Tiffany, the Whole Story

No matter how short lived; the sparkles of Tiffany & Company (TIF - Analyst Report) did come under the shadow, when the company posted lower-than-expected fourth-quarter 2011 results. However that did not deter the company from providing a healthy outlook for fiscal 2012, highlighting the improving economic environment, despite nagging fears from the Euro zone.

We are taking the issue step by step, as we try to give a concrete picture of all that is going on at Tiffany, starting from soft sales growth, the bottom-line miss, outlook and the last but not the least, the initiatives undertaken.

Analyzing Sales Trend

Tiffany hinted that global net sales did increase by 8% during the quarter, but at a decelerating rate when compared with 24% growth registered in the first nine months of 2011. Management said that the results were softer than expected due to sluggish sales of high-end jewelry and moderate increase in fine and fashion jewelry sales, when compared with the strong growth in the first three quarters of 2011.

We also observed that total sales in the third, second and first quarters of 2011, had portrayed a double-digit growth, increasing 21%, 30% and 20%, respectively, before the growth fell to a high single digit in the fourth quarter.

By geographic segment, sales grew 5% in the Americas, 19% in the Asia-Pacific region, 12% in Japan and 3% in Europe during the quarter, compared with increases of 20%, 45%, 13% and 25%, respectively, in the first-nine months of 2011.

Getting to the Bottom-Line

Tiffany’s fourth quarter earnings of $1.39 per share missed the Zacks Consensus Estimate of $1.41, and dropped from $1.44 earned in the prior-year quarter. On a reported basis, including one-time items, earnings fell 1% year over year.

Despite registering a growth in the top line, the company witnessed a drop in the bottom line due to a 9% rise in the cost of sales and a 10% increase in selling, general and administrative expenses.

With respect to earnings surprise, Tiffany has missed as well topped the Zacks Consensus Estimate over the last four quarters (including the fourth quarter of 2011) in the range of negative 2.1% to positive 22.9%. The average remained at 13.7%. This suggests that Tiffany has beaten the Zacks Consensus Estimate by an average of 13.7% in the trailing four quarters.

Outlook, a Fair Representation

A glance at the outlook will definitely give a fair idea of how the company will perform going forward, and will result in a better analysis.

Tiffany, a high-end jewelry designer, manufacturer and retailer, provided fiscal 2012 guidance. The company forecasts earnings in the range of $3.95 to $4.05, reflecting a growth of 10% to 13%. While gross margin expected to remain under pressure for the next few quarters, management projects maximum earnings growth to take place in the concluding part of fiscal 2012.

If we closely scrutinize the earnings growth forecast, we observe that it has a little proximity to the company’s long-term objective of at least a 15% growth but reflects a lower growth rate when compared with an increase of 23%, registered in fiscal 2011.

On the other hand, Tiffany now anticipates 10% growth in total net sales for fiscal 2012, aided by an increase in sales across the Americas and Asia-Pacific, compared with an increase of 18% registered in fiscal 2011. However, the sales guidance meets the lower end of the company’s long-term objective of a 10% to 12% sales increase.

Catalysts

Tiffany holds a significant position in the world jewelry market and is poised to benefit from its increased geographic reach. The company generates nearly half of its total sales internationally. We believe that Tiffany is well positioned to deliver robust sales and earnings growth.

The company is focused on opening smaller stores that offer selected collections of lower-priced, higher-margin products, which in turn boost store productivity. Tiffany concentrates on improving sales per square foot through higher customer traffic and converting them into potential buyers by targeted advertising, ongoing sales training and customer-oriented initiatives.

The company intends to expand its distribution network by adding stores in both new and existing markets. On the international side, the company is now concentrating on expanding business in Middle East, Russia, Brazil and India. Tiffany now plans to add net 24 stores in fiscal 2012 with 9 in the Americas, 7 in Asia-Pacific, 3 in Europe and 5 in the United Arab Emirates (marking the commencement of operation in the region).

Closing Commentary

We will have to wait and watch as to how the story unfolds, as the year progresses. Currently, we maintain our long-term “Neutral” recommendation on the stock. Moreover, Tiffany, which faces stiff competition from Signet Jewelers Limited (SIG - Snapshot Report) and Zale Corporation (ZLC - Snapshot Report), holds a Zacks #3 Rank that translates into a short-term “Hold” rating.