Why Tiffany & Co. Stock Surged Almost 7% -- Then Gave Almost All of It Back

What happened

It could have been a great day for Tiffany & Co. (NYSE: TIF) stock investors. Instead, it ended up being only a good day.

In early trading Tuesday, Tiffany stock ran up 6.6% at first, as investors cheered the results of the company's most recent earnings quarter. For fiscal Q2 2018, Tiffany reported earning $1.17 per share on sales of $1.08 billion. Wall Street had expected Tiffany to earn only $1 a share on sales of $1.04 billion. By the end of the day, however, these strong results ended up netting Tiffany shareholders only a 0.9% gain.

So what

Why did Tiffany give (almost) all of its gains back? Let's review.

For Q2, Tiffany grew its earnings 26% year over year, even though sales grew only 12%. Gross margin climbed 150 basis points to 64%, which helped boost earnings. On the other hand, selling, general and administration expenses climbed 20% -- faster than sales growth -- with the result that the company's operating profit margin declined by 150 basis points despite the boost from gross margin. Helping to save the day (and the quarter) were lower tax rates -- a whopping 12.8 percentage points lower than what Tiffany had to pay in the year-ago quarter. (So thanks a lot, tax reform!)

When all was said and done, Tiffany ended up netting 13.5% of its revenue as profit on the bottom line -- once again, a 150-basis-point improvement.

Now what

Wall Street was initially pleasantly surprised by the results, as was Tiffany management, which characterized the earnings as "better than expected" -- enough so that management felt confident raising its guidance for the rest of this year. Tiffany now expects to end fiscal 2018 with earnings of from $4.65 to $4.80 per diluted share on sales growth in the "high-single-digit percentage" range.

Ordinarily, you'd expect a "beat and raise" earnings report like this one to yield strong gains in stock price -- and for the stock to hold on to those gains. Tiffany stock was unable to hold on to its gains, I suspect, because (a) the operating profit margin was hurt so much by rising costs, (b) the company leaned heavily on tax reform for much of its gains, and (c) management warned that while the year as a whole will be good, results in the current third quarter will show earnings "below the prior year."

Or to be more precise -- (d), all the above.

10 stocks we like better than Tiffany & Co.When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Tiffany & Co. wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of August 6, 2018

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.