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Tiffany (TIF) Misses on Q1 Earnings & Sales, Lowers View

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After registering a positive earnings surprise of 4.3% in the final quarter of fiscal 2015, Tiffany & Co. (TIF - Free Report) succumbed to a negative earnings surprise in the first quarter of fiscal 2016. The company posted adjusted quarterly earnings of 64 cents a share – excluding the tax benefit of 5 cents – that fell short of the Zacks Consensus Estimate of 68 cents and plunged 21% year over year. The decline in the bottom line was due to sluggish top-line performance and increased selling, general and administrative expenses, partially offset by higher gross margin.

Net sales came in at $891.3 million, down 7% from $962.4 million recorded in the prior-year quarter, and also below the Zacks Consensus Estimate of $924 million. The decline in net sales was due to lower spending by both local customers and foreign tourists. Comparable-store sales (comps) declined 9%.

In constant currencies too, net sales and comps fell 7% and 9%, respectively. The top line was impacted by soft sales in the Americas, Asia-Pacific and Europe, partially offset by sales growth in Japan.

As a result of these, management provided a muted outlook for fiscal 2016. Shares of this jewelry retailer fell roughly 4.5% during pre-market trading hours.

By geographic segments, sales in the Americas fell 9% to $403 million, while comps declined by 10%. Sales in the Asia-Pacific region declined 8% to $238 million, and comps were down 15%. Sales in Japan jumped 8% to $131 million and comps rose by 12%, while sales in Europe came in at $97 million, down 9%, while comps decreased 15%. Other region's sales came in at $22 million, down 30%, while comps declined 21%.

In constant currencies, total sales and comps in the Americas fell 8% and 9%, respectively, from the year-ago quarter. Sales in the Asia-Pacific region decreased 5%, while comps declined 12%. Sales in Japan inched up 1%, while comps increased 5%. Sales fell 7%, while comps declined 14% in Europe.

Gross margin expanded 210 basis points to 61.2% during the quarter on the back of favorable product input expenses, shift in sales mix towards higher-margin products and increase in price. Operating margin contracted 260 basis points to 15.1%.

Store Update

During the quarter, Tiffany opened 2 company-operated outlets in Europe, and closed 1 location in Japan. As of Apr 30, 2016, the company operated 308 stores (124 in the Americas, 81 in the Asia-Pacific, 55 in Japan, 43 in Europe, and 5 in the U.A.E.). Management now anticipates gross retail square footage growth of 2% via 11 openings, 6 relocations and 10 closings.

Other Financial Details

Tiffany ended the quarter with cash and cash equivalents and short-term investments of $789.9 million, and total short-term and long-term debt of $1,102.8 million, reflecting 37% of shareholders equity. Capital expenditures of $46 million were incurred during the quarter.

Tiffany bought back shares worth $78 million in the quarter. As of Apr 30, 2016, the company had $416 million remaining under its $500 million buyback program that runs through Jan 31, 2019.

Management anticipates capital expenditures of $260 million and expects to generate free cash flow of at least $400 million during fiscal 2016.

Guidance

Management anticipates earnings per share for fiscal 2016 to decrease by a mid-single-digit percentage from the prior year. The company had earlier forecast earnings per share for fiscal 2016 to be flat to down in the mid-single-digits. Tiffany now projects second-quarter earnings to decline at a rate equivalent to that of first-quarter fiscal 2016.

Tiffany envisions fiscal 2016 worldwide net sales to decrease by a low-single-digit percentage.

Zacks Rank

Tiffany currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the retail sector include Delta Apparel Inc. (DLA - Free Report) and The Children's Place, Inc. (PLCE - Free Report) both sporting a Zacks Rank #1 (Strong Buy), and Carter's, Inc. (CRI - Free Report) holding a Zacks Rank #2 (Buy).

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