A month has gone by since the last earnings report for Tiffany (TIF - Free Report) . Shares have lost about 12.1% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Tiffany due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Tiffany Q3 Earnings Beat, Revenues Miss
Tiffany & Co. reported third-quarter fiscal 2018 results, which marked the company’s tenth straight quarter of positive earnings surprise. However, sales fell short of the Zacks Consensus Estimate after surpassing the same in the five successive quarters. Although top line increased year over year, it failed to check the decline in the bottom line.
The company hinted that net sales grew due to increased spending by local customers, however, lower spending by foreign tourists, mainly Chinese, remains a drag. Management also highlighted that increased investment spending hurt the company’s quarterly earnings, while gross margin expansion and lower effective tax rate favorably impacted the same.
Tiffany reiterated its fiscal 2018 earnings projection but trimmed its comparable sales (comps) guidance.
The company’s quarterly earnings of 77 cents a share beat the Zacks Consensus Estimate by a penny but declined roughly 4% year over year. Net sales came in at $1,012.4 million, up almost 4% from $976.2 million in the prior-year quarter. However, the reported figure came below the Zacks Consensus Estimate of $1,052 million.
Notably, the top line gained from sales improvement across most product categories and in all regions. Also, the company’s comps went up 2%. In constant currencies, worldwide net sales rose 5%, while comps improved by 3%.
Sales across Jewelry Collections and Engagement Jewelry grew 8% and 2%, respectively. On the contrary, sales across Designer Jewelry declined 8%. Increase in jewelry volumes led to mid-single-digit jump in net sales, in spite of lower spending by Chinese tourists in the United States and Hong Kong and fall in wholesale travel-retail sales in Korea.
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 completion of the worldwide launch of PAPER FLOWERS, which comprises solid collection in diamonds and the introduction of TIFFANY TRUE, an innovative engagement ring design.
Let’s Delve Deeper
By geographic segments, sales in the Americas rose 5% to $442 million, while comps increased by an equivalent rate. In the Asia-Pacific region, sales improved 4% to $294 million, while comps grew 1%. In Japan, sales went up 2% to $142 million, while comps inched up 1%. Sales in Europe came in at $114 million, up 3% but comps fell by the similar rate. Other sales came in at $20 million, down 7%, however, comps plunged 21%.
Gross margin expanded 70 basis points to 62.2% 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 430 basis points to 12.5%, thanks to increased SG&A expenses.
SG&A expenses rose 15% to $502.9 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, which is likely to increase at a rate higher than sales for the remaining part of the year. Consequently, fiscal 2018 operating margin is expected to decline from the year-ago level, though improved gross margin is expected to provide some respite.
During the first nine months of fiscal 2018, this designer and retailer of fine jewelry opened nine company-operated stores and shuttered three locations. As of Oct 31, 2018, the company operated 321 stores (124 in the Americas, 89 in Asia-Pacific, 55 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 10 openings, at least 15 relocations and four closings.
Other Financial Details
Tiffany ended the quarter with cash and cash equivalents and short-term investments of $655.4 million and total long-term debt of $948.9 million, reflecting 31% of stockholders’ equity.
In the quarter, the company repurchased approximately 599,000 shares at an average cost of about $118 per share. The company still has $679 million remaining under its share repurchase program, which expires in January 2022.
For fiscal 2018, management expects net cash from operating activities of roughly $600 million, capital expenditures of about $280 million and free cash flow of approximately $300 million.
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- single-digit. Tiffany continues to envision net earnings per share in the range of $4.65-$4.80.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
Currently, Tiffany has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
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.