Tiffany & Co. (NYSE:TIF) stock saw a sharp drop following its Q4 and fiscal 2017 earnings reports. While Tiffany stock beat estimates, revenue guidance disappointed Wall Street. Now, the luxury jeweler faces difficult market conditions and competition on a variety of fronts.
Tiffany must also find a way to grow as the middle class declines in its home country and marriage rates across the world decline. Despite these conditions, the company continues to increase its revenues. However, given the market and competitive conditions, investors should avoid TIF stock.
Tiffany Stock Beat Estimates
Tiffany stock beat expectations in its report released on March 16. Q4 2017 earnings came in at $1.67 per share, beating Wall Street estimates by 3 cents per share. The quarterly revenues of $1.33 billion represented an 8.1% increase from last year. Analyst had expected $1.31 billion.
For fiscal 2017 (which ended January 31, 2018), the company earned $2.96 per diluted share. Earnings fell from the 2016 level of $3.55 per share. However, the figure includes a charge of $1.17 per share. Profits for 2017 would have increased by 16% had it not been for the tax-related charge. Revenues for 2017 came in at $4.2 billion, a 4% increase from 2016.
While the Americas remain the largest market for the New York-based jeweler, growth has become stronger in its Europe and Asia-Pacific regions. Sales growth in the Americas rose 2%. In Europe, sales rose 6%. The Asia-Pacific region saw a 10% growth increase, despite a 1% revenue decline in Japan.
Tiffany Stock Has No Moat Beyond Name Recognition
I believe TIF remains a strong company more than 180 years after its founding. Its name recognition received a seemingly perpetual boost with the 1958 Truman Capote novel, Breakfast at Tiffany’s.
This book spawned a movie that gave the company a permanent place in America’s pop culture identity. Also, its worldwide presence, increasing sales, and strong free cash flows ensure the company will not go away anytime soon.
However, for all of these accolades, name recognition remains the limit of the company’s moat. Consumers have endless choices of places to buy jewelry. Signet Jewelers Ltd. (NYSE:SIG), which owns the Jared, Kay, and Zales brands, remains a threat.
Even worse for TIF, discount stores such as Costco Wholesale Corporation (NASDAQ:COST) and Sam’s, owned by Walmart Inc (NYSE:WMT), sell jewelry. Also, thousands of small jewelers compete in this market.
Wealth and marriage trends will hurt TIF stock
Moreover, the middle class has also declined in size and purchasing power in the U.S, its largest market. TIF answered this by its successful move into Asia.
Still, shifting to new markets will not get the company around facing the changing attitude toward marriage, and by extension, engagement rings. Marriage levels have declined over the years. Little can be done to address this decline in engagement ring purchases, other than to create new jewelry markets.
Given the weak moat and challenging market trends, management has done an amazing job at maintaining sales growth and brand strength. Still, Tiffany stock will continue to struggle. For 2018, management issued guidance for revenue growth in the low to mid-single digits. With this growth, the forward price-to-earnings (PE) ratio stands at about 22.
The S&P 500 currently trades at 26 times earnings, around the level of its current PE. Even though I’m a fan of management’s job performance, I cannot be a fan of this stock with low growth and hostile market conditions.
The bottom line on Tiffany stock
With tough competition, harsh market conditions, and a high valuation, investors should avoid TIF stock. To be sure, having a management team that can grow revenue amid company challenges is amazing. Still, increasing wealth in Asia remains its only growth driver.
Falling marriage rates, as well as declining wealth in its home market, bode poorly for TIF. Moreover, Tiffany stock has no moat, other than maybe its name recognition. Hence, if investors want to earn enough profits to afford Tiffany jewelry, they should shop a different stock for potential gains.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.