Tiffany is up 27% off its lows. It seems investors are expecting a decent second half from the jewelry maker. In fact, virtually anything would be better than the first half.
First-quarter fiscal 2016 sales fell 7.5%, and total North American comparable-store sales fell 10%. Earnings fell 14%. The second quarter wasn't much better. Sales were down 6.1%, comps fell 9% and earnings were down 2%.
But what drove the stock higher was the improvement in gross margin, which has been expanding since the fourth quarter of 2015. Fourth-quarter gross margins rose 221 basis points to 63%.
The trend continued into the first and second quarters too. First-quarter gross margins rose 209 basis points and 208 bps in the second.
While gross margins have been a tailwind, operating margin is down because of higher expenses. Selling, general and administrative expenses ended 2015 at 41% of total sales. But SG&A expenses are slated to rise to 43.5% by the end of this year, crushing operating margins.
While management has a handle on the price of metals and the cost of diamonds, the company needs to dramatically reduce SG&A costs. With negative same-store sales and high SG&A costs, the company has no earnings growth.
Analysts think 2016 earnings will be down 4.4% to $3.66 per share. With Tiffany's expense structure, the company has to report mid-single-digit comps to drive earnings, and that's not happening at the moment.
Tiffany reports third-quarter results on Tuesday. Analysts are looking for earnings of 67 cents per share and $926 million in revenue. Revenue is expected to decrease 1.2%. It will be interesting to see if the security detail surrounding Trump Tower (and hampering access to Tiffany's flagship store) is having an effect on sales.
Tiffany typically trades between 20 and 22 times forward estimates. The consensus is at $3.95 per share for fiscal 2017, but that implies 8% earnings growth. I think that's too high. There is no evidence that Tiffany has any earnings growth with its high SG&A expense level and low same-store sales.
Right now, Tiffany has no earnings leverage. Because of that, I think shares of Tiffany are fairly valued.