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Tiffany & Co. (TIF) - How Low Can It Go?

 November 29, 2012 01:27 PM

(By Rich Bieglmeier) Tiffany & Co. (TIF) shareholders are having a hard time keeping their breakfast down today. The high-end jewelry retailer's stock is down nearly $5 on disappointing 3rd quarter earnings and guidance.

TIF earned $63.2 million, or 49 cents per share while Wall Street expected 63 cents per share. For the third-quarter of 2011, Tiffany & Co earned 70 cents per share on $89.7 million in revenue. Clearly, as 2012 comes to a close, a slowing global economy is hitting the iconic jeweler's bottom line.

During the conference call, management told investors to expect the slowdown to continue in the fourth quarter. Tiffany now targets 2012 earnings of $3.20 to $3.40 versus it previous outlook of $3.55 to $3.70 per share.

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Perhaps, the most concerning issue, in our view, is that operating margin decreased 4.0 percentage points in the third quarter, "primarily due to declines in gross margin in both periods." Gross margin of 54.4 percent is down from 57.9 percent from 2011's Q3, driven by higher costs  for high precious metals and diamonds, higher than expected taxes (get used to it), and SG&A (selling, general and administrative) expenses increased 5 percent largely due to higher store occupancy and marketing costs.

While 5 percent seems mild, it's higher than worldwide revenue growth of 4 percent. An 11 percent increase in inventory is another concern that could lead to another eps disappointment in the 4th quarter. Inventory rising at twice the rate of revenues will likely lead to further erosion to margins. iStock wouldn't be surprised to see a pre-announcement before the next earnings announcement.

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Let's take a crack at answering Chubby Checker's question, "How low can you go?"

If margins and profits continue to shrink with sales essentially remaining flat to increasing slightly, iStock would expect TIF's valuations to contract, too. In the past 5-years, TIF has traded as low as 1.608 times its book value. Its current book value is $18.92, meaning, on a price-to-book basis, Tiffany could trade as low as $30.42.

Let's take the top-end of management's updated guidance of $3.70 per share for 2012. In the last half decade, TIF's low trailing-twelve-month (TTM) price-to-earnings ratio (P/E) is 11.39, throw out the 2008 financial crisis, and it rises to 14.57. Let's use the higher, non-crisis P/E which puts a $53.91 price-tag on TIF shares. Although, if analysts cut 2013 forecasts and reduce their 14 percent eps growth target, then a P/E of 14.57 is probably too high.

In the near-term, TIF's stock chart shows initial support at $58. If $58 doesn't hold, then the stock is likely to drop to a little under $54, which matches us nearly perfectly with our P/E analysis.

Investors might be wise to avoid the trap of trying to catch a falling knife, even a diamond crusted one. Another quarter of disappointing earnings for Tiffany & Co. (TIF) and $50 comes into focus rather quickly.



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