Once upon a time, luxury jewelry retailer Tiffany was seen as the bellwether for the global market, however not so much in the New Paranormal when as a result of the company over-reliance on China, and a new focus on aspirational middle-class consumers, the stock had recently been trading at levels not seen in over two years.
Things went from bad to worse this morning when the company reported its Q3 earnings when the company not only missed EPS expectations of a $0.75 print, reporting 70 cents in profit on $938.2 million in revenues, but slashed its FY EPS forecast from a 2-5% decline, and now sees a drop of 5-10% for the full year.
The company announced that "earnings declined 8% partly reflecting the negative effects from the strong U.S. dollar. Management is now projecting net earnings for the year ending January 31, 2016 to be 5%-10% below last year’s $4.20 per diluted share (excluding charges in both years), and is also now projecting free cash flow in excess of $500 million for the year."
Curiously it wasn't so much China's fault: "In the quarter, on a constant-exchange-rate basis the Company continued to experience healthy sales growth in China and Australia, while sales again declined in Hong Kong and Macau. Reported in U.S. dollars, total sales declined 2% to $238 million in the quarter while sales of $743 million in the year-to-date were unchanged from the prior year."
The culprit: the US.
In the Americas, on a constant-exchange-rate basis total sales and comparable store sales in the third quarter were 5% and 6% below the prior year, respectively, (compared with an 11% comparable store sales increase last year), and year-to-date total and comparable store sales declined 1% and 2%, respectively. The declines in both periods reflected sharply lower foreign tourist spending in the U.S. which management attributes to the strong U.S. dollar, while sales to U.S. customers were roughly equal to the prior year. There was healthy comparable store sales growth in Canada and Latin America. Reported in U.S. dollars, total sales of $425 million in the third quarter and $1.3 billion in the year-to-date were below the prior year by 7% and 3%, respectively.
Here is the explanation for the latest disappointment:
Frederic Cumenal, chief executive officer, said, “As expected, the strong U.S. dollar continued to put pressure on our financial results, specifically from the translation of non-U.S. sales into dollars and on foreign tourist spending in the U.S. In addition, we believe that volatile, uncertain economic and market conditions in the U.S. and other regions are affecting consumer spending, causing us to maintain a cautious near-term outlook. However, focusing on what we can control, we’re pleased with our progress this year in expanding our store base and introducing and communicating compelling new product designs. And we are focused on efforts to manage our operations and inventories more efficiently to enhance cash flow. We are well prepared to delight our customers as they celebrate this holiday season, and our management team’s longer-term strategy continues to call for further strengthening Tiffany’s solid position among global luxury brands, which we believe will ultimately drive improved financial results.”
The impact :
In light of third quarter results, negative effects from the strong U.S. dollar and increased global uncertainties, management now expects net earnings in the year ending January 31, 2016 to be 5%-10% below last year’s $4.20 per diluted share (excluding the loan impairment charge in the second quarter of 2015 and a debt extinguishment charge in 2014). This forecast does not assume recording any additional loan impairment charges; continues to assume improving inventory productivity; assumes capital expenditures of $260 million; and projects free cash flow in excess of $500 million ($100 million higher than the previous forecast). All assumptions and expectations are approximate and may or may not prove valid.
And since the strong dollar isn't going away any time soon especially if the Fed does proceed with a rate hike in three weeks, expect even more weak "tourism spending", and more scapegoating of a strong dollar. The market agrees, and as of this moment the stock was dowen another 6% to just $72, the lowest since the summer of 2013.