Skip to main content

Why to Avoid Tiffany

In my view, it's look but don't touch on Tiffany for now given the signals the business is sending.
  • Author:
  • Publish date:
Comments

As I ran down the quarter and fiscal year guidance from Tiffany (TIF), the thought of buying a man bracelet from the store (retails around $300 or so) seemed more appealing than warming to the stock after earnings.

I was bearish into the report and needed to see a couple of things from Tiffany to reverse course, for example clean inventories following below-plan sales in the quarter and any indication of stabilization in Europe. Unfortunately (and I use this word as Tiffany remains a premier global brand), there was ample disappointment scattered about Tiffany's data and commentary to warrant a reiteration of near-term cautiousness on the stock.

Reasons for a Bear Growl

  1. The earnings miss. It's not sufficient to state that Tiffany missed by 3 cents a share and toss the stock in the scrap heap. Drilling into the quarter, you are hit with negatives such as significant sequential sales decelerations on a comparable store basis in Europe and Asia-Pacific and an expense structure that did not flex accordingly. Increases in labor, occupancy and marketing all seem to be weighing on profitability and are outlays that may be considered structural to Tiffany amid a ramp in new store openings in emerging markets (high labor and occupancy costs and marketing spend to get the brand in front of the public), new product introductions and fiscal imbalances in Europe that are requiring more marketing magic to move product out of the front door. Attention will be focused on the dramatic slowdown in European same-store sales, but it's important to take note of what transpired in the Asia-Pacific region (makes you wonder about eurozone contagion and domestic slowdowns in emerging markets).
  2. Inventories. I am unable to recall the last time Tiffany mentioned it had excess inventories as a result of being caught by surprise on moderating sales trends. The fact is that these excess inventories exist and will have to be brought in line to the run rate in sales, which will constrain gross margins that are already under siege from a shift in product mix (to statement pieces from the items we normal folk purchase), higher product costs and increased occupancy costs to support future growth.

So, why is the stock up modestly in the premarket? Instead of opting to guide conservatively and beat a lower expectations bar, management presented a scenario for the market to be optimistic on the year (implied European growth will be virtually nonexistent for the year and the second half of the year will be solid enough, so overlook the front-end pain points). Moreover, commentary on quarter-to-date sales has ignited the hopes of Tiffany bulls that the fourth quarter was as bad as it will get for the jeweler.

In my view, it's look but don't touch on Tiffany for now given the signals the business is sending. Those are:  global sales deceleration, especially in key emerging markets, tough year-over-year comparisons in Europe and risk to the back-end-weighted full-year guidance as the first half is used to bring inventories in line to sales and gross margin continues to structurally change to the negative.

At the time of publication, the author had no positions in any of the securities mentioned.