Tiffany’s Prospects in a Downturn; Bigger Internet Player May Hook Razorfish
Tiffany (TIF)
(Jim: Buy)
(Mike: Don’t buy)
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Jim: I figure you’re as qualified as anyone to discuss Tiffany, Mike, given all the time you probably spend there picking out trinkets for your wife, right?
Mike: Well, I will admit getting my hands on a few of its powder-blue gift boxes.
Jim: But did the gifts inside come from Tiffany’s? Just kidding. Anyway, I love how Tiffany always makes a point of noting that some of their items still cost $50 or less, you know, as if that will draw you into the store and then you’ll decide, what the heck, I’ll get these $50,000 earrings as long as I’m here.
Mike: Right, but there’s something to remember about Tiffany products at all price levels--this store has gross profit margins that will never be mistaken for those of a supermarket.
Jim: Gross as in obscene?
Mike: That’s one way of looking at it. I’m talking about the difference between what Tiffany pays for, say, glassware and jewelry and what it sells it for. The markup. It’s stratospheric, unlike the supermarkets’, where, as we know, they’re lucky to earn a penny or two on each dollar of sales.
Jim: Let’s face it, though, there’s Tiffany and there’s everyone else. Fact is, this company and its brand have been synonymous with jewelry and other fine gifts for decades, and its stock has been a jewel too.
Mike: No question about it.
Jim: Tiffany’s stock has soared more than ninefold since 1995, trouncing the performance of the general stock market. Clearly a big reason for that is the market itself--which has created lots of additional wealth--and the strong U.S. economy.
Mike: You can also credit the inherent imbalance in this economy, in which essentially the rich get richer at a much faster pace than middle- and lower-income people.
Jim: Wait a minute. Are we going to discuss socioeconomics or this stock?
Mike: Well, I spent some time in college delving into Marxian economics and, class warfare aside, no one will say that Marx wasn’t a razor-sharp analyst of the capitalist system. Not that I’m saying there’s anything wrong with the system.
Jim: Whatever. I’d buy this stock.
Mike: Even now?
Jim: Especially now. First, it’s a well-managed operation whose top brass hasn’t diluted its sheen by over-expanding. Tiffany opens a few stores each year, but still has only about 135 worldwide, which generate about $1.5 billion in sales.
Mike: What else?
Jim: Earnings drive stock prices, and look at Tiffany. In its fiscal year ended Jan. 31, its profit surged 62% from the prior year, and sales were up a robust 25%.
Mike: Which, of course, included a very healthy holiday shopping season.
Jim: Right, but it doesn’t stop there. The other day Tiffany said its fiscal first-quarter earnings . . .
Mike: Were also very strong.
Jim: Yes, and will handily beat Wall Street’s estimates yet again.
Mike: But I look at all those numbers and I wonder, how are they going to top that?
Jim: You could have said the same thing about Wal-Mart a decade ago, and look at the gains you would have missed.
Mike: True, but Tiffany is not Wal-Mart. Tiffany is not a place you seek out for shelter when the economy goes south. So, though I second the motion that this is an admirable, well-run company, I wonder how long everything will stay in place to keep Tiffany’s sales growth perking along at this rate.
Jim: You have your doubts.
Mike: The party has to end sometime. I’m not saying the economy is going to crash, but certainly everybody from Alan Greenspan on down is determined to slow this economic train. And when that happens, it’s not the super-rich who are going to stop shopping at Tiffany’s--they will always be with us--but the less affluent, who can afford to shop there at the moment.
Jim: That is a fear. Look what happened at the start of the year. Greenspan’s Federal Reserve kept nudging interest rates higher, and the stock market nose dived, wiping out a lot of wealth. And down went Tiffany’s stock. It’s still off 23% this year, to around $70 a share. But Tiffany’s fiscal first quarter showed that the company is still performing nicely, and I see nothing on the horizon to change that.
Mike: I’m not so sure. A lot of Tiffany shoppers are feeling flush right now, but another change in the economic picture could make them feel a lot less flush--and very quickly. Plus, a year from now, Tiffany will have to top the incredible numbers it’s just posted to keep the stock moving higher. That won’t be easy.
Jim: No, but Tiffany’s drop this year means the stock sells for about 28 times its expected 2000 earnings per share. That’s not cheap for a retailer, but I’m confident Tiffany will generate the growth to justify that multiple and that the economic and stock market trends won’t get so dire as to foul things up.
Mike: I’m not sure they have to get dire. I’m worried that if they just cap out a little, Tiffany is not going to keep showing those big double-digit gains in earnings and sales. That’s the fear that hurt Tiffany’s stock in the first quarter, as people began to doubt how much more this outfit can shine.
Razorfish (RAZF)
(Jim: Don’t buy)
(Mike: Buy)
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Mike: We move from Tiffany to a stock that also raises the question of how much farther a company can go.
Jim: Actually, the first question Razorfish raised for me, Mike . . .
Mike: Was how much lower can it go?
Jim: . . . No, it was what exactly does this company do for a living? When I heard the name I figured it was a chain of swinging nightclubs or something.
Mike: You know the old line--if you have to ask, you shouldn’t be in this company. Anyway, Razorfish to my mind is a dressed-up advertising and marketing agency.
Jim: That’s basically right.
Mike: Except that it’s for the Web. To be precise, it helps large and medium-size corporations, the Fortune 1000, set up Web sites and online strategies. And does it, by all accounts, quite well.
Jim: It’s a consulting firm, basically.
Mike: A consulting firm with a lot of hands-on expertise. It puts together pretty classy Web sites for large retailers and industrial companies.
Jim: And demand for those services is exploding. Let’s face it: Every company in the world either wants to be on the Internet or wants to enhance its existing Web site. And they need help, which creates demand for outfits like Razorfish. That’s why Razorfish, which went public a year ago at a split-adjusted $8 a share, saw its 1999 revenue more than double--though that lifted its sales to only about $170 million.
Mike: But Razorfish also falls into the category of year-to-date sob stories.
Jim: Meaning?
Mike: Meaning that since Jan. 1 its stock has plunged 60%, especially after it got swept into that great April-is-the-cruelest-month debacle on the Nasdaq market. So after hitting $55 in February, it now trades in the high teens.
Jim: By the way, this young company also lost $15 million last year, though it’s expected to be profitable this year. But my main problem with Razorfish is that it’s swimming in a sea of competition like you can’t believe. So I wouldn’t buy the stock, even if its low prices might lure one to, well, bottom-fish.
Mike: This stock hasn’t gotten hammered down to the proper level of tenderness for you?
Jim: Are you kidding? It still sells for 60 times the roughly 30 cents a share that Wall Street expects Razorfish to earn this year.
Mike: That’s a lot better than 200, which was its price-earnings multiple before the market’s recent gut check.
Jim: I don’t care. Now, I know the bulls still see Razorfish generating something like 50% growth in annual sales and earnings for the next few years, to which I say, good luck. I’d be very surprised if that happens with all of the competition that’s fighting for Razorfish’s customers, too.
Mike: I’m actually attracted by Razorfish.
Jim: Come on, Mike, is it just the name?
Mike: No, the name puts me off my feed. I will say, though, that my interest in this stock isn’t really consistent with my argument that you should shun a good solid name like Tiffany.
Jim: No kidding! You’re going to pass on Tiffany and buy Razorfish?
Mike: Yes. And a big reason is that I think there’s consolidation ahead in this e-commerce consulting field.
Jim: You think Razorfish will get bought.
Mike: The big fish eat the little fish, Jim, including the Razorfish. I should say there’s been no indication, thus far, that this industry is about to consolidate. But there are a lot of big players in it that I think will be looking for extra entrepreneurial know-how.
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To suggest a stock you would like to see discussed in this column, e-mail Times staff writers James Peltz (james.peltz@latimes.com) or Michael Hiltzik (michael.hiltzik@latimes.com).
