Tiffany & Co. (NYSE:TIF) stock has been slumping all year on fears that the much stronger dollar would hurt sales and profits.
As it turns out, the market was right to be worried.
Tiffany & Co. missed Wall Street’s revenue estimate in the final quarter of last year and essentially threw in the towel for 2015. TIF expects to show only “minimal growth” this year … and even that projection is probably too optimistic.
The strong U.S. dollar is making life much harder for all American multinationals. It makes their exports more expensive in overseas markets, and overseas sales are worth less once they’re converted back onto now-pricier dollars.
It’s bad news for every company with international operations, but TIF stock is especially vulnerable.
Not only does Tiffany do brisk business in international luxury markets, but it’s highly dependent on foreign tourists shopping at Tiffany & Co. in the U.S., primarily at the flagship store in New York City. The strong dollar has fewer visitors traveling to the U.S., and the tourists who do come are spending less because prices have soared in their home currencies.
The bottom line is that Tiffany & Co.’s sales fell for the first time in five years and it offered a brutal forecast for the current quarter and full year.
Now, TIF expects Q1 earnings to tumble 30% on sluggish sales and unfavorable currency exchange. The company also sees Q2 earnings declining too, but by a more modest amount.
Tiffany & Co. Now a Second-Half Story
Beyond that, TIF expects second-half growth to allow the company to end the year with profit growth, but that sounds more like wishful thinking at this point.
Tiffany & Co. can’t predict what the foreign exchange market is going to do. The ongoing hit to results from tourists not traveling appears to have caught TIF and the Street by surprise. With the company starting off the first half in a deep hole, it’s going to have a lot of catching up to do in Q3 and Q4 to price out any full-year growth.
And make no mistake — the hole is deep.
Tiffany’s first-quarter forecast sets it 30% back already, and there’s more weakness to come in the second quarter. Tiffany & Co. thinks it can salvage the year with a minimal bottom-line gain, but that’s predicated on it generating double-digit-percent profit growth in the second half of the year.
Could it happen? Sure. But it’s impossible to take that forecast today with any kind of confidence.
After all, the dollar would need to weaken substantially to lure tourists and make TIF prices more attractive overseas. But the dollar hasn’t been this strong in 15 years, and everything on the horizon points to more gains ahead. The Federal Reserve is heading toward an interest-rate hike, which is going to make the dollar even more attractive. At the same time, the European Central Bank is pursuing policies to depreciate the euro.
Bottom Line
As much as Tiffany & Co. has been a great holding over the last three years, those days — for now — are done.
TIF stock is off 22% for the year-to-date, and there are a couple of massive macro threats from the most important central banks to Tiffany’s profit forecast.
This is a situation that looks like it’s going to get worse before it gets better.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
