TIF’s 1Q12: surprising slowdown by US customers

the report

TIF reported 1Q12 (ended April 30th) results prior to the opening of equity trading in New York yesterday morning.

Revenues were up 8% year on year, at $819.2 million.  The company earned $.64 a share for the three months, down a bit less than 5% from  results–but substantially below the Wall Street consensus of $.69.

Tif also lowered its full-year guidance by $.25 a share, to a range of $3.70-$3.80.  Worldwide sales are now expected to grow at a 7%-8% rate, down from the prior expectation of +10%.  Eps comparisons will likely be negative in 2Q12 and 3Q12.

The stock dropped sharply on the news.

As I’m writing this on Friday morning, TIF shares are somewhat lower again, in a choppy but flattish market.

the details

sales

Americas           up 3% at $386 million

Asia Pacific         up 17% at $195 million

Japan          up 15% at $142 million

Europe     up 3% at $88 million.

Business was much better than I had expected in Japan.  Analysis is complicated by the fact of the Fukushima nuclear disaster in mid-March 2011.  Still, same store sales growth is up more than 10% from two years ago, in a land that had been turning decidedly cool toward luxury goods.

I think any gain in Europe, now the epicenter of world economic woes, is just short of miraculous.

Asia Pacific performed as expected–no better, no worse.  The company says Chinese business has cooled a bit from the torrid pace of last year.  I don’t consider this a worry.  But it does suggest that Asia won’t be a source of significant upside surprise for a while.

It’s the Americas, and specifically the US, where the falloff versus expectations lies.  Sales to foreign tourists are up, with weakness in European buying more than offset by a step-up in purchases by Asian visitors.  So it looks like the problem is with sales in the US to Americans.

TIF pointed out in its conference call that the softness:

–occurred in April

–is not focussed in any one region of the country (so it isn’t just laid-off NY bankers), and

–is consistent with MasterCard data for high-end jewelry in general (so it isn’t a Tiffany-specific issue).

my thoughts

Some portion of the poor US performance may be attributed to a later date for Mother’s Day this year.  But everyone who has access to a calendar already knew that.  Certainly management had factored this into its earlier guidance.

The downward revision comes after TIF has seen Mother’s Day sales.  I think this means that–unlike the case with more mass-market jewelers like Signet–Mother’s Day didn’t counteract April weakness for TIF.  It confirmed the slowdown.

Elsa Peretti

TIF has an exclusive license to sell Elsa Peretti jewelry, which makes up about 10% of company revenues.

The company filed an 8-K with the SEC on May 23rd in which it says that Ms. Peretti, 72, wants to retire and to sell her brand name and designs.  Negotiations between her and TIF are now in progress.  The Peretti intellectual property should have more value to TIF than to anyone else, so in a completely rational world TIF would end up obtaining it.  Earnings would be affected by, say, +/- 7%-8%, depending on whether negotiations result in purchase or not.

the stock

A short while ago, I sold the last of the TIF I held while I was doing a portfolio housecleaning.  My position was small and–as I’ve written elsewhere–I think the stock market is moving toward playing recovery of the average American rather than the continuing prosperity of the affluent.

I don’t feel a huge urge to buy back the stock I sold.

On the other hand, the stock looks cheap to me at 15x earnings.

15x was the place where I became interested in the stock–which I had owned in my portfolios, off and on, for many years–during the bounceback from Great Recession lows.  There’s always the possibility that the company could be acquired by a luxury goods conglomerate or a sovereign wealth fund.  We also know TIF management, which should know the value of the firm better than anyone else, has been buying the stock at above $60 a share.

I guess I’d like to watch the price for a while-and possibly get a better understanding of the current dynamics of the US customer.

 

 

 

 

TIF’s 4Q11: supply your own adjective

the results

Just before the open on Tuesday March 18th, TIF reported earnings results for fiscal 4Q11 (TIF’s accounting year ends in January of the following calendar year). Sales came in at $1.19 billion, up 8% year on year. Profits were $178 million, or $1.39 per share, a drop of 2% from 2010.

For the full year, sales were $3.64 billion, a yoy advance of 18%. Eps were $3.60, or + 23% yoy.

In a lackluster market, the stock was up more than 6% on the news.

details

Sales for 4Q in the Americas were up 5% yoy; in Asia-Pacific they were up 19%, up 13% in Japan and 3% in Europe.

In early January, TIF had warned that its business had slowed significantly from the torrid pace of the first three quarters of 2011 (see my post). Overall, the results TIF actually reported were slightly better than it signaled at that time. Thanks to a small rebound in January, sales in the Americas were 1 percentage point higher than TIF was figuring, and Europe—of all places—was 2% better.  No change in trend elsewhere.

It doesn’t make a whole lot of difference, but 4Q11 eps would probably have been at least flat with 4Q10 and maybe up a penny, were it not for a year-end upward adjustment of the company’s tax rate. Without going into all the details,  a greater proportion of TIF’s sales than anticipated came from high-tax areas like the US and EU. Put another way, the tax rate adjustment is a consequence of the fact that sales in Asia-Pacific fell off more in 4Q11 than the rest of the world did.

TIF also gave its initial guidance for fiscal 2012—sales growth of 10%, earnings per share growth of 10%-13%–resulting in eps of about $4 for the year. The company thinks the bulk of the advance will come in 4Q12.

During the first half of 1Q12, results are tracking in line with TIF’s expectations.

During the quarter TIF spent $35 million buying back stock, at an average price of $67.26. That’s about 30% less than TIF averaged over the first nine months of the year. To me, it looks like all the buying came before the company’s profit warning. If so, I certainly can’t be too critical since I had no enthusiasm for buying, either.

Arguably, continuing to buy below $60 at the same time the company knew its sales shortfall would mean a lot of money tied up in unsold inventory would be too risky. But it certainly implies to me that TIF is not shrugging off the current sales slowdown as something that will soon be behind it.

my thoughts

TIF’s 4Q11 has played out pretty much as I thought it would in January. The only new news from the company announcement is that the situation appears to be stabilizing at the lower rate of sales growth TIF experienced in 4Q11. All in all, I don’t get the market reaction of aggressively bidding up the stock on this information.

Contrary to what I would have expected, TIF shares have also recovered all they had lost vs.the S&P after their January swoon.  And that’s before this week’s earnings report.

The stock now trades at around 18x this year’s earnings. That’s not wildly expensive for a company like TIF. But it’s not cheap, either, especially with perhaps three quarters of lackluster earnings comparisons in prospect.

There’s certainly a risk that my incorrectly lukewarm attitude to the stock at $59 will color my opinion now. Nonetheless, I’m happier on the sidelines now than buying. And I’ve got to at least consider the idea of selling some of what I own into any strength.

TIF’s 4Q11 earnings misstep

background

When TIF reported 3Q11 earnings (Tiffany’s fiscal year, like that of most retailers, ends in January), it lowered its 4Q profit guidance (see my post).

By then, the company had seen sales for virtually the entire month of November and had detected weakness in spending by residents of the Northeast and Mid-Atlantic regions of the US.  At that time, it still expected a “low-teens percentage increase” in worldwide sales during 4Q11.  But it effectively clipped $.10 from its estimate of per share profits for the year’s final three months, saying it expected to earn $1.48 – $1.58 per share during the period.  That would be 6.3% more than the $1.44 it earned in the comparable period of fiscal 2010.

the weakening holiday selling season

Last week, TIF reported the results of its worldwide sales for November plus December.

The news wasn’t good–especially in the US and Europe.

Rather than the low-teens increase in sales the company had been anticipating, revenues were only up by 7%.

By region, they broke out as follows:

Americas    total sales = +4%,     comp store sales = +2%  (3Q11 comps = +15%)     ←

Asia-Pacific (ex Japan)     +19%, +12%, (+36%)      ←

Japan     +13%, +6%, (+4%)

Europe     +1%, -4%, (+6%).

In the US, sales to residents were down year on year.  Buying by foreign tourists pushed results into the plus column.

In its press release, TIF reduced its eps forecast for 4Q11 by another $.10-$.15.  It now expects to earn $3.60 – $3.65 for the full year.

The stock fell 10% on the news.  Unlike other stocks with negative earnings surprises, TIF hasn’t rebounded.

my thoughts

December must have been a particularly disappointing month for TIF, since management had already revised down its expectations  based on November weakness.

Recent macroeconomic reports are almost universally signalling that the US economy is improving.  In the jewelry industry in particular, Signet reported on the same day as TIF that its same store sales in its Kay business were up +9.8% and in Jared, +10.0%.  Similarly, Zale reported that its non-kiosk US jewelry business had same store sales growth of +9.0%.  Neither is showing anything like the weakness in TIF’s business.

TIF is much farther up-market than either Signet or Zale.  Presumably, that’s the source of the difference.  It looks like TIF’s high-end US customers left their credit cards at home last month.  My guess is that the problem resides in the waning fortunes of executives in financial services and the industries, like legal, which support it.

Look at the Asia-Pacific figures above, as well.  TIF didn’t highlight this area.  Same store sales are still high at +12%. But three months ago they were growing at a +36% pace, or 3x the current rate.

what to do

At last Friday’s price of $59 or so, TIF is trading at 16x fiscal 1011 eps and yielding 2%. That looks cheap to me.

On the other hand, we have only guesses as to what’s causing the current deceleration in company sales.  They’re probably good guesses, but still…

For investors, the more pertinent question is probably when earnings comparisons will begin to pick up again.  My tentative answer is–not soon.  In fact, earnings comparisons could be negative or flat until late in 2012.

So my thoughts remain unchanged from late November.  I don’t feel any need to sell the stock I own, but I don’t think I have to hurry to buy more.  If I didn’t own any I might buy a small part of a position now, but no more than that.

 

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.

 


Tiffany’s even more dazzling 2Q11

the results

TIF reported July quarter  results (like most retailers, the company’s fiscal year ends in January of the following calendar year) just prior to the opening bell on Wall Street last Friday.   The numbers were better than the stunningly good results of 1Q11.

Sales were up 30% year on year at $872.7 million.  Earnings per share, at $.69, were 33% higher than in 2Q10.  Remove non-recurring items–mostly the costs of moving the New York head office, however, and eps were up 58%, at $.86.  This compares with the brokerage house analyst consensus of $.70, with estimates ranging from $.64 to $.77.

TIF raised its full-year earnings guidance by $.20/share to $3.65-$3.75.  My interpretation of management’s (very brief) remarks about this lift is that, as the business looks now, TIF should easily surpass this figure.  The only possible sign of weakness comes from Europe, where comps were “only” up 12% on a constant exchange-rate basis.  But during a time of political and social turmoil, there’s no sense in their raising the guidance bar any further.

Makes sense to me.

stuff I think is worth noting

–TIF bought back 330,000 shares of stock during the quarter at an average price of $74.29.  Not necessarily the greatest trade ever, but it tells you management thinks the intrinsic value of the company is significantly higher than that.

–Comps (comparable store sales) were stronger in 2Q than in 1Q for all regions of the world except Europe.  High-end jewelry sold especially well.  Chinese customers outdid themselves.

–3Q-to-date is just as strong as 2Q.

–Dollar weakness played a role in boosting earnings from Japan and Europe.  There’s no easy way to figure out the exact number, but my back of the envelope guess is that eps would have been around $.08 less without a rise in the ¥ and the €.  I think the $ will be a secular weak currency and that’s part of the icing on the cake of the TIF story.  But I don’t think we’ll see a gain this big again soon.  We might even see some giveback in 3Q11.

–Capital spending plans remain unchanged at around $250 million, but TIF will open 17 new stores this year–one fewer in the US than previously planned, one in Europe.  Eight remain penciled in for Asia-Pacific.

–Thursday-Friday trading in TIF wasn’t what I would have expected.  Before the open on Thursday, jeweler SIG (every kiss begins with Kay; he went to Jared) reported stellar US results for 2Q11.  US comps were up about 12%.  Despite this hint that TIF’s results would be unusually good, TIF shares faded after an initial rise to close down about 1% for the day.  On Friday, post results, TIF was up by 9.3%.

Isn’t Wall Street supposed to discount information in advance?

details

US

US sales (51% of the business in 2Q) were up 25% year on year at $438.2 million.  Half that gain came from purchases by foreign tourists, led by Chinese visitors.  Comps in the Fifth Avenue flagship store, a mecca for foreigners, were up 41% vs 2Q10.

The biggest factor was higher price.  Statement jewelry at prices of at $20,00-$50,000 and $50,000+ were notably good sellers.  However, units were up for all categories selling for at least $250.  Only silver jewelry, at the lowest price points, didn’t come to the party.

Asia-Pacific

Sales were $173.2 million (20% of sales), up 55% year on year during 2Q in this region.  Comps were up 51%.  China and Korea were the strongest areas.

What can I say.  I thought the 31% growth in comps for 1Q were great.

Japan

Sales were up 21% to $142.5 million (17%).  Comps were +8%; the rest was currency.  Sales momentum was good throughout the island nation, and built as the quarter progressed.  Purchases by Japanese tourists in Hawaii and Guam, counted in US results, were also good.

Europe

For the first time, TIF is mentioning foreign tourists–China and Russia–as a factor in its fledgling European operations, although most purchases are still by locals.  At $101.3 million, sales were up by 32%.  Comps were up 11%; the rest was currency.  Unit volume increases were the biggest factor in growth.  The UK was good; the continent was better.

Other

TIF has an “other” business, which consists of wholesale sales to emerging markets where TIF has no stores plus trade in rough diamonds.  The total for 2Q11 was $17.4 million.  I haven’t included it in my percent-of-sales calculations.  It’s not big enough to move the needle.

the stock

Same idea as three months ago  …except my numbers have changed a little.

I think TIF can earn $4 a share in fiscal 2011.  My base case for fiscal 2011 is $4.75.  If we apply a 20x multiple to those figures, we get an $80 target based on this year’s results and $95 based on fiscal 2012.  In an uptrending market, the multiple would easily be 25x, implying a correspondingly higher stock price.

In contrast, in a bad market/economy, next year’s earnings might be flat at $4, or even down a bit.  Applying a 12x multiple gives you a price of $48 (at the absolute bottom in 2008-09, TIF traded at under 9x depressed earnings of $2).

At Friday’s close, then, the $25 of upside I think possible is almost exactly counterbalanced by $20 of downside if the economy goes mildly south.

As it turns out, even though I told myself (repeatedly) that I was going to let the force of the downtrend of the past month or so play out without my buying anything, I found myself replacing the TIF I sold at $76.50 earlier in the year at around $63.50 on the day the market hit 1106.  That tells you something about me; it also says I think the more bullish outcome is more likely.

To my mind, the key variable is not China, which I think will go from strength to strength, or the overall US economy, which I think will be a story of the differing fortunes of haves  have-nots (think Europe in the 1980s) that will aggregate into only modest progress.  The big issue I see is that US comps generated by US citizens have got to lose steam at some point.  As long as they don’t drop to zero, I think the stock will be ok.

The fact that TIF was a $58- stock just a handful of days ago suggests a certain level of anxiety on Wall Street’s part about retail names.  To me, this means that there may be a chance to add to the stock at lower prices than Friday’s.