Takeaway: "When you call yourself a luxury brand, but your reputation on the Street starts to converge with Kohl’s, you know there’s a problem."

Editor's Note: Below is an institutional research note on Tiffany (TIF) written by Hedgeye Retail analysts Brian McGough and Alec Richards following the company's earnings this week. They outline why a combination of horrible results and arrogance have caused the stock to decline over -3% so far this week.

A Special Update On Our Tiffany SHORT Call - tiffany box

TIF | It’s Time To Man-Up

We don’t know what’s more surreal…Tiffany’s horrible results, its forecast accuracy, its seemingly blasé attitude towards consistently missing forecasts, the arrogance of its management team in addressing its issues, or lastly – it’s multiple. What we are sure of, however, is that this stock is still a short barring a massive correction today that erases a third of TIF’s market cap. Here’s our brief thoughts on each of the aforementioned points…

1) Horrible Results. There’s no ifs ands or buts about this. The company comped down 9% (or -16% on a 2-yr stack), with sales down in every region (excl. Japan easy comp). Margins were off by 256bp, and pre-tax income was down by 29%. Virtually every line of the P&L eroded sequentially in a very material way. But the balance sheet was no better. The days in inventory was 612, which was up 52 (!) days versus last year. To put that into context, TIF has to wait longer to convert a dollar of earnings into cash than Kohl’s, Target, JC Penney, Macy’s, Nordstrom and Wal-Mart -- combined. There are absolutely no redeeming financial characteristics here.

2) Forecast Accuracy. There are too many examples to fit here, but let’s look at the last two annual updates.  On the Jan 2015 holiday update, TIF guided to FY15 $4.15-$4.20 in earnings, which was 15% below expectations at that time.  By year end they reported $3.83.  On this year's holiday update, it gave initial 2016 guidance of ‘minimal growth in earnings’, which just 4 months later is now guided to a mid-single digit decline, assuming back half improvement. Needless to say, we don’t think that back half improvement will come.

3) Complacency in Missing. Is it me, or has management grown seemingly comfortable in missing numbers? It really does not seem to bother them anymore. The only other management team we can think of that is this comfortable missing numbers is Kohl’s.  KSS can’t be the affiliation a once-great company like TIF aspires to keep. But by its actions, you’d never know.

4) Arrogance. Ok…you just missed – AGAIN, guided down for the seventh time in two years, which just happens to be just two weeks after your CFO resigned. And all we get is what was likely a pre-recorded message by IR with no Q&A? TIF has one of the most stand-up IR programs in the business, but let’s face it…when you miss by this magnitude – and this frequency – you get the CEO on the phone, take your lumps, and stand accountable to your business. Heck, when Macy’s dropped a lousy quarter on the Street last November, Terry Lundgren (CEO) jumped on the call for the first time in almost a decade to show his confidence and support.  So…we can’t expect this from Tiffany, but we can from Macy’s?  The question here is whether TIF management really wants this to be a public company.

5) Multiple. First we heard from people that a ‘low 20s’ multiple is fair. Then ‘20x’. Then 17-18x was ‘cheap’. But what’s really the appropriate multiple for a company that is shrinking earnings at a mid-teens rate, and seemingly has no strategy to ever grow again sans a rebound by spending in US Tourist markets? The best we’d give it is a 10% discount to the market – or 15x. We’re well below the Street next year, which we think will be another down year. We’re looking at earnings of $3.25, vs the Street at $4.15. Give our number a 13-14x multiple and we’re looking at a stock about $20 lower than what we’ve got today ($40-$43).

A Special Update On Our Tiffany SHORT Call - TIF image