How Did Tiffany Stock Manage To Grow 80% With Weak Revenue Growth?

Tiffany’s stock (NYSE: TIF) has gained 83% in the last three years or so, since the end of 2016, and was up even more prior to the pandemic-driven market crash. But how did the company manage to pull off this feat considering its revenue grew by just 8% during this period?

As it turns out, Tiffany managed to expand its earnings despite a moderate increase in revenues, and investors rewarded this achievement by putting a higher value on the company’s future growth – thus, expanding its P/E ratio. This can be partially attributed to the company’s strategic change to internally manufacture jewelry, which has helped to improve the cost structure and free up resources to invest in the brand and improve sales quality. Our dashboard ‘Why Is There A Mismatch In The Rate At Which Tiffany’s Revenues And Stock Price Have Changed? summarizes key factors that drove Tiffany’s stock over the past three years.

What Has Driven An Improvement In Tiffany’s Performance?

[A] Improvement In Net Margin

Between FY2017 and FY2020 (ending January), Tiffany’s EPS (earnings per share) improved from $3.57 to $4.47 while its revenues grew by a mere 8% over the same time period. This was largely due to a steady improvement in net margins – which went up from 11.1% in FY2017 to nearly 12.2% in FY2020. What did the company do right? Tiffany hired a new CEO in 2017 and he has turned around its business with his new strategy and designer collection. The company introduced new designs that resonated well with the customers-providing a boost to the company’s revenues and profits. Additionally, Tiffany started to internally manufacture its jewelry instead of outsourcing it to others- resulting in the company’s gross margin expanding from 60.7% in FY2017 to 62.5% in FY2020. Notably, as of  FY 2020, Tiffany was internally manufacturing 60% of its total jewelry, with jewelry sales making up more than 90% of the company’s total revenues. Clearly, the decision to internally manufacture jewelry has provided an edge to the company over its rivals.

[B] Expansion Of P/E Multiple

Driven by a steady jump in Tiffany’s net margin and a slight decrease in share count, coupled with nearly an 8% increase in revenues, Tiffany’s EPS (earnings per share) improved from $3.57 per share to $4.47 per share. While the stock price increased based on the EPS improvement, investors further rewarded the stock – thanks to the increased interest in Tiffany’s strategic shift that paved the way for not only improved profitability but also providing the company more leeway over its supply chain. As a result, the P/E ratio expanded from 20x in 2016 to 30x in 2019, up 47%. While the P/E is down to about 27x now, due to the outbreak of coronavirus and the uncertainty surrounding the company’s pending merger with Louis Vuitton.

While Tiffany is outperforming, which S&P 500 component stocks have the best chance of beating the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

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