Investors reacted harshly to Tiffany's (TIF) latest earnings report after the luxury jewelry retailer came up short of growth expectations. The company affirmed its full-year outlook and is still on pace to boost sales for the first time since 2015. However, rising costs and slowing consumer spending, especially among key Chinese tourists, have added to the short-term risk for the business.
Against that backdrop, CEO Alessandro Bogliolo and his executive team held a conference call with Wall Street analysts that added context to Tiffany's challenges and opportunities heading into the peak holiday shopping period. Below are a few highlights from that discussion.
Tourists scaled back on spending
Sales attributed to Chinese tourists were lower in the Americas and in Hong Kong, as well as wholesale sales to Korean duty-free operators related to Chinese tourist purchases, which had been very strong for several quarters.
Sales growth at existing locations came in at 3%, which marked a sharp deceleration from the prior quarter's 7% jump and fell below management's projections. The main driver for the underperformance was weak demand from Chinese tourists, who scaled back their spending in several key markets.
Executives said they weren't sure what exactly spurred the shift, but they noted that the Tiffany brand is still performing well within China itself and so the hope is that this slowdown was just a temporary sales speed bump in this important consumer demographic.
Costs keep rising
As we have clearly and repeatedly communicated, we are increasing strategic investment spending this year across a number of areas and intend to maintain these higher levels of support going forward in order to drive sustainable top-line sales growth, margin expansion, and higher asset productivity.
-- CFO Mark Erceg
Gross profit margin continues to improve, but Tiffany's aggressive spending programs are more than offsetting that success. In fact, selling expenses shot up by 15% to push operating profit down to 12.5% of sales from 16.8% a year ago.
Management said the company is getting a lot of value from this spending, despite the short-term earnings pinch. The projects include advertising, a new information systems platform, and improvements to the shopping experience both online and in stores. The changes are supporting customer traffic today, but over the long term investors should expect to see their positive impact on areas like sales growth and operating margin.
Ready for the holidays
In terms of our financial outlook for the year, we continue to expect high-single-digit sales growth and diluted earnings per share of $4.65 to $4.80 per share.
Tiffany affirmed its top- and bottom-line forecasts despite the sales challenges it saw in the third quarter. Notably, revenue is still on pace to rise at the fastest rate in years.
Executives say they're in a great position heading into the key holiday season, both in terms of having the right mix of high-quality inventory and a marketing strategy that's resonating well with its global customer base. Investors will find out whether those assets translated into higher sales and profits when executives release their official holiday update in January.
Until then, Tiffany is on pace to pair steady sales growth and rising gross profitability with a sharp drop in operating margin. That outlook wasn't bright enough to stop shares from falling immediately following the earnings report.
However, the stock is still valued at over 25 times earnings compared to the broader market's P/E of 21. That premium suggests investors still have a lot of faith that Tiffany's global rebound will continue even through the growth swings that often impact the luxury jewelry business.