Lorraine Hutchinson, Bank of America Merrill Lynch (Buy: $115 PO)
Operating margin expanded 190bp to 21.0%, driven by strong gross margins, partially offset SG&A expense deleverage. Gross margins rose 250bp to 59.9%, which was better than our 58.0% estimate. This was due to easing commodity cost pressures, price increases implemented earlier in the year, and modest fixed cost leverage on strong sales. We were surprised at the GM strength in light of the weakness in Japan.
Japan is Tiffany's most profitable region, so we thought weakness there would crimp GM gains for the quarter. Tiffany's SG&A expense rate grew by 60bp to 38.9%, slightly better than our estimate for 120bp of deleverage. Incremental marketing expenses and higher labor and store-related costs more than offset sales growth. Total SG&A dollars increased by 9% versus our 10% estimate.
Edward Yruma, KeyBanc Capital Markets (Buy: $110 PT)
Tiffany raised its 2014 EPS guidance range to $4.20-$4.30 from $4.15-$4.25, which seems appropriately conservative. The guidance is largely in line with the current consensus estimate of $4.28. We think the $0.05 increase in the guidance range following the meaningful beat this quarter (actual EPS was $0.11 ahead of consensus estimates) is likely conservative, but given the still difficult retail environment, we feel this is the appropriate action to take.
We note that this earnings raise follows a $0.19 earnings beat and $0.10 guidance raise in the 1Q. Tiffany also repurchased $9 million shares under its $300 million repurchase program; we note that the Company did not repurchase shares in 2013 likely due to the overhang of the Swatch arbitration. Our estimates and outlook are under review.
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