Since August, the market view appears to have turned quite bullish. The negativity in investor sentiment that was evident during the decline in the market from spring until early summer seems to have evaporated. This is quite interesting, as the change in investor sentiment was primarily a result, I believe, of the rumor and eventual announcement by the Federal Reserve of additional quantitative easing in September.
This rise in investor sentiment was not built on a market view of substantially higher revenue and earnings for corporations, but on the rush of additional cash into the financial system. The problem with such a market view is that this is not a sustainable, long-term solution for either stocks or the economy.
Since the announcement in September, investor sentiment has once again started to become bearish. People are realizing that there are significant economic structural issues that cannot and will not be resolved by simply pumping more money into the financial system.
An interesting divergence in the market view between sectors has been that the high-end retailers are immune to the negativity purveying the general economy. However, this might not be the case in reality.
Tiffany & Co. (NYSE/TIF) just released its earnings guidance for the full fiscal year, coming in at $3.20–$3.40 per share. This is a dramatically reduced amount of corporate earnings from its earlier guidance of $3.55–$3.75. (Source: “Tiffany Reports Its Third Quarter Financial Results,” Tiffany & Co., November 29, 2012.)
For the 2012 third quarter, which ended October 31, the company reported corporate earnings of $63.0 million; a decrease of 30.0% from the same quarter last year. Two areas worry me specifically: the decrease in gross margins to 54.4% in third quarter 2012, compared to 57.9% last year; and the substantial increase in inventory to $2.3 billion at the end of the quarter, up 11.0% from the same quarter last year.
Clearly, the decrease in guidance is a shock to investor sentiment. The market view had been expecting a company like Tiffany’s to weather the storm building internationally. Obviously, this is not the case, and with such a large increase in inventory and a continued decline in profit margins, the situation might be getting worse.
Chart courtesy of www.StockCharts.com
The shift in guidance has meant a substantial decrease in the market view of the stock, subsequently leading to a drop in price. The stock has fallen to its 50.0% retracement level, at approximately $59.00 per share.
Investor sentiment will need to see a substantial increase in future prospects of the company for the price of its shares to begin moving up once again. I think that even following this decrease, the market view might still be somewhat optimistic, considering the inventory build-up.
Considering the fiscal uncertainty in America, as well as the constant financial mess in Europe and the questionable growth rate of China’s economy, it will take a substantial amount of momentum for investor sentiment to regain its previous level of confidence. I would be cautious with my market view for Tiffany’s and many other retail stocks at this moment.