Tiffany & Co. - Must Admit I'm Shocked

| About: Tiffany & (TIF)
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Summary

I called for a buy in Tiffany 8 months ago, and recently reiterated the buy call and watched the stock explode higher.

I saw improving sales and gross margins along with a moderately strong consumer driving the name higher.

Holiday sales figures are out and I discuss the impact.

Very recently I discussed how Tiffany & Co. (NYSE:TIF) had been struggling for a few years and the stock had been punished because of this. I went on to describe how given the improvement in the economy and the rise in consumer discretionary spending, particularly on luxury items, that, Tiffany may just be offering a change to catch gains. The stock exploded higher into December. However, the name is out today with some numbers that have given me some pause today, and they are cause for concern.

This year, we have a seen a real rift in holiday sales reporting. There have been some strong winners and some extreme losers. Tiffany released sales numbers early this morning so I want to discuss those results with you. I was expecting a strong performance for the holiday sales season, but am disappointed overall. The company reported net sales of $966 million, just a slight gain over $961 million last year for the holiday period of November and December 2016. Worldwide comparable sales were off 2%. In the Americas, sales fell 4% to $483 million while comparable sales fell 3%. There were higher sales in Asia, with a 7% spike to $200 million, but comps were down 4%. In Japan, though, strength continues, with sales rising 16% to $143 million on the back of a 21% rise in comparable sales. But in Europe, the pain continues, as sales were off 10% while comps fell 11%. Commenting on this action, CEO Frederic Cumenal stated:

"These overall holiday period sales results were somewhat lower than we had anticipated, but we continue to benefit from a favorable gross margin and prudent expense management. Although we do not anticipate any significant improvement in 2017 to the macroeconomic challenges that we faced this year, we continue to focus on our initiatives to enhance our stores and our customers' experience, and to add newness to our product assortment, while maintaining effective marketing communications and a well-developed supply chain. We believe executing on these initiatives, which are within our control, will contribute over the long-term to strengthening Tiffany's competitive position among global luxury brands."

This statement makes me recall when called for a buy on dips in the name eight months ago. I talked about how the data was improving, but these results suggest otherwise. The commentary also suggests Tiffany is in a holding pattern and that we can expect sideways action. This is a surprise as a few months ago when I said the stock was set to explode higher, the date was continuing to look sharp and at the time the stock sported a decent yield of 2.2% and had a growth story. The name had been surpassing estimates and seeing sales rise. These holiday numbers come as a shock given the company had been seeing gross margin expansion. Gross margin came in at 61.0 % versus 60.2% in Q3 2015, which reflected favorable product costs and price increases globally across all product categories and regions. There was also changes in the product mix which benefited the quarter. Oddly, despite the declines in the holiday period, the company expects increases in gross margin. What you can also expect, however, are declines in operating margin, as I expect to see significant rises in selling and administrative expenses. These expenses had been creeping up in 2016.

Obviously, this data is worrisome. There is still clear weakness regionally and my call may have been too early. Even with the economy continuing to move along at 1-2% growth and consumer spending rising, particularly in luxury, it was not enough this holiday season. The company is a quality name but this data could kill any momentum. The fundamentals are just weaker than I would like to see. It is not all bad news. I rate the stock a hold here. Despite the sales data, the company is also flush with cash. Cash, cash equivalents and short-term investments were $787 million at October 31, 2016 versus $725 million a year ago. Short-term and long-term debt represents 38% of stockholders' equity, about the same as a year ago. What is more that the company is shareholder friendly. The company repurchased 455,000 shares at an average cost of $68 per share in Q3 and will likely report similar purchases for Q4. It also pays a dividend that yields a healthy 2.2% on top of the buybacks. While the company has a lot of work, I would hold the name.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles, which are time sensitive, actionable investing ideas. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.