It has been about a month since the last earnings report for Tiffany (TIF). Shares have lost about 6.2% 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 the most recent earnings report in order to get a better handle on the important drivers.
Tiffany’s Q2 Earnings Miss Estimates, Decline Y/Y
Tiffany came out with its second-quarter fiscal 2020 results, wherein both the top and the bottom lines not only fell short of the Zacks Consensus Estimate but also declined year over year, thanks to the adverse impact of the ongoing coronavirus pandemic. However, the jewelry retailer swung back to profit, following a loss in the preceding quarter, owing to the sequential improvements in monthly worldwide net sales from May to July. Also, the rate of sales decline decelerated sharply on a sequential basis.
Management notified that encouraging sales trends witnessed in Mainland China and global e-commerce business during the first quarter, accelerated in the second quarter, thus aiding the company to return to profitability. Tiffany also informed that worldwide net sales trends have strengthened in the month of August. Sales during the period from Aug 1 through Aug 25 were slightly positive compared with the same month-to-date period in the prior year. Looking ahead, Tiffany remains focused on Mainland China, global e-commerce and new product innovation. Markedly, management expects mid-single-digit decline in sales during the fourth quarter. However, it anticipates fourth-quarter earnings per share to improve in low single-digit on a non-GAAP basis and in high single-digit on a reported basis.
Retail sales in Mainland China recovered in the month of April with sales improving approximately 30%. The momentum continued in the month of May with retail sales up approximately 90% in the region. Notably, the recovery continued throughout the remaining period of the quarter. Impressively, retail sales in Mainland China soared about 80% year over year during the quarter. Undoubtedly, Tiffany’s e-commerce business displayed strength. E-commerce sales surged 123% worldwide during the quarter under review. We note that important markets such as the United States and the United Kingdom registered growth of approximately 122% and 93%, respectively. Excluding Mainland China, global e-commerce business soared 114% during the quarter. Meanwhile, the LVMH Moet Hennessy Louis Vuitton SE or LVMH and Tiffany deal, which was originally set to close on Aug 24, has been extended by three months, until Nov 24. Last year, the owner of Louis Vuitton and Givenchy reached an agreement to acquire Tiffany for $16.2 billion.
Tiffany posted second-quarter adjusted earnings of 32 cents a share that missed the Zacks Consensus Estimate of 35 cents. The reported figure also fell sharply from earnings of $1.12 reported in the year-ago period. Lower net sales hurt the company’s bottom line.
Worldwide net sales decreased 29% year over year to $747.1 million, and also came below the Zacks Consensus Estimate of $800 million. However, we note that the rate of decline has decelerated from 45% witnessed in the preceding quarter. Again, comparable sales (comps) fell 24% during the quarter under review. This followed a decline of 44% in the preceding quarter. At constant currency, net sales and comps declined 28% and 23%, respectively, during the reported quarter. Sales declined 25% and 27% for Jewelry Collections and Engagement Jewelry, respectively, while Designer Jewelry sales fell 26% year over year.
Geography-wise, net sales in the Americas plunged 46% to $247 million, while comps declined 44%. This decline can be attributed to closure of stores that began in mid-March and continued into June owing to the coronavirus outbreak. In the Asia-Pacific region, net sales were flat at $299 million, while comps increased 17%. We note that robust retail sales increase in Mainland China and Korea was largely offset by softness across other markets and a decline in wholesale travel retail sales.
In Japan, net sales decreased 28% to $111 million, while comps slid 27%. This year-over-year decline can be attributed to store closures that began in early April 2020 and continued through early June coupled with a drop in tourist traffic. In Europe, net sales declined 28% to $84 million, while comps decreased 27%. This can be attributed to store closures that began in mid-March and continued into June with the vast majority of stores being reopened by mid-June.
Gross margin decreased 90 basis points to 61.8% during the quarter under review. Management pointed that the contraction in margin was due to sales deleverage on fixed costs resulting from the effects of coronavirus on net sales as well as some overhead expenses resulting from certain manufacturing locations being closed or operating at lower capacity due to the pandemic. Higher inventory reserves also impacted the margin. These were partly offset by change in sales mix to higher margin products and a decrease in wholesale diamond sales. We note that operating margin came in at 8% during the reported quarter, significantly down from 17.6% in the prior-year quarter.
Store Update & Other Financial Details
During the first half of fiscal 2020, Tiffany opened one company-operated store and closed five. As of Jul 31, the company operated 322 stores (123 in the Americas, 88 in Asia-Pacific, 59 in Japan, 47 in Europe, and five in the UAE).
Tiffany ended the quarter with cash and cash equivalents and short-term investments of $1,043.7 million and total debt (short-term borrowings and long-term debt) of $1,479 million, reflecting 46% of stockholders’ equity compared with 32% in the year-ago period. This increase was due to $500 million drawdown on the revolving credit facility during the first quarter, which remained outstanding at Jul 31, 2020.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 52.21% due to these changes.
At this time, Tiffany has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Tiffany has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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