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Tiffany Misses on Bottom-Line

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Tiffany & Company (TIF - Free Report) posted lower-than-expected fourth-quarter 2011 results. The quarterly 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.

Let’s Unveil the Picture

Tiffany, which faces stiff competition from Signet Jewelers Limited (SIG - Free Report) and Zale Corporation , posted net sales of $1,187.4 million during the quarter, up 8% from the prior-year quarter, on the heels of – healthy performance of stores in the Americas, Asia-Pacific, Japan and European regions, comparable-store sales growth and new collection launches.

Total revenue also came ahead of the Zacks Consensus Estimate of $1,185 million. Comparable-store sales climbed 6% in the quarter under review. In constant currencies net sales jumped 7% and comps grew 5%.

By geographic segment, sales in the Americas grew 5% to $605 million, whereas comps rose 3% during the quarter; sales in the Asia-Pacific region surged 19% to $225 million and comps increased 14%; sales in Japan jumped 12% to $204 million and comps also grew by 12%; and sales in Europe climbed 3% to $142 million but comps fell by similar percentage.

In constant currencies, sales in the Americas grew 5%, whereas comps rose 3% during the quarter; sales in the Asia-Pacific region surged 18% and comps increased 13%; sales in Japan advanced 5% and comps grew by 4%; and sales in Europe climbed 3% but comps edged down 2%.

Other sales dropped 22% to $12 million, reflecting fall in the wholesale sales of end goods to independent distributors and lower wholesale sales of rough diamonds.

Gross profit for the quarter jumped 7% to $716.9 million; however, gross margin contracted 50 basis points to 60.4%. Operating income increased 3% to $285.7 million, whereas operating margin shriveled 120 basis points to 24.1%.

Stores Update

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).

As of January 31, 2012, the company operated 247 stores (102 in the Americas, 58 in Asia-Pacific, 55 in Japan and 32 in Europe).

Other Financial Details

Tiffany repurchased about 525,000 shares at $67.26 each, aggregating $35 million during the quarter. In fiscal 2011, the company bought back approximately 2.6 million shares at $66.23 each totaling $174 million.

In January 2011, Tiffany announced a new share repurchase program, overriding the previous program. The new program, which is set to expire on January 31, 2013, authorizes the company to buy back up to $400 million of shares. As of January 31, 2012, the company has approximately $218 million at its disposal for future buy backs.

Tiffany ended the quarter with cash and cash equivalents and short-term investments of $442.2 million, and total short-term and long-term debt of $712.1 million, reflecting 30% of shareholders’ equity compared with 32% in the prior-year. Capital expenditures for fiscal 2011 were $239 million.

Strolling Through Guidance

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%.

The current Zacks Consensus Estimate for fiscal 2012 is $3.92 per share that falls short of management’s guidance range. Consequently, we could witness a correction in the Zacks Consensus Estimates in the coming days with analysts revising their estimates to better align with earnings outlook.

Tiffany now anticipates a 10% growth in total net sales for fiscal 2012, aided by increase in sales across the Americas and Asia-Pacific.

Management anticipates capital expenditures of approximately $240 million for fiscal 2012.

Closing Commentary

Currently, we maintain our long-term Neutral recommendation on the stock. However, Tiffany holds Zacks #4 Rank that translates into a short-term Sell rating.

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