Mixed Outlook for Luxury Retailers

The widening subprime mortgage rabbit hole does not seem to be having any adverse effect on brokerage analysts' projections for little blue boxes. During the past two weeks, all 12 covering brokerage analysts have raised their full-year earnings estimates on Tiffany & Co. (TIF - Analyst Report). The current consensus estimate of $2.31 per share is 17 cents above the average forecast from a month ago.

Two weeks ago, TIF reported second-quarter earnings from continuing operations of 45 cents per share, 10 cents above expectations. Net sales rose 19%, paced by a very strong 7% increase in same-store sales (adjusted for currency fluctuations.) In the U.S., same-store sales rose 17%. CEO Michael Kowalski expects to maintain the pace of sales growth throughout the second-half of the year and raised his guidance as a result. Kowalski projects his company to generate full-year earnings within a range of $2.22 to $2.27 per share, up from previous guidance of $2.10 to $2.15 per share. TIF is a Zacks #1 Rank ("strong buy") stock and is classified in Retail-Jewelry Stores.

TIF's second-quarter report is noteworthy, because in general, the outlook for the overall retail sector has been mixed, at best. Even among high-end retailers, the outlook varies by company. For example, Movado (MOV - Snapshot Report) reported better than expected results last week. (The company earned 45 cents per share versus expectations for 38 cents per share; net sales improved 10.2% to $139.5 million.) One of the covering brokerage analysts, however, cut his forecast for the third and fourth quarter following the report - a potential reflection of the fact that MOV experienced a decline in same-store sales at its namesake boutiques.

A similar picture exists for the high-end department stores. The majority of the covering brokerage analysts have upped their full-year forecasts for Nordstrom (JWN - Snapshot Report) within the past 30 days. The current consensus earnings estimate is $2.97 per share, three cents above the average forecast of a month ago. Conversely, the full-year consensus forecast for Saks (SKS - Analyst Report) is down by a penny, to 45 cents per share. Six of the 10 covering brokerage analysts have lowered their projections, reflecting caution about key holiday sales. SKS has previously predicted that December same-store sales growth would likely be "below average". (Both JWN and SKS are Zacks #3 Rank ("hold") stocks. JWN is classified in Retail-Apparel/Shoe and SKS is classified in Retail-Regional Department Stores.)

What this means to investors is that they need to use prudence when investing in retailers right now, including those targeting high-income consumers. There are some retailers, such as TIF, that are doing very well, but there are many others that are struggling. Although the current economic backdrop and the corresponding rise in consumer frugality are having an impact, there are many retailers who are being adversely affected by poor merchandising choices as well.

Tyson Foods' (TSN - Snapshot Report) CEO, Richard Bonds, cut his company's guidance last week. Citing "higher than expected live cattle costs and a decline in beef revenues", Bonds guided for fiscal 2007 earnings to be in a range of 72 to 80 cents per share. At the end of July, the company had guided for profits to be in the range of 82 to 92 cents per share.

The reduction in guidance comes just two weeks after Smithfield Foods (SFD - Snapshot Report) exceeded fiscal first-quarter expectations with profits of 47 cents per share, six cents above expectations. Revenues rose by more than 20% to $3.4 billion, driven primarily by the acquisition of Armour-Eckrich. The majority of the covering brokerage analysts raised their fiscal 2008 forecasts following the report, pushing the consensus estimate 10 cents higher to $2.17 per share.

Although Smithfield Foods' CEO, Larry Pope, was optimistic about his company's prospects, he did acknowledge feed costs are rising. Higher feed costs are not only a problem for companies like SFD and TSN, but are also driving up costs for the consumer. Chinese inflation surged 6.5% last month as meat prices are up 49% over the past year. Grain costs are affecting human food as well. Yesterday, Sara Lee (SLE - Analyst Report) executives told brokerage analysts that they intend to keep passing along higher wheat costs by raising bread prices. Wheat prices reached a record of $8.91 a bushel yesterday.

As I have said before, ethanol is the primary catalyst for rising food costs. It's simple supply and demand at work. The more farmland devoted to corn and sugar, the less there is for other foods. Similarly, the more corn and sugar devoted to ethanol, the less there is for humans and animals to consume. Add in worldwide economic growth and it is little wonder that trips to the grocery are more expensive than they used to be.

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