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Tiffany (TIF) Up 3% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Tiffany (TIF - Free Report) . Shares have added about 3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Tiffany due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Tiffany Beats on Q2 Earnings, Raises View

Tiffany & Co. reported second-quarter fiscal 2018 results, which marked the company’s fifth straight quarter of positive earnings and sales surprises. Moreover, both the top and bottom lines continue to improve year over year. The solid results also called for an upbeat earnings view for fiscal 2018.

Q2 Highlights

The company’s quarterly earnings came in at $1.17, which comfortably beat the Zacks Consensus Estimate of $1.00. The bottom line surged roughly 27% year over year, courtesy of higher sales, gross margin expansion and reduced effective tax-rate, partially offset by increased investment spending.

Net sales came in at $1,075.9 million, up almost 12% from $959.7 million in the prior-year quarter. The reported figure also outperformed the Zacks Consensus Estimate of $1,039 million. Notably, the top line gained from sales improvement across all product categories and regions. Also, the company’s comparable-store sales (comps) went up 8%. In constant currencies, worldwide net sales rose 11%, while comps improved by 7%.

Sales across Jewelry Collections, Engagement Jewelry and Designer Jewelry grew 18%, 8% and 5%, respectively. Sales also increased in watches and in other non-jewelry categories.

Tiffany remains focused on evolving its brand, enhancing omni-channel experience, solidifying position in core markets, increasing operating model efficiency and enriching overall organization. The company remains committed to elevating in-store experience and replenishing product portfolio. Focus on renewing product portfolio is evident from the launch of PAPER FLOWERS, which comprises solid collection in diamonds and platinum.

Let’s Delve Deeper

By geographic segments, sales in the Americas rose 8% to $475 million, while comps increased by an equivalent rate. In the Asia-Pacific region, sales improved 28% to $301 million, while comps grew 12%. In Japan, sales went up 11% to $155 million, while comps jumped 9%. Sales in Europe came in at $121 million, up 5% but comps fell by 1%. Other sales came in at $24 million, down 21%, however, comps improved 5%.

Gross margin expanded 150 basis points to 64% in the quarter under review, on the back of sales leverage on fixed costs, fall in wholesale sales of diamonds and favorable product input costs. These were partially offset by higher investment spending. Operating margin contracted 150 basis points to 17.8%, courtesy of increased SG&A expenses.

SG&A expenses rose 20% to $497.6 million during the quarter primarily due to higher marketing spending, rise in labor and incentive compensation, store occupancy and depreciation expenses. Apart from marketing, Tiffany increased its expenditure in technology, visual merchandising, digital and store presentations.

Management also revealed intentions to increase investments in various areas, in a drive to reach its long-term growth potential. This is expected to lead to a considerable rise in SG&A costs in fiscal 2018. Consequently, operating margin is expected to decline from the year-ago level, though improved gross margin is expected to provide some respite.
Store Update

During the first half of fiscal 2018, this designer and retailer of fine jewelry opened seven company-operated stores and shuttered two locations. As of Jul 31, 2018, the company operated 320 stores (123 in the Americas, 90 in Asia-Pacific, 54 in Japan, 48 in Europe, and five in the U.A.E.). Management now anticipates gross retail square footage growth of 2% on the back of eight openings, at least 15 relocations and two closings.

Other Financial Details

Tiffany ended the quarter with cash and cash equivalents and short-term investments of $814.1 million and total long-term debt of $971.7 million, reflecting 32% of stockholders’ equity.

In the quarter, the company repurchased approximately 2 million shares at an average cost of about $131 per share. The company still has $750 million remaining under its share repurchase program, which expires in January 2022. Management expects to buyback shares worth $400 million during fiscal 2018.

For fiscal 2018, management expects net cash from operating activities of roughly $600 million, capital expenditures of roughly $280 million and free cash flow of at least $300 million. The company plans to incur capital expenditures of approximately 7-9% of sales during fiscal 2019 through 2021.

Outlook

Management anticipates fiscal 2018 net sales to increase by a high-single-digit percentage on a reported and constant-exchange-rate basis. Comps for the fiscal year are expected to rise mid-to-high-single-digit. Tiffany raised its net earnings per share guidance. Net earnings per share are now envisioned in a range of $4.65-$4.80, compared with the prior range of $4.50-$4.70.

However, the company warned that the third quarter earnings per share is likely to decline year over year. Moreover, the decision to transform New York City flagship store is likely to hurt fiscal 2018 earnings by approximately 7 cents a share on account of accelerated depreciation charges associated to the existing outlet and preliminary development costs.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -8.85% due to these changes.

VGM Scores

At this time, Tiffany has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Tiffany has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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