Ugly print. Raised guidance has a good element of hope on both Revenue and Margins. This is a great brand, and we want to own it at a price. But time is our friend.
Make no bones about it, this Tiffany print was not good. In fact, we’d call it flat-out bad. 1) EPS missed, 2) every single business unit decelerated on a 2-year basis, 3) the only division to NOT miss revenue expectations was Japan, 4) the Americas catalogue and internet business (6% of total) was actually down year on year (weak transaction count offsetting higher AUR), 5) the NYC flagship was up only 2% despite strength in tourist spending (they called out financial sector as driving weakness in the Northeast region), 6) this was the first time in eight quarters TIF did not leverage SG&A.
All that said, the company raised guidance for the year, but back-end-loaded it. TIF flat-out admitted that inventory will grow faster than sales throughout FY13 and any GM degradation would be offset by SG&A leverage. That makes sense – but only if the company can grow its top line as planned, though it’s worth noting that its swing in our SIGMA analysis is extremely bearish for Gross Margins.
Tiffany is one of those great global brands we’ll always be on the lookout to buy when controversy gives us a shot. In fact, the stock has been a fairly miserable performer in a space that has been lit up since the KORS IPO. It’s +10% vs. KORS +122%, COH +35%, LIZ +56%, and VRA +24% (pre-print). As such, it’s not a surprise that the stock is up on TIF’s outlook.
But the reality is that there is simply too much in question as it relates to intermediate-term trends – even for a company with as powerful a brand as Tiffany. Just dial the clock back 3 and 6 months and see how consumer spending trends have changed by region. Now, headed into FY12 we need to be patient through 2-quarters of weaker top line, inventory build and margin degradation in hopes that things recover in 2H. If anyone can pull it off, we think it’s TIF. But we don’t see why it’s worth chasing here. Let’s see where 1H earnings expectations shake out to assess the potential for capitalizing on misaligned expectations.
Brian P. McGough