TIFFANY (TIF): BEFORE AND AFTER Q3 EARNINGS

Summary

Before earnings, TIF stock rose in anticipation.

After earnings announcement, although sales grew the comparable store sales declined. Therefore, rating remains at "neutral" level.

Positive points are TIF has strong B/S and two catalysts that might raise the stock.

Before Q3 Earnings: Tiffany’s stock increased in anticipation before the announcement of its Q3 earnings result.

After Q3 Earnings: Tiffany's Q3 results look mixed, especially considering the levels its stock is trading at. Despite the 3% increase in sales, it's never good to see comparable store sales declining. Similar to Signet Jewelers, Tiffany wasn’t able to take advantage of the improving environment in retail and failed to turn total comps into positive territory. That's not because the business is not showing improvements in North America, but because the 1% increase in comps in the Americas region was largely offset by weakness in other parts of the world, such as Japan and Europe.

It's not so great to see that while the improving environment in North America is helping sales, the rest of the business is showing weakness. The consumer spending environment in Europe may not be great, but it's not worse than it was last year. Concerns about terrorism and the revival of tourist spending should have helped sales but they didn't. The weakness in the Asia Pacific region was attributed to declines outside China, which management attributed largely to lower Chinese tourist spending, which may be a sign that despite the favorable economic conditions in the region the brand is failing to penetrate those markets and relies too much on Chinese consumers to drive sales.

Despite the weakness in comps, sales grew and helped the bottom line. Earnings increased 5% to 100 million, or 0.80 per diluted share from $95 million or 0.76 per diluted share, in Q3 2016. Anyway, margins didn't show particular strength. Gross margin of 61.3% was slightly below analysts expectation of 61.4%, but still a bit above the 61.0% in the prior year. Operating margin increased a bit to 16.4% from 16.3% a year ago. It's a good sign that the company managed to improve margins a bit in spite of a decline in comps but nothing we could be so excited about. Actually we should take into account the fact that both gross margin and operating margin are not far from the highest levels reported in the past 10 years from Tiffany, leaving me to wonder how much margin expansion can be further unlocked in a context where further efficiencies are very difficult to generate due to the high investments in digital capabilities that basically every retailer has to make to thrive in the new omnichannel retail world.

Tiffany has a strong balance sheet. It has strong liquidity and solvency ratios. The buyback policy and the rising dividend make us understand that the company is committed to returning cash to shareholders as well.

In conclusion, Tiffany's results are not bad but not above neutral. There are two catalysts that can help drive the stock a bit higher: 1. holiday sales will increase jewelry sales. 2. The tax reform could help the bottom line.