THE HEDGEYE EDGE
If you’re looking for a U.S. Equity to play our macro team’s #LateCycle #SlowerForLonger bearish themes, here’s a name wrapped in a "Little Blue Box" just for you.
We all know Tiffany. Generally speaking, this is a structurally sound business. It is definitely not a ‘headed to zero’ short like we’d argue for a company like Wayfair (W). But stocks of good companies like Tiffany go down all the time, and we think TIF is headed lower.
Common perception seems to be that “just because TIF blew up earlier this year, it can’t blow up again.” We disagree. It actually blew up twice this year. And we think there will be another. We didn’t like TIF into the latest print, and we definitely don’t like it on the way out. The company lowered back half guidance, which we expected to see, but we’re not sure if $0.10 is enough off of 2H14’s $2.27 base. We’re inclined to think ‘no’.
The bigger tell for us will be how much consensus numbers come down for next year. They currently sit at $4.56. If the macro environment plays out like we believe, then we think we’re looking at a number closer to $4.00.
The problem here is that management is adjusting guidance based on what it sees at the time of the earnings report – not based on how the environment will likely deviate from what they see in front of them.
Also keep in mind that the company is at peak productivity of $3,500/ft (some less productive Apple stores – the highest s/sqft in retail -- do $3,500), peak Gross Margins, trough SG&A margins, peak diamond exposure (59% of units has a diamond, which is gross margin accretive), and only can grow square footage by 2-3% on its best day.
We have no doubts in the quality of the management team or brand name, but the reality is that there are no obvious margin levers to offset the declining growth profile in the business, especially amidst increased late cycle risks.
It is trading near a peak multiple (18.5x) on peak margins (21%), a peak earnings ($4.20E TTM and NTM) that isn’t growing, peak returns (18%), has the worst cash conversion cycle we’ve ever seen (490 days), while sentiment is sitting at all-time highs.
It’s feast or famine – if one of those metrics breaks, then they all do.