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Bears Play Their Trump Card

|Includes: ANF, Tiffany & Co. (TIF)

Quick Summary:

NY Flagship (i.e. Trump Tower) sales are significant (~10% of global sales) for TIF and are likely to take a hit in the coming quarter. Based on Street estimates, 4Q accounts for ~40% contribution to 2016 EPS. Foot traffic will likely take a hit (security detail) and tourist are still facing significant FX headwinds; There are still a large number of protests scheduled during 4Q The street is too high on 4Q estimates and revisions will likely be to the downside. The Trump presidency over the next 4 years brings uncertainty to the productivity of TIF's NY flagship. In my view, the probability that the Street may revise down its 2016/2017 EPS is rising as the risks to TIF's NY flagship are fully realized, in addition to the currency headwinds. The next catalyst will be TIF's 3Q earnings (Nov 29) and its holiday sales report in mid-January 2017. Recall, in January 2016, Management cut guidance and the stock fell 10% over the next 3 days before TIF announced a stock repurchase program.

As I've been a member of the investor community for some time I thought it would be useful to give back through some thought-provoking analysis. So without further ado…

While some say forecasting is a mugs game, I prefer to evaluate the prospective risks / rewards heading into a quarter based on all relevant information. With this in mind, I will present a few major points/themes for the bears on TIF, for the upcoming 2 months and possibly even further.

Firstly, New Yorkers are a passionate group of voters and in my view, a group that is not shy of voicing its displeasure with the Trump presidency. There have been several news articles about the protests near the tower (see footnotes below) and even outright warnings from the mayor to avoid the area, over the next 60 days. I've included some of De Blasio thoughts below as reported by the press below:

Obviously these protests and issues have made a significant impact to foot traffic and has impacted many businesses in the area. I've included some data points and anecdotal evidence below.

A Lacoste store manager noted:

While the Street believes that these protest will die down over the next few weeks, I don't believe that will be the case. As shown below, there are a large number of protests scheduled around the critical weeks of Thanksgiving / Christmas. More specifically, there is a large protest schedule for this Thursday and Friday. The second of which is focused on causing Donald Trump economic damage, with respect to Niketown (see links/description)

So how's that related to TIF? Well its NY flagship store accounts for 10% of total sales, which is located right next to trump tower. The drop off in foot traffic and the decline in business will likely have a severe impact on sales at this property. As shown below, I've tried to illustrate the potential impact this could have on earnings.

Moreover, if one were to take a closer look at the composition of 4Q estimates, this tells me that more than half of the Street's estimates would not have likely factored in ANY trump presidency / impact to TIF's NY flagship, since he was elected on Nov 8. Accordingly, I believe the next move for 4Q earnings estimates should be lower (as a group).

Source: Factset

On a broader basis, the Jan-ending quarter is of extreme importance to TIF as it accounts for approximately 40% of annual EPS. In fairness, the Bulls may counter that this maybe a "one-time event", however given that Trump may be in his New York home very often, that may be too early of a prediction to make at this juncture.

Another way to look at this situation would be to imagine yourself as a 1% foreign-toursit who is about to make a significant purchase (5K+; as this store in particular has a relatively higher ASP) - would you want to push through these crowds and risk getting mobbed? ... In my view, investors should realize that the Trump protests/news has already negatively impacted the psyche of some of its clientele, not to mention the risk of a potential terrorist attack.

The second point the bears can point to is the strength of the US$ and the subsequent impact on tourism sales. For example, ANF recently reported notable weakness in its Flagship stores and softer sales at its tourist-oriented locations related to stronger currency headwinds. Coincidentally, ANF also has a flagship store right across from Trump tower.

"A soft sales performance due to traffic headwinds at its namesake U.S. flagship and tourist location stores was primarily responsible for the quarter's weakness."

While many investors realize that tourist dollars are critical to 5th avenue sales, I thought it made sense to see where the tourists originate from. In 2014 (latest data point), NYC received about 12.0 million international tourists and ~45 million domestic tourists who spent approximately $41billion. Taking a closer look, a large % of these tourists came from the UK. This is particularly harmful for tourist spending given what has happened to the GBP (Brexit) over the past year.

On that note, the US dollar should trend higher over the near-term as the Fed is scheduled to raise interest rates and provide its interest rate outlook for 2017.

In short, I believe the Street will have to reduce both its 2016 and 2017 EPS estimates as it realizes the extend that the Trump protests is having on sales. Moreover, this puts the Bulls "beat-and-raise" narrative at risk. Stay tuned as we will find out more answers when TIF reports on November 29 next week, but just be aware of the risks heading into the extremely important quarter.

Happy thanksgiving everyone and feel free to leave comments below.


Sources: ml?action=click&contentCollection=N.Y.%20%2F%20Region&module=RelatedCoverage&region=EndOfArticle&pgtype=article ml 46 03

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in TIF over the next 72 hours.