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Tiffany & Company’s (TIF - Analyst Report) dismal performance compelled us to take a bearish stance on the stock, and therefore we downgraded our recommendation to “Underperform” with a price target of $53.00. Earlier, we had a “Neutral” view on the stock.

Missing Zacks’ Expectation

Tiffany posted lower-than-expected third-quarter 2012 results. The quarterly earnings of 49 cents a share missed the Zacks Consensus Estimate of 63 cents, and dropped sharply from 70 cents earned in the prior-year quarter.

The disappointing results came on the back of shriveled gross margin and higher tax rate, apart from difficult year-over-year comparisons. Total revenue of $852.7 million also fell short of the Zacks Consensus Estimate of $858 million.

Given the weaker-than-expected results and sluggish economic recovery in most of the countries, management trimmed its fiscal 2012 outlook. The company now projects earnings in the range of $3.20 to $3.40 per share, down from $3.55 to $3.70 forecasted earlier.

Tiffany now expects total net sales growth of 5% to 6% for fiscal 2012, down from the 6% to 7% increase predicted previously. Operating margin for the year is also expected to contract. Moreover, gross margin in the fourth quarter is expected to be lower than the prior-year quarter.

Downhill Estimate Revision

Following Tiffany’s third quarter results, the Zacks Consensus Estimates have been portraying a downward trend.

The Zacks Consensus Estimate for the fourth quarter of fiscal 2012 dropped by 9 cents to $1.50 per share in the last 7 days. For the first quarter of fiscal 2013, the Estimate fell 4 cents to 71 cents. For fiscal 2012 and 2013, the Zacks Consensus Estimates slid 32 cents and 18 cents to $3.27 and $3.93, respectively, in the last 7 days.

Negative Earnings Surprise Trend

Tiffany seems to be in an unfavorable position as the soft economic environment continues to take its toll on the performance of this designer, manufacturer and retailer of high-end jewelry, as evident from its negative earnings surprise history. The earnings lagged the Zacks Consensus Estimates by 22.2%, 2.7% and 7.3% in the third, second and first quarters of fiscal 2012, respectively, and by 2.1% in the fourth quarter of 2011.

Closing Comment

An erratic consumer behavior and sluggish economic recovery still remain matters of concern. The above analysis supports our unbiased view, and advocates our bearish stand on the stock, which is well defined through our Zacks #5 Rank that translates into a short-term Strong Sell rating.

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