Tiffany Loses Some Sparkle - Analyst Blog

Tiffany & Company ( TIF ) lost a little shine due to sluggish sales witnessed in the Eastern U.S. and Europe that highlighted its vulnerability to the turbulent and dwindling economy. Coming to the facts, we observe that sales in Europe climbed 19% during the third quarter of 2011, following an increase of 32% in the second quarter, whereas sales in the Americas grew 17% compared with 25% in the previous quarter.

We also noted that Tiffany, a high-end jewelry designer, manufacturer and retailer, raised its fiscal 2011 earnings projection on the back of better-than-expected third quarter results but reiterated its top-line guidance. The unchanged revenue guidance was enough to dash the hope of investors, who were looking for some sales pick-up this holiday season.

Further, a lower-than-expected earnings forecast for the fourth-quarter of 2011, which comprises the holiday season, also took away some sheen from the stock that fell approximately 9% since November 28.

All these compelled us to revisit our long-term view. We recently downgraded our recommendation on Tiffany to Neutral with a price target of $71.00. Earlier, we had an Outperform rating on the stock. Our approach on the company is bit cautionary given an unpredictable economic environment.

What the Company Guided?

Tiffany, which faces stiff competition from Signet Jewelers Limited ( SIG ) and Zale Corporation ( ZLC ), projected earnings between $3.70 and $3.80, reflecting a growth of 26% to 30%. Earlier, the company had guided earnings in the range of $3.65 to $3.75.

For the fourth quarter, management projects earnings between $1.48 and $1.58 per share.

Following the company's projection, the analysts covering the stock have tweaked their estimates to better align with management's earnings outlook. The current Zacks Consensus Estimate for fiscal 2011 is $3.76 per share that reflects an increase of a penny in the last 7 days. For the fourth quarter, the Zacks Consensus Estimate dropped by 7 cents in the last 7 days to the current level of $1.57.

Where the Spark Lay…

Tiffany posted better-than-expected third-quarter 2011 results buoyed by improved demand for luxury items worldwide as the wealthier consumer continues to shop despite lingering economic woes. The quarterly earnings of 70 cents a share surpassed the Zacks Consensus Estimate of 60 cents, and increased 52% from 46 cents earned in the prior-year quarter.

Tiffany posted net sales of $821.8 million during the quarter, up 21% from the prior-year quarter, and handily beat the Zacks Consensus Estimate of $798 million. Comparable-store sales climbed 19% in the quarter under review.

The jewelry company has been outperforming the Zacks Consensus Estimate consistently. With respect to earnings surprises, Tiffany has topped the Zacks Consensus Estimate over the last four quarters, including the recent one, in the range of 3.6% to 22.9%. The average remained at 15.2%. This suggests that Tiffany has beaten the Zacks Consensus Estimate by an average of 15.2% in the trailing four quarters.

Undoubtedly, the choppy macroeconomic environment poses a major threat for Tiffany, but it still continues to keep its head high. Tiffany anticipates a high-teens percentage rise in total net sales for fiscal 2011. Management expects a high-teens percentage increase in sales in the Americas, at least a 35% rise in the Asia-Pacific, a minimum increase of 20% in European regions, and at least a 10% jump in Japan. Other sales are projected to fall marginally.

Regained Consumer Confidence

Thanksgiving, Black Friday and Cyber Monday all will have their say; regained consumer confidence looked far stronger than the prior-year period. It seems that consumers were saving up for the holiday season, and went from shop to shop to grab the best deal.

According to the data released by National Retail Federation, holiday weekend sales surged 16.4% to $52.4 billion. The survey also revealed that as many as 226 million bargain hunters visited stores and surfed the Internet over Black Friday weekend compared with 212 million in the prior year.

Other Catalysts

Tiffany holds a significant position in the world jewelry market due to its distinctive brand appeal. The company intends to expand its distribution network by adding stores in both new and existing markets. Tiffany now plans to add net 14 stores in fiscal 2011 with 6 in the Americas, 3 in Europe and 6 in Asia-Pacific. The company also plans to close one location in Japan.

Tiffany has been consistently enhancing shareholder returns through share repurchases and dividends. The company recently increased its quarterly dividend by 16%. This is the ninth time the company has hiked its dividend in as many years. In January 2011, the company announced a new share repurchase program of $400 million, which is set to expire on January 31, 2013.

Let's Conclude

The jewelry market was hit hard by the recent global meltdown, which resulted in a shift in focus to cheaper private label brands, but as the recession eased demand for luxury items also improved. The company 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 that Tiffany is well positioned to deliver robust sales and earnings growth.

The company is focused on opening smaller stores that offer selected collections of lower-priced, higher-margined 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 brand appeal, strategic initiatives and a brighter outlook bolster a sense of confidence in the stock even amid a dwindling economy. But we have to wait and watch as to how the cautious consumers react to the sparkles of Tiffany in the upcoming holiday season. As of now, we have a short-term Hold recommendation on the stock, which is well defined through our Zacks #3 Rank.

SIGNET GRP PLC ( SIG ): Free Stock Analysis Report

TIFFANY & CO ( TIF ): Free Stock Analysis Report

ZALE CORP NEW ( ZLC ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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