Jewelry sales: Tiffany’s October quarter

TIF is a truly remarkable company

It’s the only consumer name I can think of that’s been able to bring its brand to cover progressively more down-market without destroying its image.  The iconic Blue Box holds a leading share worldwide in sales of “statement” jewelry items retailing for over $50,000 each.  The typical BB, however, houses a silver pen, a glass pitcher or whatever else the average purchase price of well under a thousand dollars will buy.

For TIF, no one seems to mind.   For almost everyone else who has tried to achieve the same kind of brand extension, no trace, no sign remains of them on the main shopping streets of major cities.

TIF is strong in the US and in Asia, where the fact that it’s an American company is a positive.  The company is making gradual inroads in Europe as well, but there the going has been slower.  There, traditionalists regard TIF as an upstart. They also seem to believe that luxury goods from outside Europe don’t have the sophistication of domestic products.

Third quarter earnings were just about flat, year on year…

after adjusting for unusual items.  At $598.2 million, sales were above the company’s expectations, and down only 3% vs. the year-ago quarter.  Same store sales were down 6%, a much smaller decline than in the first half of the year.  Each month in the quarter was better than the previous one.  This pattern has continued into November.  As a result of the continuing recovery in sales, TIF has raised its full year earnings guidance.

…although they’re not quite as good as they seem.

Pre-tax earnings from operations were down 17% year on year.  The difference between that figure–which is an improvement in operations compared with the first half–and breakeven is the tax rate.  Third-quarter results were taxed at 22% vs. 32% in the year-ago period.

What happened?  The (too) simple, but enough for us, explanation is this:  at the beginning of each year a company estimates what its full-year tax rate will be and applies that to each quarter’s earnings.  During the October quarter TIF got favorable tax rulings that meant the rate would be a few percentage points lower than it had thought.  As it’s supposed to do, TIF made the entire year-t0-date adjustment by lowering the third quarter rate.

A revenue breakout

Americas (mostly US)   $303.5 million    51% of total

Pacific    $225,8 million     38%

Europe    $188.9 million     11%

What the company said

Europe:  overall sales were up 16%, comparable store sales were up 9% (the difference shows how fast TIF has been expanding there).  This was a lot better than expected.  Business is showing sequential improvement.

Pacific:  ex Japan, overall sales were up 18%, comps up 9%.  China, Australia and Singapore are going from strength to strength; Hong Kong, Korea, and Malaysia are improving.

Japan, where the large majority of TIF’s current Asian business is done, continued weak, with no recovery in sight.  Why?  poor economy, national disenchantment with luxury goods, TIF’s brand positioning.

Dragged down by Japan, TIF’s overall Asian sales continue to improve but were up only 2%, and comps down 3%.

Americas: US sales are also improving month by month.  Overall sales were down 9% for the quarter, comps down 10%.  Comps at the flagship store in NYC, helped by tourist spending, were down 8%, about the same experience as all NY-vicinity stores had.  For what it’s worth, CA was relatively soft, FL relatively strong.  Hawaii and Guam, boosted by tourism were up for the quarter.

The greatest revenue declines were at the high end.  This was a decline in number of items purchased, not selling prices.

Catalog and online were up in October.

Improving comps are a function both of improving demand and of the “anniversary-ing” of the financial crisis-induced falloff in sales.  In other words, starting around September, current sales are no longer being matched against strong, pre-crisis results from the prior year.  Last year’s sales are beginning to show crisis-related weakness.

My thoughts:

The regional information confirms what other companies have been saying. That is:

–China is already more or less back to normal.  The rest of the Pacific ex Japan is following suit.

–Japan is weak

–the US is weak, but slowly recovering.

The question I see with the stock–which I owned for years during the Nineties–is that the real bright spots for TIF,  Pacific ex Japan and Europe, together make up less than a quarter of company sales.  Japan, another quarter or so of sales, could be a drag for years to come.  Let’s say these two factors offset one another for the moment (eventually, the positive side will be more important, though).

If so, the investment focus should be on the US.  There’s no doubt in my mind that TIF remains a dominant force in domestic jewelry sales.  The investment issues are:  how fast will demand recover, and, given that the stock is within 20% or so of its high before the financial crisis, how much is already priced into the stock.  My first reaction would be to look for a company outside luxury goods, or one with less exposure to US+ Japan.

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