Is Tiffany's Growth About to Unwind?

Implications: With global economic growth slowing, Tiffany's sales and earnings may substantially decline.  Here's why

Analysis: Tiffany surprised traders when it posted solid gains in the first quarter ending April 2008.  Then the company thought total sales would increase about 10% for the year.  Management’s optimism was predicated on several assumptions including: European sales would increase by about 20%, growth in the Asian and Pacific markets would be in the low double digits, same store sales in the US market would improve, especially in the 2nd half of 2008, and increased sales space would grow by approximately 10%.  However, the efficacy of those assumptions is now in question as the global economy slows.  

Ironically, international diversification doesn’t necessarily insulate North American companies like Tiffany from sales and earnings declines during a long and deep US slowdown.  The fact is most consumer markets, both domestic and overseas, are linked to US economic performance.  Granted, emerging markets like China, India, and the Middle East have gotten a lot stronger.  But none of those markets are sufficiently developed to sustain their current growth rate through domestic consumption alone.  Likewise, even a unified European market can’t sustain growth if US tourism and North American exports substantially decline.  

Unfortunately, that’s exactly what’s happening and Tiffany may be the worse for it.   There is every indication economic growth has substantially slowed in part because of inflation, but also because tourism and US exports have continue to decline.  One sign of the slowing is strengthen of the US dollar. At record lows, the dollar has rebounded to five month highs as European central banks try to stabilize decreasing GDP.  Unfortunately for everyone, the stronger dollar doesn’t mean the American economy has gotten stronger, but that overseas economies have gotten weaker.  

That’s a recipe for a global slowdown that could spiral into a worldwide recession.  That’s particularly true if China’s should decide to dump excess product that’s been overproduced to keep workers employed in the Peoples Republic.  There are already indications that higher commodity prices and wage inflation have thousands of factories idle, while others are producing at 50% capacity.   

Tiffany will report its 2nd quarter sales and earnings results on August 28th.  Clearly, the company will have continued to benefit from it overseas diversification for most of May and June.  The degree a weakening global economy will have hurt Tiffany’s international sales in July remains to be seen.  Historically, there is some inertia in jewelry sales at the beginning of a slowdown as earlier holiday plans play out and gifting decisions fulfilled.   

However, the second half of 2008 and early 2009 is a different matter for a company that generates about 33% of its sales from the Asia-Pacific region and about 9% in European community countries.  Add, “31% of Tiffany branch locations operate in the hard hit U.S. housing regions of California and Florida”, according to the SeekingAlpha.com article, and you have a combination of external events that may conspire to bring the Tiffany juggernaut to a stand still, at least for the next several quarters.