Tiffany's jewel of a quarter not enough to dazzle

The dramatic plunge in Tiffany & Co. shares on Tuesday illustrates the sky-high expectations that have built up around the global luxury-goods market.

The mere indication by the New York-based jewellery retailer that it's seeing "recent sales weaknesses" in Europe and in the eastern part of the U.S. was enough to knock down the stock price by 8.7 per cent, despite sharp gains in sales and earnings last quarter.

The reaction to Tiffany's results is significant because the company acts as a bellwether for the high-end retailing industry, to which many investors have turned as a refuge from sluggish business in other sectors. The theory is that the rich will continue to spend, even if slowing economic growth erodes demand by middle-class and low-budget consumers.

While global demand is holding up well, Tiffany's results show that investors may be expecting too much. The stock fell after the company said sales growth this quarter will slow to the "low teens" after having increased 21 per cent last quarter and 24 per cent in the first nine months. At the same time, the company raised its forecast for full-year earnings per share.

"There is a pretty good sized disconnect between the reaction and what was delivered," Matt Arnold, an analyst at Edward Jones & Co. in Des Peres, Mo., said in an interview. "Is it slower? Yes. Is it still dramatically faster than what you're witnessing in almost every other segment of retailing? Certainly."

Mr. Arnold recommends that investors buy Tiffany shares in a bet that the company and its peers in the luxury industry will benefit as demand rises from China and other emerging markets.

The stock-price plunge on Tuesday followed a surge on Monday after reports showed record retail-industry sales during the U.S. Thanksgiving weekend. Coach Inc., the largest U.S. maker of high-end leather goods, and Ralph Lauren Corp., a clothing retailer, also soared on Monday and retreated on Tuesday. The S&P 500, a benchmark for U.S. equities, advanced both days.

Even if new millionaires in China and elsewhere do buy more luxury goods, that won't always lead to fat profits at retailers. Tiffany said its profitability shrank in the latest quarter because it sold a greater proportion of higher-priced jewellery, where margins are narrower.

As of Monday, Tiffany shares had gained almost 20 per cent this year with dividends included, more than double the return for Wal-Mart Stores Inc., the world's largest retailer by market value. By Tuesday's close, investors would have been better off holding Wal-Mart.

"Tiffany posted another great quarter marking an impressive run year to date," Randal Konik and colleagues at New York-based Jeffries & Co. said in a research report after Tuesday's results. "However, the outlook is what matters and chinks in the armour are emerging with signs of slowing in Europe and the U.S."

The jeweller is still expanding faster than the luxury-goods market as a whole. Global sales of luxury products will rise 10 per cent this year to €191-billion ($262-billion), Bain & Co. said last month in an update to its annual study of the market. That's faster than the 8-per-cent gain that Bain forecast in May.

"Despite the headwinds of global events and economic uncertainty, luxury is experiencing a sort of 'anti-crisis,' " Claudia D'Arpizio, the Bain partner who headed the study, said in a statement. "We expect to see the sector continue to outperform other categories, if brands stay as nimble as they have been in their approach to recovery."

"There are headwinds, but you also have to look at the tailwinds," said Mr. Arnold of Edward Jones. "The smart thing is to step back and take a good look at the trend. Overall, there's plenty to like."