Tiffany’s Sales Plunge on Strengthening Dollar

Retailer’s worldwide net sales declined 6% to $932 million during Q2 FY16

t1Luxury jewelry house Tiffany & Co. (NYSE: TIF) announced its Q2 FY16 and H1 FY16 financial results on August 25th, 2016.

The New York-based Company, through its subsidiaries, designs, manufactures, and retails jewelry and other items worldwide. Its jewelry products include fine and solitaire jewelry; engagement rings and wedding bands; and non-gemstone, sterling silver, and gold jewelry. The company also sells timepieces, leather goods, sterling silverware, china, crystal, stationery, fragrances, and accessories. In addition, it wholesales diamonds to third parties. The company offers its products through retail sales, internet and catalog sales, business-to-business sales, and wholesale distribution.

As of January 31st, 2016, it operated 124 stores in the Americas, 81 stores in the Asia-Pacific, 56 stores in Japan, 41 stores in Europe, and 5 stores in the United Arab Emirates (UAE). Read more about Tiffany’s financial results below.

Q2 FY16 financial highlights

t2During Q2 FY16, Tiffany’s worldwide net sales declined 6% to $932 million and comparable store sales declined 8%. On a constant-exchange-rate basis, worldwide net sales and comparable store sales declined 6% and 9%, respectively. The Company’s dismal sales were 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. Customers around the world are cutting back on jewelry spending, particularly in Europe. However, Tiffany has been successful in keeping costs under control, allowing it to remain profitable in the face of global economic turbulence that has hampered sentiment among high-end consumers.

During Q2 FY16, Tiffany’s gross margins increased to 61.9% from 59.9% in the year-ago period, due to lower product input costs, changes in product sales mix, and price increases. Selling, general, and administrative (SG&A) expenses declined 4% Y-o-Y to $402.2 million due to lower variable labor-related costs, lower sales-related variable costs, lower marketing expenses and higher store-related costs. Excluding the effect of a specific charge in the prior year period, SG&A expenses declined 2% in the reporting quarter.

As a result, Tiffany’s earnings inched up 1% to $105.7 million, or $0.84 per share, as lower SG&A expenses helped drive bottom-line from $105 million, or $0.81, in the prior year. The Company ended the quarter with cash and cash equivalents and short-term investments of $720 million as of July 31st, 2016, versus $771 million as of July 31st, 2015.

H1 FY16 financial highlights

For H1 FY16, Tiffany’s worldwide net sales fell 7% to $1.8 billion versus the prior-year period, while comparable store sales declined 9%. On a constant-exchange-rate basis, worldwide net sales and comparable store sales fell 6% and 9%, respectively.

For H1 FY16, Tiffany’s gross margins increased to 61.6% from 59.5% in the prior-year period. The increase was due to lower product input costs, changes in product sales mix, and price increases. SG&A expenses declined 1% in the first half, reflecting lower variable labor-related costs, lower sales-related variable costs, lower marketing expenses and higher store-related costs. Excluding the effect of a specific charge in the prior year period, SG&A expenses increased less than 1% in H1 FY16.

However, net earnings fell to $193 million, or $1.53 per diluted share, and included a tax benefit of $0.05 per diluted share in the first quarter related to the settlement of a tax examination. This compared to the prior year’s $210 million, or $1.62 per diluted share, as reported, and $216 million, or $1.67 per diluted share, when adjusted for the charge cited above.

Regional highlights

t3Tiffany earns its revenue from five regions: the Americas, Asia Pacific, Japan, Europe, and Others.

Americas: In the Americas, Tiffany’s sales were $434 million in Q2 FY16 and $837 million in H1 FY16, both falling 9% Y-o-Y versus the prior year’s periods. Comparable store sales declined 9% and 10% in Q2 FY16 and H1 FY16, respectively. On a constant-exchange-rate basis, total sales declined 8% and comparable store sales fell 9% in both Q2 FY16 and H1 FY16. The decline is sales and comparable sales are mainly due to lower spending by U.S. customers as well as by Chinese and other foreign tourists.

Asia Pacific: In the Asia-Pacific region, total sales fell 6% to $230 million in Q2 FY16 and fell 7% to $469 million in H1 FY16 versus the prior year periods. Comparable store sales declined 12% and 13% in Q2 FY16 and H1 FY16, respectively. On a constant-exchange-rate basis, total sales fell 3% in Q2 FY16 and 9% in H1 FY16, while comparable store sales declined 4% in Q2 FY16 and 11% in H1 FY16. Sales growth in China and Korea was offset by significant declines in Hong Kong and moderate declines in other markets.

Japan: The lone bright spot in an otherwise dull scenario was Japan, where total sales jumped 10% to $138 million in Q2 FY16 and rose 9% to $269 million in H1 FY16, while comparable store sales grew 13% in Q2 FY16 and 12% in H1 FY16. On a constant-exchange-rate basis, total sales fell 5% in Q2 FY16 and 2% in H1 FY16, while comparable store sales declined 3% in Q2 FY16 and grew 1% in H1 FY16. The decline in sales was mainly due to lower spending by Chinese tourists in both periods.

Europe: In Europe, total sales fell 12% to $111 million in Q2 FY16 and 11% to $208 million in the H1 FY16, while comp sales declined 17% in Q2 FY16 and 16% in H1 FY16 versus the prior year periods. On a constant-exchange-rate basis, total sales fell 8% in Q2 FY16 and 7% in H1 FY16, while comparable store sales declined 13% in Q2 FY16 and 13% in H1 FY16. Lower sales in Europe were attributed to weak demand by foreign tourists and local customers, in contrast to better performance in the U.K.

Others: Other sales declined 3% to $18 million in Q2 FY16 and 20% to $40 million in H1 FY16, while comparable store sales declined 22% in Q2 FY16 and 21% in H1 FY16. The decline was mainly due to lower retail sales in the UAE and an increase in wholesale sales of diamonds.

Other highlights

t4Store update: Tiffany opened four company-operated stores in Q2 FY16 and closed one existing location. As of July 31st, 2016, the Company operated 311 stores (125 in the Americas, 83 in Asia Pacific, 55 in Japan, 43 in Europe, and 5 in the UAE), compared with 304 stores a year ago (124 in the Americas, 79 in Asia-Pacific, 56 in Japan, 40 in Europe, and 5 in the UAE).

Inventories: Net inventories at July 31st, 2016 were 1% lower than at July 31st, 2015.

Capital expenditures: Tiffany’s capital expenditures of $101 million in H1 FY16 were slightly higher than $98 million in last year’s first half.

Share repurchases: The Company bought approximately 1.1 million shares of its t5Common Stock at an average cost of about $63 per share in Q2 FY16 and bought approximately 2.3 million shares at an average cost of $65 per share in H1 FY16. As of July 31st, 2016, Tiffany’s had $344 million remaining under its share repurchase authorization of up to $500 million expiring on January 31st, 2019.

Guidance for full year FY16

For full year FY16, Tiffany predicts its worldwide net sales to drop to a low-single digit percentage from last year. Similarly, the company expects EPS to fall by a mid-single-digit percentage from $3.83 a share achieved in 2015.

Stock Performance

t6Tiffany’s stock ended the day at $67.27, slipping 2.52%, at the close on Friday, September 9th, 2016, having vacillated between an intraday high of $68.80 and a low of $67.25 during the session. The stock’s trading volume was at 1,564,520 for the day. The Company’s market cap was at $8.62 billion as of Friday’s close.

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