With two successive quarters of lower-than-expected bottom-line results, it seems that Tiffany & Company (TIF) is gradually losing its sheen. Dimming it further was the company’s decision to trim its fiscal 2012 guidance. However, the long-term target of a 10% to 12% sales increase and at least 15% earnings growth annually that the company kept intact, keep some hope alive.
We are taking the issue step by step, as we try to give a concrete picture of all that is going on at Tiffany, starting from soft sales growth, the bottom-line miss, lowered outlook, revision in the Zacks Estimates and the last but not the least, the initiatives undertaken.
Analyzing Sales Trend
Tiffany hinted 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.
Coming to the Bottom Line
Tiffany continues to disappoint with its bottom line results. The company’s first-quarter 2012 bottom-line performance mirrored the fourth quarter of 2011. First-quarter 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 weak demand for jewelry.
As regards 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 Estimate by 7.3% in the first quarter of 2012 and 2.1% in the fourth quarter of 2011. However, in the third and second quarters of 2011, the company beat the Zacks Consensus Estimates by 16.7% and 22.9%, respectively.
Tiffany, a high-end jewelry designer, manufacturer and retailer, lowered its fiscal 2012 guidance. The company 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 with the company’s long-term sales growth goal of 10% to 12%.
Downward Estimate Revision
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 79 cents a share in the last 30 days. For the third quarter, the Estimate fell 7 cents to 69 cents a share. For fiscal 2012 and 2013, the Zacks Consensus Estimates also fell 24 cents and 26 cents to $3.75 and $4.33, 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 recommence 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 side, the company is now concentrating on expanding business in Middle East, Russia, Brazil and India. Tiffany now plans to add 24 stores in fiscal 2012 with 9 in the Americas, 8 in Asia-Pacific, 2 in Europe and 5 in the United Arab Emirates (marking the commencement of operations 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.
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