Tiffany & Co. (TIF, Financial) recently revealed its first-quarter results for fiscal 2016 with both the top and bottom lines surpassing the consensus estimate. The jewelry retailer posted earnings of $0.81 a share on revenues of $962.4 million, compared to the consensus estimate of earnings of $0.69 a share on revenues of $913.5 million. Following the upbeat results, Tiffany & Co shares climbed over 11% to $96.33 before closing at $94.54.
Currency headwinds eat into sales growth
While Tiffany & Co reported estimate-beating results, the figures indicated significant year-over-year decline, with earnings falling 16.5% for $0.97 in the year-ago quarter owing to lower sales and higher SG&A costs. At the same time, net sales dropped 5% owing to slowdown in the Japanese market that was partially offset by sales improvement in other regions. However, the company’s gross margin expanded 90 basis points to 59.1% of sales on the back of increase in prices and reduced product costs, while operating margin contracted 300 basis points to 17.7% during the quarter.
While Tiffany & Co saw 1% growth in net sales on a constant currency basis, comparable-store sales fell 1%. Although the company saw growth in comparable-store sales in majority of the regions it operates in, negative foreign currency headwinds took a toll on the Q1 results. Regionwise, sales in Japan took the biggest hit with a 30% year-over-year decline to $122 million, while comparable-store sales plunged 35%. At the same time, the Asia-Pacific region saw 1% year-over-year drop in sales to $259 million, with a 2% fall in comparable-store sales. Sales and comparable-store sales also tumbled 6% and 8% respectively in the company’s "Other" regions. On the upside, Tiffany & Co saw 2% and 1% year-over-year growth in sales respectively in Europe and the Americas to $103 million and $444 million. However, comparable-store sales dipped in both these regions by an equivalent percentage.
During Q1 2016, Tiffany & Co launched 3 new company-operated stores taking the overall global store count to 298. The company also repurchased shares worth $33 million during the quarter, with authorization to buy back shares worth $240 million more before March 2017.
Outlook for FY2015
Following the results, Tiffany & Co, which competes with Zale Corporation (ZLC, Financial) among others in the specialty retail industry and Blue Nile Inc. (NILE, Financial) in the consumer discretionary sector, also provided guidance for the remainder of fiscal 2015. The company projected only marginal growth in earnings for FY 2015 compared to earnings of $4.20 a share posted in FY2014. The company also said it expected to see modest year-over-year decline in net earnings for the second quarter of fiscal 2015, while double-digit percentage growth is in the offing for the third and fourth quarters. Consensus estimates peg Tiffany & Co’s Q2 earnings at $0.91 a share, while for the full fiscal 2015, earnings are expected to come in at $4.72 a share.
Final thoughts
Going into Tiffany & Co’s earnings report, market expectations were incredibly low. Consequently, it came as no surprise that investors were upbeat following the better-than-expected results and sent shares surging over 11%. Although the results were significantly lower than the year-ago quarter, with comparable-store sales dipping across the board, what is heartening is that there was growth in most parameters on a constant currency basis. Negative foreign currency headwinds were expected, and so was a slowdown in global sales. However, the company managed to keep expenses to a minimum and also continued buying back shares during the quarter. While experts are looking at an average annual earnings growth rate of nearly 12% for Tiffany & Co over the next five years, earnings growth is foreseen to pick up significantly next year after remaining essentially flat in FY2015. Consequently, the Tiffany & Co stock currently carries a "hold" rating for the near term.
