IDEX Online Research: Tiffany Slams another Home Run in the Second QuarterSeptember 10, 07
Tiffany is smacking the ball out of the ballpark by generating consistently strong financials, quarter after quarter. While other jewelers are lamenting sales softness, Tiffany continues to post dramatically stronger revenues and profits.
Just ask Mike Kowalski, Tiffany’s chairman, about the weak consumer demand for jewelry. Our guess is that his response would be something along the lines of “what weakness?”
For its second fiscal quarter ended July 2007, Tiffany U.S. same-store sales rose by a whopping 17 percent, far ahead of any other publicly held jeweler, and dramatically above the 5 percent gain for the industry. Same-store sales in the same period a year ago were up 5 percent; that wasn’t a slam-dunk easy comparison for Tiffany to go against.
The table below summarizes Tiffany’s results for its second fiscal quarter ended July 2007 as compared to the same period a year ago.
More and Higher Value Transactions Drove Sales
What drove Tiffany’s sales? Management cited several factors which drove sales in Tiffany’s American market, including the following:
- The average transaction value was up substantially.
- The total number of jewelry transactions rose.
- Sales at all price ranges, from below $500 to over $50,000, were up. The greatest sales gains came from jewelry in the $50,000 and higher range.
- Management described diamond jewelry was a “standout” category, with diamond engagement ring sales up more than 25 percent versus the same period a year ago. Diamond jewelry sales – non-bridal – were also strong.
- Silver jewelry, especially charms, was a solid performer.
- Designer jewelry demand was very strong.
- The company noted only two categories where sales were below average. Tabletop sales were below last year, and watch sales were up only modestly. In contrast, many jewelers have reported strong watch sales recently.
- Sales strength was geographically broad-based across the continental U.S.
- Sales were especially strong in the company’s New York Fifth Avenue flagship store, which posted a 31 percent gain for the quarter. This dramatic sales jump was driven by both domestic shoppers as well as Europeans who took advantage of their strong Euro currency to purchase jewelry in America.
- Sales were also especially strong in Boston, the Orlando vicinity, Houston, Beverly Hills and Bellevue (WA). In contrast, some other jewelers have reported weak sales in the Florida market.
- Sales were weak in only two areas: Hawaii and Guam. This is related to the lack of free-spending Japanese tourists.
- Sales were strong across the quarter. May same-store sales in the U.S. market were up 20 percent, June same-store sales advanced by 10 percent, and July same-store sales peaked at +22 percent.
- Tiffany’s international sales rose by a very strong 17 percent in constant dollars, and international same-store sales were up 7 percent. Virtually every region of the world was substantially ahead of last year, except for Japan.
- In Japan, total sales were down 1 percent, and same-store sales were down 6 percent. The company had not expected sales to be this weak. While the average transaction value rose, the number of units sold dropped.
- In the Asia-Pacific region, sales leaped ahead by 24 percent, driven in large part by Chinese tourists in Hong Kong.
- Europe’s same-store sales rose by a robust 23 percent, with all markets reporting strong results.
- Stores in both Canada and Mexico reported substantial sales gains.
- Tiffany’s direct marketing division generated a weaker sales gain of only 12 percent. When is a 12 percent gain weak? Only when it is compared to Tiffany’s other divisions. Most specialty jewelers in the U.S. would have been happy for a 12 percent sales gain in the second quarter. Tiffany reported that it continues to cut back on catalog mailings; increased sales are coming from online orders. However, the company expects to continue to publish its catalog, since it drives people to Tiffany’s website. Tiffany plans to re-launch its commerce website this fall.
- Tiffany’s “other” division, which consists mostly of wholesale diamond sales and revenues from its Iridesse pearl stores, reported a revenue gain of 151 percent. Now that Little Switzerland is slated to be sold, its revenues are no longer reported.
- Tiffany’s gross margin fell slightly to 55.3 percent of sales from last year’s 56.0 percent due to a higher mix of no-margin wholesale diamond sales.
- Tiffany’s expense ratio fell significantly to 39.1 percent of revenues from last year’s 42.1 percent of revenues due to strong sales leverage in the quarter.
- Tiffany generated a pretax profit of $104 million, 46 percent greater than last year. Its pretax margin was 15.7 percent versus 12.9 percent in the quarter. Most specialty jewelers lose money in the second quarter of the year.
- Total corporate sales advanced by 17 percent, but Tiffany’s inventory rose by less than 7 percent. That illustrates the strength of Tiffany’s inventory controls. In addition, stronger-than-expected sell-through may have left the company under-inventoried, in our opinion.
- During 2007, Tiffany plans to open seven new U.S. stores, in addition to 11 new stores in overseas markets. The company started the year with 64 U.S. stores; it will end the year with 71 units. Between new U.S. and overseas stores, Tiffany will add about 11 percent new square footage this year.
- Tiffany plans to begin wholesale distribution of its Tiffany branded watches in 2008. We think this will not contribute meaningfully to revenues for several years.
- Tiffany’s management reported that August was a strong sales month for the company. As a result of recent strength, the company is now projecting that U.S. same-store sales will rise by a low double-digit level this year. Further, it has revised its earnings guidance upward.
What is the magic driving Tiffany?
Here’s how Tiffany’s Kowalski describes his success in the second quarter: “These sales results, which exceeded our expectations, are continued confirmation of the strength of the Tiffany & Co. brand around the world and continue to validate the effectiveness of our focused distribution and product strategies. While diamond jewelry continued to perform exceptionally well, led by strength in engagement jewelry, we were also pleased with growth in many other jewelry categories and with the overall balance of our product mix between aspirational and accessible price points.”
Management is driven by numbers and research. They don’t make decisions lightly, and while they rely on merchants’ instincts to guide product assortments, they move quickly to replace slow-selling goods.
The Tiffany name has a cache unmatched in the jewelry world. Unlike some other guild names, Tiffany operates stores that are approachable by both wealthy consumers and middle America shoppers.
Tiffany spends slightly more on advertising, as a percentage of sales, than the typical U.S. jeweler. We would argue that Tiffany gets more bang for the buck because it approaches its advertising spending like it approaches everything else: with great care and deliberation.
Tiffany uses a macro slowdown to accelerate new store openings. Thus, the company is well-positioned to capture sales, when the economy hums again.
Basically, it comes down to this: Tiffany is operated by visionaries – people who can see past last week’s results. As a result, the company’s performance has consistently – year after year – been ahead of industry trends.
While Tiffany is one of the largest jewelers in the world – with over $2.6 billion in sales during 2006 – management has the same day-to-day struggles as any other jeweler: personnel, cash flow, payrolls, vendors, and everything else that all jewelers deal with. The difference is that Tiffany turns challenges into opportunities. Other jewelers should take note.