The big news from Tiffany wasn’t the fact that its holiday sales were strong – that was expected. The big news is that the company is accelerating its new store openings in the U.S. as well as maintaining a solid pace of store openings in international markets.

 

Store Openings to Accelerate

Despite the prospect of a global economic slowdown in 2007 – and the likelihood of softening jewelry demand – Tiffany is plowing ahead with its accelerated new store opening program. Smart merchants often take advantage of an economic slowdown – and the related soft real estate market – to snap up retail locations and open stores in anticipation of the economic rebound. Economic slowdowns in the U.S. occur only every five years or so, and are often brief. Thus, it is clear that Tiffany management is taking advantage of an opportunity to add to its real estate portfolio.

 

After opening stores for several years at a rate of three-to-five new units annually, management said that it plans to open five-to-seven new Tiffany jewelry stores in America in 2007. Internationally, the company plans to open ten units; that, too, is an acceleration from earlier store opening rates.

 

At the end of 2006, the company operated 64 Tiffany stores in the U.S. and 101 company-owned units in overseas markets. In addition, it has granted operating licenses to others to operate Tiffany units in certain markets around the world. Finally, it operates just over 30 smaller specialty jewelry stores under the names Little Switzerland and Iridesse.

 

The company’s accelerated new store opening plan will yield a mid-single digit gain in selling square footage, and will help drive management’s plan to grow sales by a low double digit level – perhaps 11 to13 percent – despite the prospects of a slowing global economy. Its profits could grow by 13 to15 percent in 2007, based on the prospects of its strong sales growth leveraging operating costs.

 

Holiday Sales Strong

While Tiffany’s press release summarized the company’s performance by major division, management went into significant detail about each of its operating units. The following are highlights from management’s comments about its performance in the 2006 holiday selling season of November and December. Unless otherwise noted, all percentage gains are shown in constant dollars to eliminate the impact of currency translation.

 

• U.S. Market – Sales in the company’s 64 U.S. stores rose by 12 percent, with an 8 percent same-store sales gain. Clearly, the company’s five new stores helped boost sales. In November, the company’s U.S. units posted a same-store sales gain of 11 percent, followed by a more moderate 8 percent gain in December. Tiffany’s sales trends followed industry trends: November was stronger than December for most U.S. jewelers.
  
  In the U.S., both the average transaction size and the total number of transactions rose. Further, sales increased in every price strata, with the largest gain in the sale of jewelry priced above $50,000 retail.
  
  Its New York Fifth Avenue flagship store posted a 15 percent sales gain, and its seven branch stores in the New York area were up 11 percent. Foreign tourists, armed with strong currencies, helped boost sales in Tiffany’s newly renovated Fifth Avenue store.
  
  Around the country, Tiffany’s 63 branch stores posted a same-store sales gain of 7 percent. The only disappointment came from Tiffany’s stores in Guam and Hawaii where same-store sales comparisons were negative.
  
  On an annual basis, the U.S. market represents about half of Tiffany’s revenues.

• International Markets – Total sales in international markets were up 14 percent on a constant dollar basis (+18 percent in current dollars due to a weakening U.S. greenback). Same-store sales were up 6 percent in Tiffany’s international stores.

• Japan – Japan represents about 50 percent of Tiffany’s international sales. Total sales were flat, and same-store sales were down 4 percent in Japan. By month, November same-store sales were down 4 percent, while December’s same-store sales fell by 5 percent. In Tokyo, same-store sales were down 4 percent, both in its Ginza Flagship store as well as branch stores in the market. Outside Tokyo, same-store sales were down 5 percent.
  
  In Japan, the company opened four stores and closed one store in 2006. It is in negotiations to renew its operating license agreement with Mitsukoshi. Tiffany-Japan operates 19 boutiques in Mitsukoshi stores; revenues in those stores account for about 10 percent of Tiffany’s annual sales.

• Asia-Pacific – Same-store sales in other Asia-Pacific markets were up a dramatic 23 percent in the 2006 holiday selling season. The company cited particularly strong results in stores in Hong Kong, Taiwan, and Australia, followed by solid performance from its stores in Beijing, Shanghai, and Macau.

• Europe – Same-store sales rose by a robust 19 percent in Europe. Same-store sales were very strong in London, especially in its Flagship Bond Street store, which had undergone renovations earlier this year. The company posted double digit growth in every store located in continental Europe.

• Mexico and Canada – Stores in both of these markets posted solid gains in the 2006 holiday selling season.

• Direct marketing – Sales were up 10 percent in Tiffany’s Direct Marketing unit; this strong performance was particularly notable due to difficult comparisons against last year’s +14 percent. Not only was the average ticket up, but the company processed more orders in the 2006 holiday season versus the same period in 2005. Online sales soared, offsetting some softness in catalog sales. Catalog circulation was down 10 to 15 percent in the period.

• Other – Total sales in the company’s “other” division, consisting of wholesale diamond sales, Little Switzerland, and Iridesse, were up 51 percent. Most of the gain came from wholesale diamond sales. Little Switzerland generated a 9 percent sales gain; this was below plan. Iridesse, the company’s pearl stores, generated a strong double-digit sales gain.

• Diamonds dominated – Diamond jewelry was the strongest product category for Tiffany during the holiday selling season. Diamond engagement jewelry, necklaces, studs, and bracelets were strong across all price points. Classic looks were popular, as were Tiffany collections. Sterling silver designer jewelry was also strong.

• Gross margin under pressure – Like most of the other publicly held jewelers, Tiffany reported that its gross margin was down in the 2006 holiday selling period.