Tiffany & Co. 2015 Holiday Campaign

Tiffany & Co. delivered fourth-quarter and full-year earnings results that managed to beat analysts’ expectations, but sales were down from the previous year and the company lowered guidance once again.

Net income for the quarter was $186.8 million, or $1.46 a diluted share, a 4.8 percent decline from last year’s $196.2 million, or $1.51 a diluted share. This beat the FactSet estimate of $1.40 earnings a share.

“I think we can begin with a candid assessment that overall financial results in 2015 were disappointing,” said Mark Aaron, vice president of investor relations on the earnings conference call. Aaron went on to detail the pressure of the strong U.S. dollar and the marked deceleration in Chinese tourist spending.

Net sales for the three months ending Jan. 31 decreased 5.6 percent to $1.21 billion from $1.29 billion a year earlier. Sales in the Americas declined 8 percent in the quarter from last year due to lower tourist spending and softness in sales to U.S. customers. The company blamed the weakness inU.S. customers on the volatility of the financial markets and the presidential campaign. Silver jewelry under $500 was one category that was called out for lower unit volumes.

In Asia-Pacific, total sales declined 3 percent for the quarter and in Europe total sales increased 2 percent. On the conference call, chief executive officer Frederic Cumenal said that momentum in mainland China remained strong, but then he stated, “Hong Kong continues to be a nightmare. There is no other word and I believe it is the same for all of us, all the luxury players. Wedon’t know when we will bottom out and we don’t believe the situation will significantly improve in Hong Kong during ’16.”

Lower sales in the United Arab Emirates pulled down the Middle Eastern region by 6 percent for the quarter.

Tiffany’s said it was taking steps to better position itself to manage a strong dollar environment or just a volatile currency environment in general. The company pointed out that they can’t change currency perceptions. As an example, the jewelry retailer said its prices weren’t any cheaper in Europe than in the U.S., but some customers believe they get a better deal in Europe, leading to stronger sales in that region.

For the full year, the company’s net earnings of $493.8 million, or $3.83 a diluted share, were 9 percent lower than last year’s $545.1 million, or $4.20 a diluted share.

The company saw higher gross margin in the full year and fourth quarter due to lower product costs and price increases. Tiffany’s expects to see benefits from lower metals prices in 2016, but declines in rough diamond prices won’t be felt until 2017. Gross margin in the full year rose to 60.7 percent from 59.7 percent in the prior year.

The minimal sales growth and rising expenses put pressure on margins. Tiffany’s expects expenses to rise in 2016 as it spends more on e-marketing.

Looking ahead, Tiffany’s forecast full year earnings per diluted share for 2016 will range from unchanged to mid single digit. Based on sales trends for the current quarter, earnings per share could decline 15 percent to 20 percent and for the second quarter could drop another 5 percent to 10 percent.

“We see little reason to change our negative view on the stock following their Q4 release this morning,” wrote Ike Boruchow, an analyst at Well Fargo. “All in, despite the EPS beat, we see many issues persisting here (primarily in North America and Asia­Pac) that creates an unfavorable setup in the stock today. While most of the headwinds facing TIF are macro driven (not company specific) we continue to see risk to the downside.”

RBC Capital Markets analyst Brian Tunick called the outlook “another hockey stick guidance.” Tunick noted that the dismal outlook for the first half of the year followed by strong second half was reminiscent of last year’s forecast. “We are relatively cautious just as last year a similar setup failed to work.”

Tunick did concede that Tiffany was still generating nice free cash flow despite the drop in earnings. Tiffany had projected free cash flow of $400 million for 2015, but ended up with $561 million. As for 2016, they are back to projecting $400 million in free cash flow.

Tiffany stock is up 0ver 2 percent to $71.72 and while the stock is down 13 percent for the past year, it has risen 9 percent in the past four weeks. Investors seem pleased that the company beat estimates despite giving a less than stellar outlook.