Jewelry retailer Tiffany & Co posted a third-quarter profit, up 63 percent, but the fourth quarter is taking a sharp turn for the company.
Current quarter estimates are below consensus. On Tuesday, Tiffany shares fell more than 9 percent in afternoon trading.
"There's an inflection in gross margins. Everybody was expecting them up, they actually turned down 50 to 60 basis points. I think that's due to the way the inventory works in their system," says equity analyst Paul Swinand of Morningstar. "They've got a very long inventory cycle, and they had been getting a tailwind from the inventory they had been selling, which they bought earlier at lower prices."
Diamond prices, which make up the bulk of the company's costs, were much higher in 2011, and Swinand believes this is directly affecting Tiffany's valuation, which was 21 prior to today's decline. Its valuation, or PE ratio based on 2012 estimated earnings, is now 17.7.
Yet other luxury retailers such as Coach and Ralph Lauren are trading around 21. Swinand, however, doesn't expect Tiffany's to outperform its peers.
"Tiffany's valuation was ahead of itself. Its tough to get a 21 to 23 multiple when you're only growing the topline at 6 or 7 percent," he adds.
Swinand's price target is $50, which means he expects the company to lose a quarter of its current market capitalization— currently $8.5 billion.
"It's not that I'm so pessimistic on Tiffany, its just that this summer's increases were really what was driving the sales," he told CNBC. "A lot of the sales increase has been due to pricing."
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Paul Swinand does not own Tiffany stock. Morningstar's editorial policy prohibits analysts from holding positions in the companies they cover.