Tiffany (TIF) bottomed out in July and has been moving higher ever since. The company reports earnings Tuesday. Can it continue to sparkle?
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.