Tiffany (NYSE:TIF) this week posted second-quarter earnings results that supported investors' optimistic hopes for a solid sales rebound. Revenue growth held steady even as gross profit margins improved. The jeweler's profitability, meanwhile, was hurt by an elevated spending pace that management believes will only increase over the next few quarters.

More on those rising expenses in a moment. First, here's how the retailer's latest results stacked up against the prior-year period:

 Metric

Q2 2018

Q2 2017

Year-Over-Year Change

Revenue

$1.08 billion

$960 million

12%

Net income

$145 million

$115 million

26%

EPS

$1.17

$0.92

27%

Data source: Tiffany's financial filings.

What happened with Tiffany this quarter?

Revenue growth was strong on a consolidated basis and reflected gains across most of its sales territories. That success kept Tiffany on track to meet management's full-year revenue outlook, yet the robust revenue gains were offset by soaring expenses.

A solitaire diamond ring.

Image source: Getty Images.

Here are some of the key highlights from the quarter:

  • Comparable-store sales were up 7% after accounting for foreign currency exchange shifts, which extended the retailer's strong growth pace from the prior quarter.
  • Sales gains were broad-based, with only one of Tiffany's geographies failing to expand during the quarter. The U.S. segment grew 8% while the China unit posted a 10% sales spike. Europe's 4% decline made it the relative laggard of the bunch.
  • Gross profit margin improved to 64% of sales from 62.5% a year ago thanks to a combination of favorable trends including lower wholesale sales of diamonds and falling input prices.
  • Selling expenses rose at a faster pace than sales, jumping 20%. These costs included higher spending on marketing, wages, and investments in the digital sales channel. The spending jump ensured that operating margin worsened to 17.8% of sales from 19.3% a year ago.
  • Tax liabilities fell, which helped net income jump 26% to $145 million. Tiffany's base of shares shrank also, thanks to stock repurchase spending, and so per-share earnings rose at a slightly faster 27% rate.

What management had to say

CEO Alessandro Bogliolo said the solid sales results demonstrate that the company's growth projects are finding early traction. "We are pleased with initial customer reactions to our new communication, product and in-store initiatives," he said in a press release. Bogliolo highlighted Tiffany's new Paper Flowers collection that's set to see global distribution over the next few months.

Executives said that investors can continue to expect elevated spending in the quarters to come, meanwhile, as the company tries to lay the foundation for more consistent growth. "It's worth noting," Boglio said, "that strategic spending is increasing for the remainder for the year, as expected, which is intended to support longer-term sustainable growth."

Looking forward

The jewelry giant affirmed full-year sales growth guidance that calls for revenue to rise in the high single digits. But the company lifted its earnings forecast to a range of $4.65 to $4.80 per share, up from the prior target spanning $4.50 to $4.70 per share.

Tiffany still expects operating margin to shrink in 2018 as it pours resources into store remodels, the digital sales channel, and a massive renovation of its flagship New York City location. These spending priorities likely contributed to a downgrade of the retailer's cash forecast, which now predicts operating cash flow of $600 million this year compared to the prior $700 million target. Executives believe their investments will pay off by supporting the Tiffany brand. And, with demand firming up, the retailer has plenty of resources available to direct toward these long-term growth priorities.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.