Tiffany(TIF): strong 3Q11 + weak guidance = 8.7% stock drop

the results

TIF reported its 3Q11 (ended October 31st) earnings results before the start of New York trading yesterday morning.  For the three months, the company took in revenue of $821.8 million.  It earned $89.7 million, or $.70 per share.  This represents a 52% increase over the $.46 a share the company earned in 3Q10.  The 3Q11 figure handily beat the Wall Street consensus of $.60 a share, even exceeding the most optimistic estimate, which was $.67.

TIF also continues to buy back stock at around the $65-$66 level.

the guidance

TIF says it expects 4Q11 earnings to come in between $1.48-$1.58 per share.  This represents a (mere) 6.3% increase over the $1.44 per share the company posted for 4Q10.  This guidance falls near the bottom of the 4Q Wall Street analysts’ estimate range of $1.51 – $1.69.  The median estimate, which  may be revised down, has been $1.64.

Just for reference, a year ago TIF guided to eps of $1.29 and reported $1.44.  If we adjust management guidance for possible lowballing of the same magnitude, we arrive at a figure around $1.65.  That would be a year on year gain of 15% or so.

the details

3Q11 business was stellar.  By areas:

–the Americas, 47.9% of TIF’s sales (49.7% a year ago), rose by 17% yoy.

–Asia Pacific, 22.6% (19.6%), was up by 44%

–Japan, 18.1% (19.1), rose by 12%

–Europe, 11.4% (11.6%), was up by 19%.

Strength was in high-end merchandise.

Where’s the problem?

In its guidance, TIF alluded to “recent sales weaknesses” it has noticed in Europe (no surprise there–and it’s still a tiny part of TIF’s overall business) and in the eastern US.  In its conference call, the company said the western US remains strong and buying by foreign tourists continues to be a significant positive.  But it has noticed a slowdown in purchases by domestic customers in the Northeast and Mid-Atlantic states.  That’s the reason for its relative caution.

my thoughts

On the surface, the Boston-Washington corridor slowdown seems odd.  The just-released National Retail Federation survey (see my post) highlights the Northeast as an area where holiday spending is surging.  However, I’d already heard the same story as TIF’s from another (privately held) luxury retailer doing business along the East Coast.  I’d attributed that to company-specific problems, but it’s sounding like I’m wrong.

What could be the cause?  …pent-up demand from the recession being satisfied over the past year?  …lower bonuses on Wall Street?  …Newt Gingrich taking a lower spending profile (a joke)?

TIF is still projecting sales in the Americas to be up by 15%-20% yoy in 4Q11, but is now expecting the lion’s share of the sales growth to come from buying by foreign tourists.  This contrasts with the 50-50 split the company has seen in sales growth  between locals and foreigners during recent quarters.

TIF is currently earning at a $4 per share annual rate.  This means it’s now trading at a bit over 15x earnings.  That’s an unusually low multiple by historic standards.  It’s also where the TIF management sees considerable value, as evidenced by its stock buybacks.  In addition, Asia Pacific sales probably amount to about a third of revenues, if we factor in sales to tourists in the US and Europe.  Those sales alone seem to me to be enough to grow the entire company’s profits by at least 10% per year.

On the other hand, if US sales of luxury goods to domestic buyers are beginning to flatten out after an extraordinary burst of buying over the past year–and continue flat for a while–then earnings comparisons for TIF over the next few quarters will likely be lackluster.  Any potential bids from European luxury goods firms (I’ve regarded this possibility as very small, in any event) will likely stay on the shelf until the EU’s economic future is less cloudy.

All in all, I’m content myself to wait before adding to my holding.  If I owned no TIF at all, however, I’d be tempted to buy a small amount now and await further developments.

 


is the US job market taking on a European look?–why this is important

unemployment

The Wall Street Journal is arguing in its Monday print edition that the US job market is–at least in the sense that the US may be facing the type of chronic high unemployment that has bedeviled Europe for decades.

In an earlier online version of the same article, the WSJ pointed out that, despite an unemployment rate approaching double digits, there’s actually a shortage of workers in some specialties in the US.  Wages in these areas are rising significantly, meaning employers can only fill these positions by poaching from rivals, not from dipping into the sea of unemployed.  It also gave machinery-related examples–but it’s now lost in cyberspace.

The JOLT (Job Openings and Labor Turnover Survey) complied by the Bureau of Labor Statistics points out the same phenomenon.  As of the latest JOLT reading (September 2011), there are 3.4 million unfilled job openings in the domestic labor market.  That figure has risen pretty steadily since July 2009, when there were 2.1 million such openings.

Also, the head of the Federal Reserve Bank of Minneapolis, Narayana Kocherlakota, made a much-publicized speech on this topic in August 2010 (see my post), in which he said that the Fed doesn’t have the means to change construction workers into manufacturing workers.  Retraining does this, not easy money policy.

Of course, the roots of European unemployment have been mostly caused by very rigid labor laws that make it very time-consuming and expensive to fire a worker, once hired.  In the US, in contrast, (the smaller) part of the issue is that scared Baby Boomers have stopped retiring at normal rates, and are thus not freeing up jobs for younger workers.  In addition, globalization has moved unskilled labor jobs to emerging markets.  This has been going on for a long time, but adjustment in the US was put on hold during the housing bubble that lasted half a decade.  So the US labor force has a lot of catching up to do.  That’s the main problem, in my view.

why is this important?

Two reasons:

economic policy

It’s probably right to use money policy to stabilize the stock market, so that Baby Boomers will move into the retirement phase of living, freeing up jobs for younger workers.  But, as Mr. Kocherlakota observes, low interest rates can’t retrain workers.   Legislators can–but so far won’t.

stock market

The main reason I’m writing this is that I think most American investors believe the domestic economic recovery is somehow broken because it isn’t following a typical post-WWII pattern.  They continue to think that high unemployment is a business cycle signal that all is not well.  As a result, they’re suspicious of any strong corporate earnings reports and are only willing to pay low multiples for what they regard as “broken” profits.

I think the WSJ article I cite above is interesting because it suggests that, as I’ve been writing for a year or more, that for 90% of the US, the economy is expanding, jobs are secure and the future is bright.  I think that’s why Black Friday and Cyber Monday have been so strong this year.

If this is correct, we should see resumption of wage increases on a wider scale next year.

Frictional unemployment is, say, 4% of the workforce.  This means that 5% of the workforce wants work and can’t get it (I know this figure excludes the underemployed and discouraged workers).  Normal retirement patterns by Baby Boomers might clip 1% from that number, leaving 4% of the workforce to receive government support and retraining assistance.  Yes, that’s still a big number.  But it’s doable.  And denial–or nostalgia for the 1950s, when the US had the only industrial base untouched by WWII–won;t help.

From a Wall Street point of view, however, I think recognition of the structural nature of current high unemployment would mean the gradual expansion of the price earnings multiple investors award to the market.

Thanksgiving retail sales–more evidence of a healing economy

the National Retail Federation survey

Yesterday, the National Retail Federation, a large retail trade association, released its annual survey of shopping over the Thanksgiving/Black Friday weekend.  The survey, conducted by BIGresearch, polled 3,826 US consumers on November 24-26 about their actual spending and their intentions for the remainder of the weekend. It has a margin of error of +/- 1.6%.

the results

overall

The typical shopper reported spending $398.62 over the weekend.  That’s up up 9.1% year on year, and contrasts sharply with spending behavior in 2010, which was virtually flat (up .3%) vs. 2009.  This is a record high, and the largest yearly increase since 2006.

A lot of people who stayed home last year joined the fray.  Total spending was $52.4 billion, up 16.4% vs. 2010.

Buying was led by consumers in the Northeast, who reported that their outlays are up 24% year on year.  (During the Great Recession, buying remained steady in the South and rose steadily in the West, but fell off a cliff in the Northeast and Midwest.  The latter rebounded last year; this year’s Northeast figures are only slightly above the 2007 level.)  This makes some intuitive sense, since the Northeast was the epicenter of the financial crisis and hurt very badly by it.

The average shopper polled has done 38% of his shopping this weekend, about the same as last year.  Despite having spent the most money so far, shoppers in the Northeast say they’ve only spent 36% of what they intend to.  That’s the lowest regional total.

the rise of the Thanksgiving Day shopper

Although Friday and Saturday are the heart of the retailers’ Thanksgiving weekend, the increase in store openings and special sales on Thanksgiving evening led to 21.9% of survey respondents showing up at the stores during the Thursday holiday.  That’s up from 18.1% who turned out last year.

online shopping increases

This year, shoppers reported that they spent 37.8% of their total online.  That seems like a huge amount, but last year the percentage was 33.3%.

The bigger behavioral change, shown in a companion survey about Cyber Monday behavior, is in the use of mobile devices.  That’s tripled to 14.5% of shoppers over the past three years, and doubled since last year.  This doesn’t necessarily mean that many consumers will order merchandise over their phones or tablets.  Some will, but most use these devices to comparison shop or to check in-store prices.

By the way, the vast majority of today’s Cyber Monday shoppers now buy early in the morning and from their home computers, rather than during breaks at work.

investment conclusions

The survey outcome appears to have the NRF considering whether its forecast of a 2.8% increase in retail sales for the 2011 holiday season isn’t too low.  In my view, it probably is.

To me, aside from the magnitude of the spending increase this year, the most interesting result of the NRF surveys is that they highlight the rebound of the financial services-dependent Northeast after two years of caution.

The overall survey reinforces the view I’ve held for a long time that high unemployment is an urgent social and political problem, but one that will have little negative impact on GDP growth in the US or on the results of publicly listed US corporations.

 

China: infrastructure spending will boost Western growth. We’ll help.

CIC investing in Western infrastructure

Today’s ft.com contains a commentary from Lou Jiwei, chairman of the mainland sovereign wealth fund, China Investment Corporation.  In it, Mr. Lou argues that global economic recovery can’t come from developing countries alone.  Developed nations must expand as well.  To help this latter effort along, the CIC is preparing to participate in Western infrastructure projects as  “investor, developer, operator and contractor.”  Projects could be in “energy, water, transport, digital communication, waste disposal…”  The CIC’s first stop will be the UK.

In a companion article, the FT says that a proposed high-speed rail line between London and northern England has caught China’s eye.

Why?

Why do this?  …and why the UK, of all places?  After all, it isn’t that long ago that China was demonizing the UK for invading China in the mid-eighteenth century to force the mainland to accept opium imports from British colony, India.

I can see several reasons for the CIC proposal, aside from the salutory effect infrastructure spending may have on Western economies:

–infrastructure projects can provide higher returns for China’s massive foreign currency holdings than government bonds will.  China is such a super-size investor that liquidity may not be that different,

–successful infrastructure upgrades can buy public goodwill and political influence,

–reversal of the “normal” flow of equity investment funds from developed to developing is a sign of China’s increasing importance in the world economy,

–Chinese industrial and service companies may have a greater chance to win contracts for such projects than they might otherwise,

–the UK is small enough that Chinese spending can have a significant, highly visible impact,

–the UK may be a showpiece.  It could provide entrée into the Eurozone and ultimately to the US,

–the UK is apparently willing to accept Chinese money and not raise spurious “national security” objections to prevent mainland investment.

investment considerations

CIC-backed projects could provide a mild–mostly psychological–boost to the UK.  It’s possible that private investors may be allowed to invest side-by-side with the CIC, as well.

Better transport… alternatives could take business away from direct competitors.  Better rail links, for example, might be bad for commuter airlines or for delivery trucks.

On the other hand, better overall infrastructure support could lure industrial or service businesses from elsewhere in the EU.

So far, however, we don’t have enough information to act on.

a post-Thanksgiving addendum to Current Market Tactics

I’ve just wrote a post-Thanksgiving update to Current Market Tactics.  If you’re on the blog, you can also click the tab at the top of the page.

celebrity deathmatch: Bill Miller vs. Jon Corzine

the importance of fixing mistakes

My earliest mentor as a portfolio manager continuously pounded into my head the need to find and fix mistakes before they get out of control and destroy your performance.  This is crucial, she said, and she was right.

In her view (I’m simplifying), a good stock might get you 10 percentage points over the index return in a year.  A bad stock, on the other hand, might cost you 30 percentage points before you admit to yourself that you’ve made a mistake and sell.  Therefore, it takes three good stocks to offset the damage done by one bad one.

In other words, common sense says that you’d better spend a lot of time on the lookout for underperforming names in your portfolio.

Why the 3:1 relationship?  Why not 1:1?  I don’t know.  I do know that the bad stocks are uglier than good stocks are pretty.   As to reasons, it may be the professional investor’s disease.  Every time he buys a stock he thinks he knows more than the consensus.  That takes a huge ego.  But the same ego can get in the way of recognizing that you’re wrong.  Or it may just be that when an unfavorable event occurs, holders all rush to sell.  This activity itself depresses the stock significantly.

In any event, it’s PM 101 that you can’t fall in love with your holdings.  You have to develop some way of identifying the clunkers (everyone has them; it’s a fact of life) before they wreck your portfolio.

Miller vs. Corzine

Bill Miller and Jon Corzine are recent instances of famous Wall Street figures who forgot this lesson, with disastrous consequences.

a difference

There is a crucial difference between the two, however.

Every manager knows his asset size, his cash position and his daily inflows and outflows almost to the penny.  A professional trader working on margin knows the size of his equity in real-time and monitors it just as closely.  I find it extremely difficult to believe that an “extra” $600 million or $1.2 billion could plop down into accounts you’re managing without your noticing it.  That’s doubly true if the money is needed to stave off a ruinous margin call.  You’d have to know, in my opinion, and would immediately want to understand where it came from.

similarities

What do the two managers have in common, other than their inglorious ends?

Both were very successful for an extended time within the long period of interest rate declines in the US that occurred between 1982 and, say, 2005.  That period, which is over now, taught managers to expect that even extreme risk-taking would eventually be bailed out by lower interest rates.  Neither man seems to me to have understood that this strategy no longer works.

Both appear to have forgotten to play defense.

My guess is that Mr. Miller regarded the recent financial crisis as a replay of the savings-and-loan meltdown that he successfully navigated in the early 1980s.  So he had reason to believe that he had an edge over other, less experienced stock market investors.  Mr. Corzine, on the other hand, strikes me as being more like a professional athlete who returns to the field after a decade working in an office and assumes that he can perform at the major league level from day one.  He seems to me not to have noticed that the other guys were faster, stronger and had instincts honed by never having fallen out of game shape.

In a lot of ways, professional investors are like kids playing video games.  Firms that employ them typically recognize this and install checks and balances that either force them to consider the business consequences of their actions or set portfolio parameters beyond which they are not permitted to go.  Both Miller and
Corzine seem to me to have been so deeply entwined in the management of their firms, however, that the firm’s risk controls were overridden.

Both are cautionary tales for investment professionals.