2018 was a tough year for Tiffany's (TIF +0.00%) stock, which tumbled from the $130s in the summer to the $70s by December on concerns about its slowing growth. However, it's rebounded nearly 30% this year as investors have looked past its near-term challenges and focused on its longer-term growth.
Those mixed numbers are reflected in Tiffany's fourth-quarter report. Its revenue fell 1% annually to $1.32 billion, missing estimates by $10 million and marking its first quarter of negative growth in over two years. Its net earnings more than tripled to $205 million, or $1.67 per share, which beat expectations by seven cents. But excluding tax-related charges and benefits in both quarters, its EPS would have declined 4%.
Image source: Tiffany & Co.
Tiffany expects its earnings growth to resume in the second half of 2019 on the strength of its e-commerce business, which grew roughly twice as fast as its overall business during the fourth quarter. For the full year it expects its sales and comps to rise by the low single digits, its operating margin to improve slightly, and its earnings to grow by a mid-single digit percentage.
Wall Street expects Tiffany's revenue and earnings to rise 3% and 5%, respectively, this year. That represents a significant slowdown from its 7% sales growth and 60% earnings growth (12% after excluding tax-related benefits and charges) in 2018, but it indicates that the business isn't headed off a cliff. But does that stabilization justify buying this stock, which doesn't look that cheap at 21 times this year's earnings?
Check out the latest earnings call transcript for Tiffany.
The key numbers
Tiffany already warned that its fourth quarter would be rough in its holiday sales update in January, which revealed a 2% comps decline and sales declines across all of its regions except Japan during the final two months of the year.
Compared to that earlier forecast, Tiffany's 1% comps decline for the fourth quarter seemed mild, and its regional declines weren't as steep. Nonetheless, its regional sales growth during the fourth quarter was still dismal relative to that of its previous quarters:
|
Region |
Q4 2017 |
Q1 2018 |
Q2 2018 |
Q3 2018 |
Q4 2018 |
|---|---|---|---|---|---|
|
Americas |
5% |
9% |
8% |
5% |
0% |
|
Asia-Pacific |
13% |
28% |
28% |
4% |
(1%) |
|
Japan |
2% |
17% |
11% |
2% |
3% |
|
Europe |
13% |
13% |
5% |
3% |
(3%) |
Year-over-year sales growth by region. Source: Tiffany quarterly reports.
In the Americas (47% of its fourth quarter sales), Tiffany attributed its flat growth to a slowdown in spending from local customers and foreign tourists, which had been robust in the first half of the year. The region's comps stayed flat, but improved 1% on a constant currency basis.
In Asia (24% of sales), Tiffany saw strong growth in China, which allayed fears about a backlash from the escalating trade tensions with the US. However, that growth was offset by "mixed results" in its other Asian markets. Comps in the region fell 3%, but rose 2% on a constant currency basis.
Japan (15% of sales) remained Tiffany's strongest market as its comps rose 3% on both a reported and constant currency basis. It attributed that growth to higher spending from both local customers and tourists.
The European market (12% of sales) was Tiffany's toughest market, due to sluggish demand from both local customers and foreign tourists. A strong dollar exacerbated the pain: Comps in the region fell 5% as reported, but stayed flat on a constant currency basis.
How does Tiffany expect to win back shoppers?
Tiffany expects new store openings in the US, refreshed store displays, a rollout of its new "Tiffany True" products, and the expansion of its e-commerce ecosystem to boost its North American sales later this year.
Image source: Tiffany & Co.
In China, it plans to expand its first-party e-commerce ecosystem while maintaining partnerships with major online marketplaces like Alibaba's Luxury Pavillion, an invitation-only platform for luxury brands. Tiffany CEO Alessandro Bogliolo noted that the Chinese customer's average purchase was "much higher" than that of American and European customers.
Tiffany's emphasis on e-commerce growth isn't surprising, but only 7% of its sales came from digital channels last quarter. Bogliolo expects that figure to eventually reach 10% and "maybe even" 15% over the long term, according to Reuters. However, e-commerce expansions generally weigh down a company's margins, and Tiffany's margins are already under pressure:
|
Metric |
Q4 2017 |
Q4 2018 |
|---|---|---|
|
Gross margin |
63.9% |
63.8% |
|
Operating margin |
23.3% |
20.3% |
Source: Tiffany Q4 report.
Therefore, Tiffany's forecast for expanding operating margins in 2019 could be too optimistic -- but it could reduce expenses in other areas to achieve that goal.
Avoid Tiffany (for now)
Tiffany's business isn't falling apart, but its sluggish sales growth, contracting margins, and the stock's valuation indicate that investors should check out other luxury stocks, like the bigger and better-diversified LVMH, instead.
As for Tiffany, I'd wait for the company to generate better sales growth and prove that it can expand its margins as it grows its e-commerce presence, and wait for its stock's P/E ratio to cool down before I pull the trigger.
