We’re staying short TIF in the wake of the company’s 3Q results. Simply put, in the absence of 2016 guidance, the consensus will remain too high – likely in the range of $4.30-$4.40. We’re clocking in about $0.30 lower. Is that a huge miss? No. But
a) we also don’t assume a material worsening in the economy in our model, which could push numbers closer to $3.50.
b) After last holiday’s blow-up, the Street was at $4.45 for FY15, and now is at $4.02. Not a huge earnings miss by our standards – yet the stock is down 28% year to date. There’s no reason we can’t, and won’t, see that again.
The key question we ask is why earnings NEED to grow next year. If TIF is going to have a flat year in FY15 in an otherwise decent US and Global economy, what kind of consumer climate do we need to assume in 2016 to get earnings higher? That’s especially the case given the following…
a) Sales productivity at historical peak of ≈$3,450
b) A Brand that might be Great to the person typing this note, but one that is simply ‘very good’ to Millennials.
c) Minimal square footage opportunity (2% long term)
d) A business that structurally does not lend itself to online (only 6% of sales)
e) Gross Margins currently at peak levels of 60%
f) EBIT margins still at 19% this year despite the company’s challenges – with 2-3 points of potential downside.
Ultimately, while we have no doubts in the quality of the management team, 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.
The price has come off, but so have earnings. It is trading near a peak multiple on our numbers (18x) on peak margins (21%), and peak earnings that are not likely to grow for 2-3 years.