Tiffany’s Loses Sheen to Strengthening Dollar

Iconic jeweler’s stunning Blue Book collection fails to draw the crowd

Luxury jewelry house Tiffany & Co. (NYSE: TIF) announced its Q1 FY16 results on Wednesday, May 25th, 2016, pre-market. The Company’s Q1 FY16 revenue fell 7.4% to $891.3 million versus $962.4 million in the year-ago period, making this quarter the sixth in a consecutive string of revenue decline. Revenue missed analyst’s estimates of $915.1 million, as per Reuters. The Company’s dismal sales was mainly on account of the strengthening dollar that refrained tourists from buying high-end jewelry which in turn impacted revenue from markets outside the U.S. Tiffany’s Q1 FY16 net income fell 16.6% to $87.5 million, or $0.69 per share, from $104.9 million, or $0.81 per share, in the comparable quarter last year.

Source: Company's Website
Source: Company’s Website

Sales at the jeweler’s stores open for more than a year fell 10% in the Americas region in Q1 Fy16 compared to a forecast of 9.1% decline. On a constant currency basis, net sales and comparable-store sales declined 7% and 9%, respectively. Tiffany’s signature “Blue Book” collection (featured alongside), paraded by top actresses at this year’s Oscar red carpet, failed to bring in revenue despite their uniqueness in terms of cut, quality, and design. The Company prefers not to offer promotions and discounts on its exclusive collections, which has turned away discerning shoppers. On the other hand, the stronger greenback has made purchases more expensive for tourists. During the quarter under review, the Company faced many headwinds in terms of frugal spending by foreign tourists in Europe, the U.S., and Asia, particularly in Hong Kong.

Regional sales split

Tiffany earns its revenue from five regions: the Americas, Asia Pacific, Japan, Europe, and Others.

Source: Company Data
Source: Company Data

During Q1 FY16, the Americas clocked a 9% decline in total sales to $403 million, with a 10% fall in comparable store sales. On a constant-exchange-rate basis, total sales and comparable store sales declined 8% and 9%, respectively. The sales decline is attributed to the challenging retail environment and the changing preferences by U.S. customers and foreign tourists.

In the Asia-Pacific region, total sales declined by 8% to $238 million and comparable store sales declined 15%. On a constant-exchange-rate basis, total sales and comparable store sales declined 5% and 12%, respectively. The main reason for the dismal performance was a continued significant decline in Hong Kong and further moderate declines in China and other markets.

The lone bright spot in an otherwise dull scenario was Japan, where total sales grew by 8% to $131 million and comparable store sales increased 12%. On a constant-exchange-rate basis, total sales and comparable store sales rose 1% and 5%, respectively. Management attributed the sales growth to higher spending by local customers.

In Europe, total sales fell by 9% to $97 million and comparable store sales declined 15%. On a constant-exchange-rate basis, total sales and comparable store sales declined 7% and 14%, respectively. This is mainly due to a challenging economic scenario in most countries, led by France, which resulted in lower foreign tourist spending.

Other sales declined 30% to $22 million, and comparable store sales declined 21%. This in turn reflects lower retail sales in the UAE and wholesale sales in the other markets. It is pertinent to note that Tiffany wholesales diamonds to third parties. The Company also offers other products such as timepieces, leather goods, sterling silverware, china, crystal, stationery, fragrances, and accessories through retail and wholesale distribution.

Store count and Buyback Program

During Q1 FY16, Tiffany opened two company-operated stores in Europe and closed one store in Japan. As of April 30th, 2016, the Company has 308 stores compared with 298 stores a year ago.

Source: Company Data
Source: Company Data

Another key event in Q1 FY16 was the repurchase of shares worth $78 million by the Company. As of April 30th, 2016, the Company has $416 million remaining under its new buyback program that is expected to run through January 31st, 2019.

Q2 FY16 and full-year guidance

Given the challenging retail scenario and other headwinds in the form of the strengthening dollar and frugal spending on luxury items in recent months, management anticipates earnings in Q2 FY16 to decline at the same rate as seen in Q1 FY16. The Company also forecasts a mid-single digit percentage fall in its full-year profit.

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