Tiffany Expects Pressure on Profit to Ease; Shares Up

(Reuters) - Tiffany & Co cut its sales and earnings forecasts on Monday for the second straight quarter, citing a tough global economy and muted expectations for the holiday season, but the prospect of improving profit margins later in the year comforted investors. Shares of the jeweler rose 7 percent to $62.62 on its expectations that pressure on margins from gold and diamond costs are at last easing this quarter. Tiffany said gross margin should start to rise again in the holiday quarter, its biggest of the year by far. Its the light at the end of the tunnel, Morningstar analyst Paul Swinand told Reuters. Still, Tiffany is more exposed than other U.S. luxury names to a slowing of Chinas torrid economic growth, a pullback in Europe and a damping of higher-end jewelry sales at home. Tiffany reduced its global net sales growth forecast by 1 percentage point to range of 6 percent to 7 percent for the year ending in January. The companys growth was bound to be more modest than the 30 percent pace of a year earlier. Mondays forecast reduction, which follows one in May, came in large part because Tiffany now assumes sales growth during the holidays will be slower. Tiffany lowered its full-year profit outlook to between $3.55 and $3.70 a share from $3.70 to $3.80, coming in line with Wall Street expectations of $3.64. Despite the cautious forecasts, Tiffany is proceeding with the expansion plans that have supported its fast growth in recent years. The chain said it now expected to open 28 stores by the end of the year, including locations in Toronto and Manhattans SoHo neighborhood, up from the 24 initially planned. The stock trades at about 16 times future earnings, below shares of some fellow luxury goods makers with heavy exposure to Europe and Asia. While U.S. handbag maker Coach Inc trades at 14.5 times future earnings, multiples are 20.3 for Ralph Lauren Corp and 18 for French luxury conglomerate LVMH. Global sales at Tiffany rose 1.6 percent to $886.6 million in the second quarter ended on July 31. Sales at stores open at least a year fell 1 percent, excluding the impact of currency fluctuations. Same-store sales dropped 5 percent in the Americas. They also declined 5 percent in the Asia Pacific region that includes China, which has been the fastest-growing market for Western luxury brands. Sales in Europe only got a boost because of exchange rates favorable to Tiffany and because vacationing Asian tourists went shopping. Sales at the chains famous Fifth Avenue flagship store, a favorite of the millions of international tourists in New York, fell 9 percent. That location generates almost 10 percent of revenue. Despite widespread fears that tourists would hold back when vacationing in the United States, the company said the drop in U.S. sales was entirely due to lower spending by locals. Last week, Signet Jewelers Ltd reported a modest 2.4 percent rise in same-store sales at its pricier Jared chain. Tiffany said it had earned $91.8 million, or 72 cents per share, for the quarter, up from $90 million, or 69 cents per share, a year earlier. The results missed Wall Street estimates by a penny a share. Analysts had been expecting a smaller profit because of rising precious metal costs.