Tiffany & Company’s (TIF) disappointing first-quarter 2012 results and dismal fiscal 2012 outlook compelled us to take a bearish stance on the stock. Consequently, we downgraded our recommendation to Underperform with a target price of $48.00. Earlier, we had a Neutral view on the stock.
Analyzing Quarterly Results
Tiffany posted lower-than-expected first-quarter results. The quarterly 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. The soft bottom-line reflected dismal performance in the Americas region due to lower demand for jewelry.
Despite registering a growth in the top line, the company witnessed a drop in the bottom line due to a 10% rise in the cost of sales and an 11% increase in selling, general and administrative expenses.
This was the second consecutive quarter that Tiffany missed on the bottom line. Previously, fourth-quarter 2011 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.
Tiffany, which faces stiff competition from Signet Jewelers Limited (SIG) and Zale Corporation (ZLC), stated that global net sales for the first quarter of 2012 rose 8%, following a similar percentage increase in the fourth quarter of 2011.
From this perspective, it appears that nothing is wrong with the company, as the sales growth rate remains equivalent. But, if we look back at the sales growth in the first three quarters of 2011, the story would be clearer. We observed that total sales in the third, second and first quarters of 2011 enjoyed double-digit growth, increasing 21%, 30% and 20%, respectively, before the growth fell to a high single digit.
Given the weaker-than-expected results and sluggish economic recovery in most of the countries, management trimmed its fiscal 2012 outlook.
The high-end jewelry designer, manufacturer and retailer now projects earnings in the range of $3.70 to $3.80 per share, down from $3.95 to $4.05 forecasted earlier, reflecting an increase of 3% to 6%. Earlier, the company had projected earnings growth of 10% to 13%.
If we closely scrutinize the earnings growth forecast, we observe that it stands nowhere when compared with the company’s long-term objective of at least 15% growth, and represents a much lower growth rate when compared with an increase of 23%, registered in fiscal 2011.
On the other hand, Tiffany now anticipates 7% to 8% growth in total net sales for fiscal 2012, down from 10% predicted previously, reflecting a soft macroeconomic environment and tough year-over-year comparison in the second and third quarters of 2012. The guidance shows slight proximity to the company’s long-term sales growth goal of 10% to 12%.
Estimate Revision Showing Downtrend
Following Tiffany’s first-quarter 2012 results, the Zacks Consensus Estimates have been portraying a downward trend.
The Zacks Consensus Estimate for the second quarter of 2012 dropped by 7 cents to 78 cents a share in the last 30 days. For the third quarter, the Estimate fell 8 cents to 67 cents a share. For fiscal 2012 and 2013, the Zacks Consensus Estimates also fell 25 cents and 32 cents to $3.73 and $4.27, respectively, in the last 30 days.
The above analysis supports our unbiased view, and advocates our bearish opinion on the stock, which is well defined through our Zacks #5 Rank that translates into a short-term “Strong Sell” rating.
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