Jewelry retailer Tiffany & Co. (TIF) opened with a bang Tuesday, rallying some 6% after the company reported better-than-expected fiscal-second-quarter earnings. But the shares later gave back much of the initial gains and closed just 1% higher at $131.07. And as the initial euphoria dies down, a dig into Tiffany's new numbers shows that there are some sobering items to be had.
Yes, TIF rang up $1.17 in quarterly earnings per share - 16 cents above consensus expectations -- on revenue that came in modestly higher than expected. The company also issued a stronger outlook for the year as a whole, boosting EPS guidance to $4.65 to $4.80 from a prior $4.50 to $4.70.
But looking more closely at the numbers, we see that Tiffany guided its current-quarter EPS to fall below last year's 80 cents a share. That would a miss of analysts' $0.85 consensus expectation.
Similarly, Tiffany's increased guidance for 2018 as a whole merely bookends analysts' $4.75 EPS consensus expectations. And despite a modest increase in second-quarter gross margins, inherent in TIF's forward guidance is increased margin pressure as the company steps up spending on marketing, technology and visual merchandizing, including renovating its flagship Manhattan store.
In other words, we should temper enthusiasm for the company's positive second-quarter results with the realization that longer-term expenses will hit EPS in the near term. This isn't the first time we've seen this, and odds are it won't be the last.
The question is: "How long will this period of investing impact the company's business?" To answer that, let's do what I call "sandbox math."
First, the midpoint of Tiffany's new EPS guidance for 2018 as a whole is $4.73. Depending on how far fiscal third-quarter earnings fall below the year-ago period's 80 cents per share, that implies the jewelry company will deliver about $1.60 to $1.70 of EPS during its fiscal fourth quarter.
Going from less than 80 cents per share to $1.60 to $1.70 is a sharp sequential gain, but Tiffany's fourth quarter includes the key holiday-shopping season. In fact, TIF earned $1.67 a share in its fourth quarter a year ago.
So, $1.60 to $1.70 a share in earnings doesn't seem that unreasonable, especially since Tuesday's report from the Conference Board showed that U.S. consumer confidence reached its highest level during August since October 2000. The U.S. economy is also enjoying an incremental benefit this year from the Trump tax cuts.
These factors likely mean that a recent pick-up in U.S. consumer spending will continue as we head into the holiday-shopping season. That's good for retail stocks in general, and Tiffany seems poised to benefit from more luxury spending.
However, Tiffany is currently trading at elevated levels compared to where the stock has been in recent years. While TIF is off of its 52-week high, it's trading at about 27.7x the midpoint of management's new guidance and 24x next year's expected earnings $5.40 or so EPS. Those are lofty valuations.
So, while we could see the stock rise to as high as the $135 or $140 level as we move into the holiday-shopping season, that'd likely be just a shorter-term trade to make between now and 2018's end. To make the company a good longer-term investment would require the stock rising to more than $150 a share. I'm not ready to predict that until I become more comfortable that Tiffany's investment strategy will pay off.
Meanwhile, investors who've owned TIF shares since this time last year are up nearly 50%. In my opinion, a prudent move for them would be to trim their Tiffany holdings back and look for other opportunities.
