Will Tiffany (TIF) Disappont?

Summary

Tiffany has defied current trends for luxury retailers, but the forces of weakening global economy and a deteriorating US market maybe catching up with the venerable Fifth Avenue retailer.  Here's why

Analysis

Despite Standards & Poor’s higher rating, Tiffany stock slipped to $27.72 in afternoon trading 0n Friday, October 17^th.  S & P cited the retailer’s product portfolio and geographical diversity as the reason for raising the luxury jewelers rating from “sell” to “hold” earlier in the week.

In reality nothing has changed at Tiffany to warrant the change in rating.  If anything, Tiffany’s out look worsened as European governments acknowledged the overseas banking system had the same capital asset valuation problems as Wall Street banks do. That can only weaken the company’s international business which is the one part of Tiffany’s diversified sales base that been strong.

Tiffany’s recent growth has been driven from new stores and like for like sales growth overseas.  According to the company, it expects to open about 24 new stores.  That’s about a 13% increase.  In addition, it will be testing a new small format store in California.  However, as important as new store growth is, its comparable stores sales that drives profitability in retail and that has been more illusive for Tiffany.

During the second quarter, comparable store growth was negative in its America segment declining (4%) versus a negative (2%) for the half.  So, same store sales growth was declining as FY 2009 progressed.  Comparable store sales growth was also declining in Tiffany’s Asia-Pacific business segment, although it remained positive.  For example, second quarter like for like sales grew 1% compared to 2% for the first half.  It was the European business segment that really drove profitability where comparable stores sales in creased 11% in the second quarter and 12% for the half.  Still, second quarter results were softer, reflecting some slowing in the Tiffany’s European sales base.  Now with the European economy fully embroiled in the global banking crisis, it’s reasonable to expect 3^rd quarter results to soften even further.  

According to Tiffany, the company expects sales to increase about 9% for the FY 2009.  That estimate includes an increase of about 5% in the US, Canada, and South American segment of the business with flat same store sales.  Realistically, positive growth in the fourth quarter in the US market is problematic at best.  While Tiffany describes its comparisons with last year as easy, that optimism remains to be seen; especially with the banking crisis unresolved and the economy slipping into a recession.  Add weaker European comparable store sales, declining sales in Japan, and flat Asian-Pacific store sales and Tiffany looks like any number of other luxury retailers struggling to maintain market share in this economy.