0 Use the chaos in Europe as an opportunity to buy shares of profitable, conservatively-financed luxury names like Tiffany, Coach and LVMH on the cheap.\u00a0 And don\u2019t be surprised if Tiffany\u2019s earnings next quarter end up beating estimates.<\/p>\n

If you liked this article by Sizemore Insights<\/em>, you\u2019d probably enjoy The Sizemore Investment Letter<\/em>, our premium members-only newsletter. Click here<\/a><\/strong> for more information.<\/p>\n","protected":false},"excerpt":{"rendered":"

By The Sizemore Letter At the end of \u00a0August I wrote about the diverging fortunes of the \u201cTwo Americas\u201d and used the relative performance of high-end jeweler Tiffany & Co (NYSE: $TIF) and the Everyman\u2019s store Wal-Mart (NYSE:$WMT). (See \u201cTiffany, Wal-Mart and the Two Americas\u201d).\u00a0 While Tiffany had been enjoying massive sales and profits gains\u2014and … <\/p>\n

Continue reading “Tiffany, Wal-Mart and the Two Americas, Part II”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-25690","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/25690","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=25690"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/25690\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=25690"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=25690"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=25690"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}