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Tiffany & Co. (NYSE: TIF) reported pretty lousy earnings on Thursday, which not only suggests bad things about where the company is at present, but about the luxury retail sector.
Net sales were virtually flat at $991 million in the second quarter compared to $993 million last year. The good news was that comparable-stores sales rose 7%, which is a robust number. The problem was that these comps didn’t lead to a stronger bottom line.
Net earnings for the luxury jeweler came in at $105 million, which was a 16% decline from last year’s $124 million. The company got hit with three obstacles.
First, selling, general and administrative expenses rose because the company ramped up marketing.
Second, currency effects whacked Tiffany earnings.
Lastly, the company had to write off about $6.5 million after a loan it made to a diamond mining company went bad.
Contrasts Among Regions
Much of what we can learn from Tiffany as investors comes from its individual geographic regions.
- The Americas was lackluster; both total sales and comps were flat. That’s on a constant-exchange-rate basis, as are all of the following. In Asia-Pacific, total sales and comps rose 9% and 6%, respectively, led by strength in China and Australia, so that was somewhat decent news.
- In Japan, sales and comps blew out the windows, increasing 27% and 21%, respectively. Some of this was driven by sales to foreign tourists. However, there was a quirk in Japan when you look closer. These are sales compared to last year, and last year’s second quarter saw the introduction of a consumption tax in Japan, which depressed sales. So even good news gets dinged.
- There was no such quirk in Europe, where sales and comps both rose 19%. There’s no doubting that consumers were spending big in the quarter. Alas, currency effects mean that even these great comps dribbled away. In U.S. dollars, total Europe sales only rose 2% to $123 million.
The news was otherwise bad. Tiffany’s other sales fell 27%, and that’s on a constant-exchange-rate basis. Once those currency effects get baked in, this division saw a 33% sales decline to $23 million.
Earnings Drop Ahead
The picture ahead doesn’t get better. Management expects net earnings to be 2% to 5% below last year, and that’s after factoring in share repurchases.
So Tiffany’s earnings are going to end up at around $4 per share this year. With the stock at $83, there is no way to justify paying 21 times earnings for a company with these kind of lousy sales declines.
The global view isn’t encouraging. The suggestion is that either Tiffany as a brand is losing its luster, or that luxury consumers are withholding purchases because they are not loving where the economy is or where it’s headed. Tiffany was one of the first beneficiaries of the upswing in spending following the financial crisis.
Is there any good news coming out of Tiffany? A little. Its cash position is very strong, having nearly doubled it to $771 million. It has very manageable debt of $878 million. The company isn’t in danger of going away, but the stock is in danger of falling sharply if the market clues in that it’s far too expensive.
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