Do Tiffany’s Earnings Foretell Bad Times?

Luxury growth is slowing, and that could point to another recession

   
Do Tiffany’s Earnings Foretell Bad Times?

Anyone who was paying attention in 2010 saw that Tiffany & Co. (NYSE:TIF) was one of the first luxury brands to post stellar results following the financial crisis. The surge in revenue and earnings turned out to be a harbinger for the entire retail sector — especially the luxury sector, which has soared since around that time.

However, what leads a recovery may also lead a double-dip recession. Investors need to keep an eye on Tiffany — and the whole luxury sector — because the most recent quarter was definitely difficult.

Revenue was up a paltry 2% to $866 million against analyst expectations of $891 million — a particularly distressing number since Tiffany often sees a nice bump from spring weddings and graduations.

Earnings per share hit 72 cents, but that was down a whopping 17% year-over-year. And U.S. comparable store sales dropped 5%. The company also lowered full year earnings estimates to $3.55 to $3.70 per share, below the $3.74 expectation, with revenue guidance dropping to 6%-7% from 7%-8%.

Investors must interpret these results in context, however.  First, management reminded us that comparisons were tough compared to last year, when U.S. comps were up 23%, worldwide sales were up 30% and net earnings up 33%. In other words, there was a lot of pent-up demand that flooded the market last year, as people waited for the financial situation to stabilize.

So they are still spending money on Tiffany, they just aren’t spending even more of it than last year. Managements also reported that consumer spending across the entire jewelry segment had declined.

The real question to ask is actually why Tiffany is struggling when other luxury brands are not. Michael Kors (NASDAQ: KORS) is on a tear. Its quarterly sales shot up 71%, earnings almost tripled, with 25% comps. And Estee Lauder (NYSE:EL) earnings went up 25% on a 9% revenue increase.

Other luxury brands, though, are starting to show weakness.

Ralph Lauren (NYSE:RL) might be the next leg of the table to wobble. Revenue was up just 4% and earnings were up 5% in the last quarter, after the company enjoyed double-digit increases for several consecutive quarters, just as Tiffany did.

And Coach (NYSE:COH) also disappointed in its results. Although the company posted a 12% revenue increase, comps were weak at 1.7%, well below the expected 6%.  The market sold the stock off 20% on the report. And Burberry, which trades on the London Exchange, is seeing revenue growth slow as well.

Experts talk about the “hourglass” retail economy, that it’s the luxury and lower-end retailers like Target (NYSE:TGT) and Wal-Mart (NYSE:WMT) that do well in this kind of recovery. The richer folks buy up their luxury items as they feel comfortable enough that the crisis has passed, and the folks who used to shop at the mid-level retailers feel the need to save their money, so they pile into the lower end retailers.

That we are now seeing a slowdown in growth at more than just Tiffany is what concerns me. It may suggest that those who can afford luxury items are starting to snap their wallets shut. If this trend continues, I’d suggest being very cautious with retail stocks. These babies can get volatile at the drop of a hat, and Coach’s 20% one-day decline demonstrates this danger.

The bigger worry, of course, is that is consumer spending grinds to a halt, that may push us into another recession. Consumer confidence figures, released today, were the lowest since last November — all the more reason to stay on your toes.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.


Article printed from InvestorPlace Media, http://investorplace.com/2012/08/do-tiffanys-earnings-foretell-bad-times/.

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