Tiffany & Company (TIF - Analyst Report), who once impressed investors with its sturdy nature against economic upheavals, is perhaps showing a few cracks amidst the latest economic threats. Shares of the company suffered a fall of over 10% yesterday as it curtailed its full year 2011 earnings forecast following a dismal holiday season sales in the U.S. and Europe. More importantly, this also highlighted the company’s vulnerability to the turbulent and dwindling economy.
Other specialty jewelry retailers were also not able to shield themselves from the negative impact of this news. The panic triggered by Tiffany dented the investors’ confidence that subsequently dragged the shares of Zale Corporation and Signet Jewelers Limited (SIG - Snapshot Report) down by 9.3% to $3.02 and by 6.3% to $44.05, respectively, in yesterday’s trading session.
What we are apprehensive about, is, if the truncated forecast and dismal holiday sales ring an alarming bell for the luxury sector, which has been most resilient to the economic upheavals. But for now, it is showing signs of sluggishness with luxury shoppers restraining themselves from purchasing high-end jewelry amid persistent economic woes. It is possible that the European debt-crisis that forced the members of the cross-Atlantic territory opt for austerity measures have tempered the demand from wealthy consumers.
A Look at Holiday Sales
A close look at the sales numbers suggests that the consumers in the U.S. and European markets remained cautious to the sparkles of Tiffany in the holiday season. However, markets in the Asia-Pacific and Japan posted strong sales.
The company informed that the total sales for the two months period ended December 31st, 2011, climbed 7% to $952 million. In constant currencies, net sales jumped 6% and comparable-store sales grew a mere 4%.
By geographic segment, sales in the Americas grew 4% to $503 million; sales in the Asia-Pacific region surged 19% to $165 million; sales in Japan jumped 13% to $160 million; and sales in Europe inched up 1% to $117 million.
In constant currencies sales in the Americas grew 4%, whereas comps rose 2%, reflecting increased sales to tourists that were partially offset by soft U.S. consumer demand. Internet and catalog sales dropped 4% compared with the prior year.
Sales in the Asia-Pacific region soared 18% and comps increased 12%; sales in Japan advanced 5% and comps grew by 6%; and sales in Europe edged up 2% but comps fell by 4%, attributing to meek sales growth in Continental Europe and sluggish sales in the U.K.
Other sales, which include wholesale sales of end goods to independent distributors and wholesale sales of rough diamonds, rose 8% to $8 million.
The Trimmed Outlook
Management hinted that after posting better-than-expected results for three consecutive quarters in fiscal 2011, sales of luxury jewelry suddenly softened in the U.S. and Europe during the holiday period, raising concern whether the company will be able to sustain its trend of outperforming expectations in the fourth quarter.
Following the sluggish sales, Tiffany chopped its earnings projection. Management now expects fiscal 2011 earnings between $3.60 and $3.65 per share, reflecting a growth of 23% to 25%. Earlier, the company had guided earnings in the range of $3.70 to $3.80 per share.
The current Zacks Consensus Estimate for the year is $3.74, which is well above the company’s guidance range. Consequently, we could witness a correction in the Zacks Consensus Estimate in the coming days, as analysts revise their estimates to better align with the company’s earnings outlook.
Undoubtedly, the choppy macro-economic environment poses a major threat for Tiffany, but management still remains optimistic about the company’s performance in 2012, and expects healthy sales and earnings growth.
Tiffany holds a significant position in the world jewelry market due to its distinctive brand appeal and is poised to benefit from its increased geographic reach. The company intends to expand its distribution network by adding stores in both new and existing markets. As of December 31, 2011, the company operated 246 stores – 102 in the Americas, 57 in Asia-Pacific, 55 in Japan, and 32 in Europe. We remain skeptical about the company’s fourth quarter performance, whether it will beat, meet or miss analysts’ expectations.
Currently, we maintain our long-term Neutral recommendation on the stock. Moreover, Tiffany holds Zacks #3 Rank that translates into short-term ‘Hold’ rating, and correlates with our long-term view.