Tiffany & Co.(NYSE:TIF)announced disappointing results last week. Fourth quarter and full-year 2014 performance were mixed, but a sour 2015 outlook has investors more concerned. During the earnings call, the management team reiterated that it still believes long-term results will sparkle. Here are five nuggets of information investors should know.
Macroeconomic factors are putting Tiffany at a disadvantage
Tiffany has much more international exposure than its largest competitor,Signet Jewelers (NYSE:SIG), which operates in the U.S., Canada, and U.K. At the moment, the strengthening dollar and softness in markets like Japan are largely to blame for the 1% year-over-year sales dip Tiffany suffered during the quarter. According to Mark Aaron, Vice President of Investor Relations:
The yen weakened 8% on average against the U.S. dollar in 2014, and that's after weakening about 20% on average in 2013. Therefore, when translated into dollars, total sales in Japan declined 13% in the fourth quarter and 4% for the full year.
Management went on to explain that full-year 2014 results were solid with earnings up 13% and sales rising 5%. Yet recent performance has trailed competitors like Signet, which enjoyed strong holiday sales. Unfortunately for investors, the news might get worse before it gets better.
Will the U.S. dollar kill 2015 results?
While we don't typically talk about quarterly forecasts, we think you should be aware that we have a very difficult comparison in Japan to a 30% comp increase in last year's first quarter. And we've also continued to experience softness in the Americas, both of which will contribute to a forecasted 10% sales decline in the first quarter on a reported basis in U.S. dollars. From a quarterly perspective, based on the top-line challenges in this first quarter, we expect that first-quarter EPS could be 30% lower.
CFO Ralph Nicoletti dropped that bombshell for the current quarter, but that 30% drop is not as scary as it seems. Management chalks up its holiday weakness and poor outlook to currency woes -- Tiffany currently earns half its revenues overseas, and the currency translation is more to blame for the poor outlook than any other factor.
When you take into account the fact that sales in Japan were also very strong during the first quarter of 2014, making for a difficult year-over-year comparison, you realize this quarter will be artificially weak. That does not mean the entire business is in trouble.
Dollar woes hit home
The other significant problem with a strong dollar: decreased tourist spending. International customers are thinking twice before opening their wallets, which is impacting sales at home. Aaron had this to say:
The strong U.S. dollar had a minimal negative translation effect on the Americas sales but is having an adverse effect on foreign tourist spending in the U.S., especially in New York. And this is fact certainly worsened in the latter part of 2014. Foreign tourist spending has historically represented about a quarter of annual U.S. sales.
Tiffany is reinvesting in the customer
Despite these obstacles, Tiffany is moving ahead with its growth plans. Its strategy is to launch new design collections, such as the modern and well-received Tiffany T collection for 2014, invest in its brand image, and enhance the in-store experience for shoppers. According to President Frederic Cumenal:
That strategic direction focuses on continued elevation as a global luxury brand. In our stores, we are striving to better engage customers through a more consultative approach and with enhanced visual merchandising presentation. Although the next couple of years, we will strengthen our abilities when we finish developing a global CRM system and are able to better analyze our customer base and shopping partners.
The sky is not falling
The main takeaway from the call was that the sky is not falling for the company. Gross margin actually improved during the quarter, and management expects it to expand further throughout 2015. Despite its dire first quarter predictions, management expects sales to grow in the low single-digits for the full year. Sales growth should be even better on a currency neutral basis. Management also plans to open more stores this year, specifically in the Asia-Pacific region which earns the highest rate of sales per square foot ($3,100). Per Aaron:
We are currently planning to increase our company-operated stores by a net of approximately 12 to 15 stores during 2015. A majority of that net addition is planned in Asia-Pacific with the balance in the Americas and Europe. In total, this will represent a 4% to 5% net increase in our company-operated store base and in worldwide square footage.
Tiffany can make these substantial investments, even amid a soft quarter, because its balance sheet is in excellent condition. Long-term debt in 2014 was virtually unchanged from $1.1 billion, or about 39% of stockholder equity. Management is beating its goal of earning a minimum 15% return on equity and expects that to continue for company projects in 2015. In short, it is good to see the company reinvesting in growth, and it gives more weight to the idea that these issues will be short-lived.
The currency woes are temporary, and any weakness in the stock could signal a long-term buying opportunity for patient investors.