IDEX Online Research: Tiffany's Tables Turned - US Sales Weak, International Strong

Sales Trends Weak in U.S.

For the first fiscal three-month period ended April 2006, Tiffany reported a 1 percent decline in same-store sales in its U.S. units; total sales rose by a modest 2 percent. The same-store sales performance was below management’s plan of a high single-digit gain. By geographic division, U.S. same-store sales were as follows:

• New York Fifth Avenue flagship store ?Down 7 percent
• New York suburban stores ?Flat
• All U.S. branch stores ?Flat ?The flattish sales trends were geographically broad-based across the U.S. 

This performance reflects the following factors:

• Foreign tourist customer traffic was down
  • Sales to European tourists were down in New York stores
  • Sales to Japanese tourists were down in stores in Hawaii
• Store traffic and total transactions declined slightly in the quarter
• The conversion rate (browser to buyer) was unchanged
• Sales were strongest at retail price points between $3,000 and $10,000
• Sales at Tiffany’s highest price points were soft; this reflects a diversion from recent trends
• Demand for engagement jewelry and silver jewelry was particularly strong 

IDEX Online research believes that inflationary pressures ?real or imagined, especially among high-income consumers ?may be affecting demand for Tiffany’s merchandise. However, we believe that over time, consumers who want jewelry will make shifts in their discretionary spending budgets to include jewelry, but not until oil prices stabilize.

With the prospects that the U.S. dollar may fall further in value, it is likely that foreign tourists?spending will pick up. While this demand won’t make up for lost sales to Americans, especially in Tiffany’s branch stores, it will have a positive impact on the company’s total sales. Tiffany’s Fifth Avenue New York flagship store, which captures most of the spending by foreign tourists, represented about 10 percent of corporate sales in 2005, or roughly $240 million in revenues of the company’s total $2.4 billion of sales.

International Sales Surged

Tiffany’s international sales were strong in all markets. Aggregate same-store sales in all international markets rose a very strong 16 percent; total sales surged by 21 percent (constant dollar basis) in Tiffany’s international stores.

• Japan ?+12 percent ?Same-store sales were up a very strong 12 percent in Japan, well above plan. Unit sales increased, and the average ticket was up; the sales increase was broad-based geographically in Japan. Engagement jewelry, fashion gold, and silver jewelry demand was strong. In addition, sales were also strong for high-end fine jewelry, watches, and designer goods.
• Asia-Pacific ?+20 percent ?Asia-Pacific same-store sales rose by a dramatic 20 percent, with double digit increases in all countries in the region.
• Europe ?+24 percent ?European same-store sales surged by 24 percent, well above plan. Store sales gains in both the U.K. and continental Europe were up.
• Tiffany’s sales in Canada, Mexico, and Brazil were also strong. 

IDEX Online Research believes that easy comparisons against last year’s very weak performance were responsible for some of the large international sales gains reported in the first quarter. Indeed, Tiffany management cited this as a partial explanation, and noted that the company expects gains in international markets to moderate later this year.

Sales in Specialty Retail Division Down Slightly

Sales in Tiffany’s “Other?division, including both specialty retailing and rough diamond sales, were down 4 percent.

• Little Switzerland, which represents about three-fourths of “other?sales, reported a sales decline of 3 percent. Fewer cruise ships docked in the Caribbean during the spring quarter.
• Tiffany’s sale of Temple St. Clair last fall had a slight, though not material, negative impact on sales in the quarter.
• Iridesse, the company’s pearl jewelry stores, continues to post growth. There are seven Iridesse units currently in operation; six more are slated to open this year. 

While the change in rough diamond sales did not have a material impact on sales in the “other?division this quarter, management says it will likely step up sales of rough diamonds in subsequent quarters. While this may help boost revenues, it will have a depressing affect on margins, since this is a low-to-no margin business for Tiffany.

Long Term: Tiffany’s Sales Are a Good Proxy for Economic Performance

IDEX Online Research shows Tiffany’s same-store sales have historically reflected economic cycles in the U.S. Therefore, if Tiffany’s sales trends remain soft, there is a relatively high likelihood that the U.S. economy is going to weaken.

As the graph below illustrates, Tiffany’s U.S. same-store sales typically dip when economic growth begins to slow in the U.S. There are signs that economic growth may be slowing in America.