Tiffany & Co. (TIF)
Tiffany & Co. (TIF: Charts, News, Offers), the New York based luxury retailer best known for its jewelry, announced a 19% gain in profit and a 9.2% gain in sales, beating earnings by 3 cents. Same-store sales rose 5% and the company raised its guidance for the rest of the year. Net income rose to 67.7 million, up from 56.8 million in the same quarter last year. Despite beating earnings in a shaky consumer environment, analysts are still wary that Tiffany’s domestic business may suffer and it will, as several large names in the fashion industry have, begin to rely more on emerging markets to fatten up its bottom line. Despite naysayers, Tiffany has raised guidance, expecting an 11% growth this fiscal year. What will Tiffany do now, moving forwards into an uncertain global economy?
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Stock Analysis
Tiffany’s business is split across three main regions – the Americas (52%), Asia (35%) and Europe (11%). In the Americas – which includes the United States, Canada, Mexico and Brazil, sales increased 8% to 350 million. Comparable-store sales increased 5%, with softer demand in the Western United States. Much of the American sales, especially in its New York flagship store, has been driven by foreign tourists, who pay a high premium on Tiffany items in their home countries. In Asia – which includes Japan, China, Korea, Taiwan, Australia, Malaysia and Singapore, sales rose 21% and comparable store sales rose 7%. The growth leader in the region was China – with its mainland, Hong Kong S.A.R. and Macau S.A.R. stores bringing in most of the region’s revenue. In Europe – which includes the U.K., Germany, Italy, France, Austria, Switzerland, Belgium, Spain and Ireland, sales rose 14% to 76.9 million. The U.K. has been the sales leader of the region, and is currently the only area in the EU that has access to direct online sales from the Tiffany website. It’s also worth noting that Asian and European earnings would have been significantly higher if the dollar had not been as strong; Tiffany’s USD earnings are impacted heavily by currency fluctuations. Tiffany’s gross margin this quarter increased to 57.8%, up from 55.1% last year, due to increases in retail prices across the board and declining prices in wholesale rough diamonds.
A main concern is the lower sales of items under $500. Higher priced items still sold well, but the reduced numbers in its more affordable products set of alarms of economic conditions catching up to the company. Some believe the launch of the Tiffany Keys line have thrown off the balance of its tiered pricing system. Tiffany has long attempted to broaden its spectrum of affordable luxury into multiple tiers – from below $200 to above $50,000. Like its industry peer Coach (COH: Charts, News, Offers), it does not fear cheapening its brand; rather, it seeks to bring in the largest customer base as possible while maintaining its classic luxury image. In the same manner as Coach, Tiffany has been seeking to diversify into other lines outside its core competencies – namely handbags and leather accessories for men and women, watches, as well as eyewear and mobile phones. Its eyewear line is produced through a partnership with Luxxotica Group S.p.A. (LUX: Charts, News, Offers), and its extremely limited diamond-encrusted phone line was produced with Japan’s Softbank. Tiffany has also diversified its classic diamond line, introducing colored diamonds, which have been traditionally viewed as a cheaper alternative to clear cut diamonds.
While diversifying will help keep its product line fresh and interesting, and expand its customer base, there are several key factors that will affect Tiffany’s ability to grow. First and foremost is rising metals prices, which directly affect its flagship line of silver and diamond products. In the past year, lower metals prices have benefited the company; but a macro-economic recovery would also lead to a rebound in these prices, and if that outpaces the consumer spending cycle, then Tiffany will be faced with shrinking margins. It is likely that this is the reason for its expansion into leather products, to avoid being tied too strongly to the commodities market. This leads into the second obstacle – consumer spending, which has always been a factor in luxury items. However, Tiffany’s line is more aptly spread to capture a larger market share during an economic decline than higher priced rivals such as De Beers or Cartier. Lastly, the fluctuating US dollar will either hurt or heal Tiffany’s bottom line. With widely placed bets across the globe, Tiffany will either be aided by a weakening US dollar and strengthening Chinese Yuan or Euros, or hurt by an overly strong dollar and subsequent higher prices in foreign markets.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
