Tiffany Misses Earnings Estimates, Investors Are OK With It

| About: Tiffany & (TIF)

As the earnings season fades, a few final companies are announcing their earnings. Tiffany (NYSE:TIF) was one of the names to announce quarterly earnings on Monday. It turns out that the company continues to suffer due to the global economic slowdown, although there might be light at the end of the tunnel. Tiffany earned 72 cents per share in the last quarter, whereas the analysts were expecting it to earn 74 cents per share. Also, the company generated revenue of $887 million, while analysts were expecting it to generate $890 million. In addition, the company lowered its full year guidance from $3.95-$4.04 to $3.70-$3.80. Despite all this, the company's share price was up by 8% as of noon Monday.

This is different from what investors in Tiffany are used to. In the last few quarters, the company usually beat estimates but still saw its share price plunge due to the lowered guidance. This time, the lowered guidance didn't really hit the share price because investors were already expecting it. At the end of the day, Tiffany is a luxury item retailer, and these kinds of businesses usually do well when the global economy is doing well. Tiffany has a considerably sized consumer base in Europe, and the economical challenges in the continent will continue to hurt the outlook of the company for a while. Then again, a lot of these troubles were already baked in the share price of the company, and we saw a rally today.

In the last couple of years, the company's gross margins suffered from high material costs, particularly gold and diamond prices. During the earnings call, it was mentioned that the company expects the gross margins to improve in the next few quarters as the management believes that its margins have bottomed. The company hasn't been able to increase prices of many of its products in recently due to the pressures surrounding the global economy. Once the economy gets going, Tiffany might be one of the major companies to prosper.

Same-store sales dropped by 1% globally and increased 2% in Europe, whereas analysts expected them to drop by 3% globally and 5% in Europe. For the time being, most if not all of the company's growth will come from the newly opened stores. This year, Tiffany will open 28 new stores, up from the 24 announced earlier.

On a negative note, the company's balance sheet worsened in the quarter. The company's cash and equivalents are now worth $367 million, down from $565 million a year ago. Interestingly enough, the company's debt is up from $694 million to $940 million. The company sold debt of $250 million in the quarter, maturing in 30 years with an annual interest rate of 4.40%. Currently the company's debt is as much as 39% of stockholders' equity, up from 29% last year. While the company's cash reserves decreased, its inventories increased significantly. Last year, the company's inventories totaled $1.84 billion, whereas the sum of the company's inventories reached $2.23 billion by the end of last quarter. From the way Tiffany loaded up on inventory, it looks like the company expects to sell a lot of items in the next year. We will have to wait and see how the holiday season treats Tiffany.

Tiffany's financial results can usually indicate how well the wealthy people are doing in the current economy, as most of Tiffany's customers are wealthy and those with higher incomes are usually the last to cut costs when an economic slowdown occurs. When wealthy people start cutting costs, this should signal a bottoming in the global economy, unless something really bad and drastic is about to happen.

Back in June, I wrote an article calling a bottom in Tiffany. Back then, Tiffany's share price was around $53. Since then, the company's share price has appreciated by 16%. If the global economy improves while precious metal prices stabilize, the company will see a lot of upside. Patient investors may find a lot of value in this company if they are willing to wait a few years.

Disclosure: I am long TIF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.