On Monday, luxury jewelry maker Tiffany & Co. (TIF) reported fiscal second-quarter results that were only slightly lower than expected. Revenue grew 2% year-over-year to $887 million, on constant currency worldwide same-store sales that slipped 1% (in-line with consensus expectations). Earnings were a penny shy of expectations at $0.72 per share, up 4% compared to the same period a year ago, but down 19% when adjusted for costs related to the relocation of Tiffany's headquarters that occurred during the fiscal second quarter of 2011. Looking ahead, Tiffany cut its fiscal 2012 revenue growth forecast to 6-7% (from 7-8%) and lowered its yearly earnings per share guidance to $3.55-$3.70 (from $3.70-$3.80). Our fair value estimate for Tiffany remains unchanged, despite the reduced outlook.
The geographic divergences during the quarter were particularly fascinating, in our view. Revenue in the Americas region was unchanged on a constant currency basis, but down 1% to $434 million on a reported basis. Same-store sales in this region fell 5% on an aggregate basis, though 9% at the New York flagship and 4% at branch stores-however, the company lapped increases of 41% and 19%, respectively. Still, the results echo the weakness we've seen at other affordable luxury retailers like Coach (COH). In our view, Tiffany's slow and steady expansion into more affordable product lines like silver, gold and handbags may be challenging. Not only is this space more competitive than ultra-high-end goods, but it carries lower margins and is more economically sensitive. Further, we aren't too surprised by weakness at the firm's 5th Avenue Store in New York City, especially given recent sluggish performance from Saks (SKS). It seems that tourism to New York is down this summer, and sales could be further cannibalized when the firm opens a SoHo location later this year.
Asia-Pacific revenues increased 1% year-over-year to $174 million, though sales grew 3% on a constant currency basis. Same-store sales, excluding foreign exchange fluctuations, decreased 5% for the quarter, (on top of a 41% increase last year) confirming sluggish consumer-spending trends we've seen in the region. The firm opened its 18th and 19th stores in China during the period, and it remains particularly sensitive to the luxury consumer in the expanding economy. Still, Tiffany expects its own growth to be challenged in the country, which it cited as the major driver of its guidance cut.
Revenue in Japan grew 11% to $159 million, and sales in Europe only fell 1% on a reported basis, to $100 million (up 8% constant currencies). We suspect the better-than-expected performance in Europe, where same-store sales grew 2% on a constant currency basis, was the result of higher domestic spending within continental Europe, offset in part by weakness in the UK. We find this to be an interesting data point given that most of Europe is in or near recession.
All things considered, we do not think Tiffany's shares are very attractive at current levels. Not only are they fairly valued, but shares also score just a 3 on our Valuentum Buying Index (our stock-selection methodology). We fear that some of the weakness at Tiffany is the result of poor execution and product assortment in the US, rather than simply macroeconomic headwinds. We'd need to see substantial weakness (to the low end of our fair value range) before considering the shares for addition to the portfolio of our Best Ideas Newsletter.