Even the rich are starting to feel the pinch, at least according to the favorite jeweler of the upwardly mobile middle-to-upper class (especially in China and Japan), Tiffany & Co., which earlier today reported Q2 EPS of $0.86, below the $0.91 expected, with GAAP EPS of $0.81 some 16% below the $0.96 record last year.
Like other retailers, TIF was quick to blame the surging dollar (which isn't going anywhere if the Fed indeed proceeds with a rate hike), blaming it for lowering the value of the Tiffany’s sales overseas, where the company gets most of its revenue. Currency fluctuations also have kept tourists from making purchases at U.S. stores, dealing a second blow to revenue.
Per the release, "higher sales to U.S. customers contrasted with lower foreign tourist spending in the U.S. which management attributes to the strong U.S. dollar."
However, the slowdown in USD-purchases were offset by tourists purchasing TIF wares in Europe: "higher sales to U.S. customers contrasted with lower foreign tourist spending in the U.S. which management attributes to the strong U.S. dollar, and there was healthy comparable store sales growth in Canada and Latin America."
In other words, Tiffany is rapidly becoming a global FX arb, with tourists from countries with overvalued currencies purchasing TIF jewelery in countries with devalued FX rates. Still, we are confident Tiffany's speaks for everyone when, as its newly appointed (on April 1) CEO Fred Cumenal said, "The adverse effects from the strong dollar have been even more significant than initially expected."
Topline weakness was met with increased labor and wage spending: SG&A expenses rose 9% in the second quarter and 7% in the first half, due to higher marketing expenses and increased costs related to store occupancy and depreciation, as well as increased labor expenses. Don't expect Tiffany to be hiking wages any time soon.
Whether as a result of the global FX turmoil, or simply because suddenly the rich don't feel so very rich following the inability of the global stock market to hit new highs in Q2, the company cut guidance, and now expects its fiscal 2016 earnings to be 2 percent to 5 percent below last year’s total of $4.20 a share. Analysts estimated $4.23 on average. TIF may have been overly optimistic: in its guidance it explicitly states that its expects the resumption of growth in Q4.
From the report:
For the year ending January 31, 2016, Management now expects net earnings to be 2%-5% below last year’s $4.20 per diluted share. This forecast assumes no growth in net earnings in the third quarter and a resumption of growth in the fourth quarter. Also for the full year, this forecast does not assume recording any further similar loan impairment charges; this forecast does continue to assume inventories increasing at a rate below sales growth; capital expenditures of $260 million; and free cash flow in excess of $400 million. All assumptions are approximate and may or may not prove valid.
The may indeed, good luck. For now, however the stock is not too happy and was down 7% in the premarket trade, having already slumped 20% through Wednesday. Perhaps this is the culprit: the Company repurchased only $23 million shares in the second quarter. However, considering the average cost of repurchases was $90 per share, maybe the company will be less enthused about generating -12% returns...
