Despite the prospects of an uncertain holiday selling season, on-going profit pressure, and the probability of a slowing global economy in 2007, Tiffany & Co., the world-renowned luxury jeweler, continues to open new stores, introduce new products, and rollout its new Iridesse pearl stores.

 

Smart merchants such as Tiffany use an economic slowdown for expansion. Real estate is cheap and abundant, interest rates are declining, and capital is readily available. Clearly, Tiffany is poised for strong growth, regardless of economic cycles.

 

Highlights of the company’s expansion program are as follows:

 

• New retail square footage gains – During 2006, Tiffany’s global new store openings will add about 7 percent new square footage; this is far above the growth of most of the other U.S. jewelry chains. Five new Tiffany stores are slated to open in the U.S. in 2006, including units in Indianapolis, Nashville, Tucson, Atlantic City, and Hawaii. In addition, several overseas stores will open this year and next in locations such as Hamburg (Germany), Tokyo (Japan), Vancouver (British Columbia, Canada), and other sites. The company’s Iridesse pearl store division plans to open seven stores this year, doubling the number of Iridesse units in operation. Worldwide, the company owns about 130 stores, not including licensed operations.

• New York Flagship store remodeling underway – Tiffany is remodeling its New York Fifth Avenue Flagship store, a project that was begun several years ago. When the remodeling is completed, there will be 25 percent more retail selling square footage. Despite disruptions related to the remodeling process, sales remain at about $5,000 per square foot (this store generated about $240 million in sales in 2005). If the typical independent jeweler in America generated sales of $5,000 per square foot, their sales would be roughly $10 million per store, rather than the actual average of about $1 million. Thus, Tiffany’s Flagship store is about ten times as productive as a typical independent U.S. jewelry retailer.

• London Flagship store remodel completed – The company’s Bond Street store in London has been remodeled. During the remodeling process, which ended this past summer, sales were depressed. Management reports that sales have rebounded strongly in this unit.

• Average ticket up – Despite flat traffic and a flat number of transactions during the second quarter, Tiffany’s average ticket rose. Several factors were responsible for the increase in average ticket, including the following:

• Merchandise mix helped boost sales – Three categories boosted sales, including the following:
• Big-ticket diamond sales continue to climb. Engagement jewelry as well as diamond and platinum jewelry were strong.
• Collections and designer jewelry posted solid gains.
• Timepiece sales were up.
• Strong growth of high-end goods – Tiffany’s sales were strongest among goods priced in three categories: about $10,000, about $20,000, and $50,000 & above.
• Sales to local customers were up. The company did not rely on sales to foreign tourists to push up the average ticket.

• All geographic areas worldwide posted solid sales gains – Every global market showed positive sales increases in the second quarter.

• During the second quarter, U.S. retail same-store sales gains were +5 percent. While July same-store sales were slightly negative, August same-store sales have rebounded to positive mid-single digit levels.
• Japan’s same-store sales were up by 2 percent in the quarter.
• Other Asia-Pacific markets posted a dramatic 27 percent same-store sales gain, well above plan. Tiffany’s stores in Hong Kong, Singapore, Taiwan, and Australia generated strong sales gains.
• Europe same-store sales were up 17 percent, also well above plan. Every European market was strong for Tiffany.
• Tiffany stores across the Americas were also strong. The company’s stores in Toronto, Brazil, and Mexico generated solid growth in the quarter.

• Little Switzerland sales ahead – The company’s Little Switzerland stores generated a 10 percent sales gain, despite weak growth in cruise ship sailings. Little Switzerland operates most of its stores in the Caribbean, a cruise destination for Americans and Europeans.

• Advertising up – Tiffany spends about 6 percent of revenues on advertising, about 50 percent more than the 4 percent of revenues spent by most independent jewelers.

• Websites launched – During the quarter, Tiffany launched its website in China. This is the fifth global market which has its own website. Tiffany websites also target consumers in the U.S., Canada, the U.K., and Japan.

• Tiffany’s rough diamond sourcing continues – During the second quarter, wholesale diamond sales of rough stones declined slightly, but this was a seasonal aberration. Management expects rough diamond sales to be up for the full year.

• Direct market sales solid – Direct marketing sales were up 18 percent in the second quarter. A portion of this increase was due to a late Mothers Day, which pushed sales into the second fiscal quarter this year versus the first fiscal quarter last year. In addition, the number of orders and the average ticket rose in the direct marketing division. E-commerce sales are rapidly growing; as a result, the company plans to reduce its catalog circulation by 10-15 percent during 2006.

• Sales outlook bullish – For the full year, Tiffany management expects sales globally to grow in the high-single digit range, including mid-single-digit same-store sales growth in its U.S. market and low-single-digit increases in its stores in Japan (together, these markets represent roughly 70 percent of Tiffany’s total annual sales). Management expects its gross margin and operating expense ratio to be about flat for the year.

• Strong balance sheet – Tiffany is loaded with cash – $147 million at the end of the second quarter, 14 percent above last year’s levels. Its customer receivables are turning at 19 times annually. Inventories are up 16 percent in anticipation of 7 percent new selling square footage and 9 percent sales gains.

• Only two negative trends – Tiffany is experiencing gross margin pressure similar to most other retail jewelers. In the second quarter, its gross margin fell 40 basis points to 55.1 percent. However, this is still well above the typical gross margin of 45-50 percent, which is posted by the typical independent or chain jeweler in America. Most of Tiffany’s margin pressure is coming from changes in its sales mix; as it sells more high-end diamonds, its gross margin shrinks. In addition, Tiffany’s operating expenses continue to rise, a trend which plagues every jeweler in America.