Tiffany Needs More Revenue Growth to Put the Sparkle In My Eye

 | Jul 05, 2017 | 2:00 PM EDT
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Back in March, I was skeptical that it was Tiffany & Co's time to shine. Since then the stock has drifted slightly higher. Is TIF ready to shine now?

After poor holiday sales, the company replaced its Chief Executive Officer Fredric Cumenal. Chairman -- and Tiffany's former longtime CEO -- Michael Kowalski took the CEO job until the Board can find a replacement. In addition, Tiffany's design director Francesca Amfitheatrof got the boot. 

Shortly after the executive shakeup, the company announced that Reed Krakoff had been hired as Chief Artistic Officer. Krakoff has been given the task of designing the jewelry and accessories -- and will be responsible for all the marketing imagery, including that used in stores, e-commerce and advertising. Krakoff was design director for Coach (COH) , but has no background in jewelry.

After the holiday disaster and executive shakeup, the stock was hit by a slew of analyst downgrades.

On May 24, Tiffany reported first-quarter fiscal 2017 earnings of $0.74, $0.04 better than expected. Revenue rose just 0.9% to $899.6 million. Sales in the Americas totaled $392 million, down 3%, and comparable-store sales fell 4%. Asia-Pacific comps fell 3%. Total Asia-Pac sales were $257 million, up 8%. 

Importantly, gross margin rose to 62% from 61.2% in the year ago quarter.

On the conference call, management increased the year-end outlook. They now see worldwide sales increasing by a low-single-digit percentage, which implies it could be slightly better than consensus estimates of 2.8%. Furthermore, the company is betting net earnings per diluted share will increase by a high-single-digit percentage over last year's earnings. Tiffany & Co plans to add 10 new stores, relocate seven and close seven.

Investors appeared to be impressed with the company's outlook -- and the stock jumped.

First, investors are betting the new design team, led by Krakoff, will increase the number of collections and bring "newness" to the brand. Previously, carmakers released new products faster than Tiffany. Newness should help drive customers in the door. 

Second, Tiffany seems to have a better handle on expenses. Last year, gross profit was down because of higher SG&A expense. Chief Financial Officer Mark Erceg told investors he would focus on reducing expenses. For example, SG&A expense was 45.8% this year as opposed to 46.1% last year and operating income was 16.2% versus 15.1% a year ago. Investors are hoping Erceg can find more cuts.

So, on basically flat sales in the first quarter, Tiffany was able to grow earnings per share 7%. (Of course, the company's share buyback plan didn't hurt, either.) In the last year, TIF shares have substantially outperformed the S&P 500.

Tiffany needs a mid-single-digit same-store sales increase to leverage its fixed expenses and drive earnings, but I don't think the company can get there. To me, the stock is ahead of itself. Cost cuts and share buybacks are not enough for me to chase the stock. TIF needs to find more revenue growth. Without it, I don't think TIF is ready to shine.

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