Why Tiffany's Earnings Didn't Cut It

There was precious little for investors to celebrate in jewelry retailer Tiffany's (NYSE: TIF  ) third-quarter earnings report. Mr. Market reacted harshly to the report, sending the stock down more than 6% for the day.

But just how bad was it? Let's go through the numbers.

As for the headline results, they were rough. Tiffany booked a 30% decline in earnings, to just $0.49 a share compared to $0.70 a share in the year-ago quarter. Comparable sales eked out a gain of only 1%. Geographically, revenue was up slightly in the company's U.S. region, but only because price increases offset a worrying drop in unit sales. Europe was Tiffany's best-performing region, up 6% for the quarter.

On guidance, the company cut its forecast for the year. It now expects about $3.30 a share in earnings, down from the $3.50 it had predicted before.

But the biggest disappointment came from the company's plummeting gross profit figure. Surging costs of Tiffany's main inputs, including diamonds and precious metals, ran up faster than prices, leading to a nearly 10% drop in gross margin. The company is by no means alone in this profit squeeze, however. Online competitor Blue Nile (NASDAQ: NILE  ) also reported a near-five-year low profit margin last quarter.

Yet Tiffany was supposed to be different. The company's stellar brand has allowed it to weather rising input costs by passing much of them along to customers. For example, in the second quarter of last year, CEO Michael Kowalski boasted that Tiffany was "able to absorb precious metal and gemstone cost increases while improving our gross and operating margins."

That impressive trend has come to an abrupt stop.

TIF Gross Profit Margin Quarterly Chart

TIF Gross Profit Margin Quarterly data by YCharts.

What's next?
And the holiday season isn't expected to turn this story around. The company is projecting another year-over-year decline in gross margin for the fourth quarter, with sales forecast to rise 5% to 6% versus the prior forecast of a 6% to 7% bump. So, until input costs start to moderate again, Tiffany's profits and sales look completely vulnerable to economic trends.

Tiffany is having profit trouble right now, and investors might want to look elsewhere in the retail sector for promising stocks. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in our special report. Uncovering these top picks is free today; just click here to read more.

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