Summary
Tiffany's revised 2008 sales forecast flies in the face of reality, here is why Tiffany is likely to disappoint shareholders.
Analysis
Tiffany’s management surprised analysts when it raised its earnings expectations for 2008. Earlier the company had warned investors that earnings could suffer; expecting December’s weak US sales to continue in 2008. Now the company believes strong international sales growth in combination with increased overseas purchases in its New York flagship store will propel company sales to the 10% level.
While management has ‘pushed the numbers’, Tiffany’s forecast flies in the face of current luxury trends, unsound international fiscal and monetary policies, and Tiffany’s own sales base. After three quarters of strong US and international sales in 2007, Tiffany’s growth slowed during the 4th quarter. According to the company, sales for the critical November-December period were mixed with its domestic in land store sales declining by about 4%, while its New York flagship store sales increased about 10%.
Most of Tiffany’s remaining growth was from its international stores driven in part by a weak US dollar. Tiffany’s revised sales forecast assumes its international store sales will continue to out perform the US market, but that's far from certain. Department store sales fell in Japan for the eleventh consecutive year. For 2007, jewelry sales declined by about 2.7%. Much of Tiffany’s distribution and new growth in Japan is in the countries national department store brands.
Elsewhere, emerging fiscal and monetary policies may adversely affect Tiffany’s sales growth overseas. For instance, Jean-Claude Trichet, European Central Bank President hinted that "European market growth was slowing and demand slackening among consumers and corporations". This amid growing concern that the Central Bank had been substantially increasing the Euros’ money supply could propel Europe’s inflation above 4%. That could mitigate any sales advantage foreign consumers once had buying dollar denominated luxury products and brands like Tiffany.
According to Tiffany, January’s sales trend was better, but investors have to question whether that improvement wasn’t due more favorable January 07 to January 06 comparisons than a reversal of the current trend in luxury product sales, especially jewelry.
Of larger concern to investors should be the dilution of the Tiffany brand name among ultra luxury consumers. According to a recent study by the Luxury Institute, Tiffany didn’t rank in the top three luxury jewelry brands. Harry Winston was first, followed by Buccellati and Van Cleef which tied for second place. Graff placed third in a list of twenty jewelers. That’s in contrast to an earlier study that placed Tiffany in the top three brands.
Brand dilution is evident everywhere in the new Tiffany strategy. From opening the joint venture with Swatch to distribute Tiffany branded watched world wide to the recent decision to open a Patek Philippe salon in Tiffany stores, strategic brand dilution is management’s new formula to increase shareholder value. Add to that the company’s plans to open approximately 170 small format stores in smaller US markets and you can see why fewer high end consumers see Tiffany as ultra luxury brand than an aspirational one as the Luxury Institute study demonstrates.
