Tiffany & Company (TIF) 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 third consecutive quarter of lower-than-expected bottom-line results and trimmed fiscal 2012 outlook. The big question that remains: "Is Tiffany losing its sparkle?"
We are dealing with the issue systematically, as we try to portray a concrete picture of the proceedings at Tiffany, starting with its soft sales growth, the bottom-line miss, truncated guidance, revision in the Zacks Estimates and -- last but not least -- the initiatives undertaken. However, the company’s unchanged long-term target of a 10% to 12% sales increase and annual growth of at least 15% in earnings keeps hope alive.
Soft Sales Trend Continues
Tiffany’s global net sales for the second quarter of 2012 rose 2%, following an increase of 8% in the first quarter of 2012 as well as in the fourth quarter of 2011. From this perspective, it appears that sales growth rate has fallen to the low-single digits from the high-single digit range.
But if we look back at the sales growth of the first three quarters of 2011, the story is much clearer. Total sales in the third, second and first quarters of 2011 enjoyed double-digit growth, increasing 21%, 30% and 20%, respectively.
Missing on Bottom Line
Tiffany continues to disappoint with its bottom line results. The company’s second-quarter 2012 bottom-line performance mirrored the results of the first quarter of 2012 and fourth quarter of 2011.
Second-quarter earnings of 72 cents a share missed the Zacks Consensus Estimate by a couple of cents, and dropped sharply from 86 cents earned in the prior-year quarter. The disappointing result was a reflection of the dismal performance in the Americas and Europe region due to soft demand for jewelry.
The company’s first-quarter 2012 earnings of 64 cents a share missed the Zacks Consensus Estimate of 69 cents, and dropped from 67 cents earned in the prior-year quarter. With regards to the fourth-quarter 2011 performance, earnings of $1.39 per share fell short of the Zacks Consensus Estimate of $1.42, and dropped from $1.44 earned in the prior-year quarter.
The earnings lagged the Zacks Consensus Estimates by 2.7% and 7.3% in the second and first quarters of 2012, respectively, and by 2.1% in the fourth quarter of 2011. However, in the third, second and first quarters of 2011, the company beat the Zacks Consensus Estimates by 16.7%, 22.9% and 17.5%, respectively.
Trimmed Guidance Mirrors Losing Streak
Tiffany lowered its guidance for the second time in fiscal 2012. The company now projects earnings in the range of $3.55 to $3.70 per share, down from $3.70 to $3.80 forecasted earlier. Previously, management had lowered earnings guidance to a range of $3.70 to $3.80 per share, down from $3.95 to $4.05.
If we closely scrutinize the earnings forecast, we observe that it stands in a feeble position when compared with the company’s long-term growth objective of at least 15%.
On the other hand, Tiffany now expects total net sales growth of 6% to 7% for fiscal 2012, down from 7% to 8% increase predicted previously. The guidance shows no proximity with the company’s long-term sales growth goal of 10% to 12%. Earlier, management had projected 7% to 8% growth in total net sales for fiscal 2012, down from 10%.
Downhill Estimate Revision
Following Tiffany’s second-quarter 2012 results, the Zacks Consensus Estimates have been portraying a downward trend.
The Zacks Consensus Estimate for the third quarter of 2012 dropped by 3 cents to 63 cents a share in the last 30 days. For the fourth quarter, the Estimate fell by a penny to $1.60 per share. For both fiscal 2012 and 2013, the Zacks Consensus Estimates slid 6 cents to $3.59 and $4.12, respectively, in the last 30 days.
Tiffany holds a significant position in the world jewelry market and is poised to benefit from its increased geographic reach. The company generates nearly half of its total sales internationally. We believe once the predicament in the economy bottoms out, Tiffany will perk up and get back to its healthy sales and earnings growth.
The company is focused on opening smaller stores that offer select collections of lower-priced, higher-margin products, which in turn boost store productivity. Tiffany concentrates on improving sales per square foot through higher customer traffic and converting them into potential buyers by targeted advertising, ongoing sales training and customer-oriented initiatives.
The company intends to expand its distribution network by adding stores in both new and existing markets. On the international front, the company is now concentrating on expanding business in Middle East, Russia, Brazil and India. Tiffany now plans to add 28 stores in fiscal 2012 with 13 in the Americas, 8 in Asia-Pacific, 2 in Europe and 5 in the United Arab Emirates (already commenced operation in the region).
We will have to wait and watch as to how the story unfolds, as the year progresses. Currently, we maintain our long-term Neutral recommendation on the stock. Moreover, Tiffany, which faces stiff competition from Signet Jewelers Limited (SIG) and Zale Corporation (ZLC), holds a Zacks #3 Rank that translates into a short-term Hold rating.Read the Full Research Report on TIF
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