Tiffany Could Positively Surprise, Remains Target of Speculation

Shoppers at Tiffany are rarely disappointed. The same, however, cannot be said of Tiffany shareholders. The high-end retailer let down investors in January when it reported soft holiday sales and warned the stronger dollar would pressure profits for the year.

The dispiriting news sent shares swooning 14%. The high-end jeweler lowered its profit forecast for the year ended January 31, adding that current issues will also weigh on future results. Tiffany warned of a 30% income drop in Q1 2015, followed by “a more modest decline in Q2” due to sustainable headwinds from a stronger dollar.

Further, the company expects “minimal growth” for 2016. The dismal guidance came as the posh purveyor of pricey baubles reported a 1% year over year decline in worldwide net sales for November and December, typically a robust two month holiday season. Revenue of $1.3 billion was the lowest year over year growth rate since 2012, when the company’s revenue grew by 2%. Tiffany spokesperson Mark Aaron told CTFinancialNews that the company was unable to elaborate further.

To be sure, a stronger dollar played a key role in Tiffany’s dull Q4 2014 sales. Sluggish growth in the Americas, Tiffany’s biggest market, also weighed on results. Sales in the region, which includes Canada and Latin America, slipped 1% with comps down 2%. So it appears that challenges plaguing Tiffany, with 122 stores in the Americas and another 183 sprinkled around the globe, might go beyond a strong dollar. Investors have taken note and the stock has languished.

Tiffany’s sluggish stock price has stoked rumors that Paris based LVMH Moët Hennessey, with luxury brands including Dom Perignon champagne and Guerlain perfume, is interested in acquiring the New York headquartered company.

Those rumors will likely surface again when Tiffany reports first quarter results Wednesday, May 27, before the open. In an interview with CTFinancialNews, equity analyst Marie Driscoll of Driscoll Advisors, shared her thoughts on Tiffany. Focused on luxury goods stocks, Driscoll has been recognized three times in the Wall Street Journal’s “Best on the Street” analyst survey, capturing the first place ranking for stock selection in the clothing and accessories industry. Here are her comments.

CTFinancialNews: Tiffany will report first quarter results May 27. Shares, trading nearly 20% below their 52-week high, have unperformed the S&P 500 by some 19%. Short interest has spiked 8% month over month. Are markets preparing for another disappointing quarter?

Marie Driscoll: Tiffany could surprise. Compared to most luxury brands, Tiffany has less exposure to the Euro and its approximate 24% year over year depreciation versus the U.S. dollar. Still, the appreciating U.S. dollar is a key factor. Sales in the U.S., especially at its New York City flagship store, have been impacted by foreign exchange rates, fewer travelers, and softer traffic. Recent luxury sales and earnings reports generally reflect a slowing of luxury spending and the impact of foreign exchange. Tiffany’s share performance likely incorporates industry trends as well as company specific.

CTFinancialNews: Current market volatility, a stronger dollar, and currency fears are having a triple whammy effect on Tiffany. Sales are suffering both abroad and stateside. Foreign tourist spending historically represents a quarter of total U.S. sales and more than 40% of sales at its New York City anchor store. Are those trio of factors truly what is weighing on Tiffany or is it something deeper? There has been talk the Tiffany brand is falling out of fashion.

Marie Driscoll: The brand is repositioning to higher price points and incorporating more fashion into its jewelry offerings. A reduction of merchandise below $500 hurt during prime gifting periods. Rather than a fall from fashion, the limited offerings at lower price points has impacted sales.

CTFinancialNews: That is the perfect segue into the next question. Has Tiffany’s sub- $500 (down market) line, which carries higher margins yet generates a sliver of sales, helped or hurt? Is it here to stay?

Marie Driscoll: The narrowing of this assortment is a good long term strategic move for the business and the brand. Near term, lost sales at the lower end are not yet offset by increased sales at price points above $500.

CTFinancialNews: What is the biggest threat right now to Tiffany’s business?

Marie Driscoll: Historically, Tiffany’s business correlates closely with stock market returns. So, increased stock market volatility, which impacts consumer confidence for high income households, is the biggest threat. Further appreciation of the U.S. dollar to world currencies would be another negative.

CTFinancialNews: In addition to an increasing number of rivals in the luxury space, Tiffany now has to compete with tech titan Apple Inc. and its new smartwatch. Last month, Tiffany launched its new CR60 line of watches that sport a traditional design over high tech. Please share your thoughts.

Marie Driscoll: The Apple Watch is increasing awareness for the overall watch category, and the Apple Watch is as much a fashion and personal branding statement as it is a tech product. A new and younger generation will now consider watches at higher price points than the fashion brands, such as Michael Kors, which have grown dramatically in the past five years. Tiffany’s watches will be at a higher price point generally, but still approachable. Watches could be meaningful for Tiffany longer term.

CTFinancialNews: Does Tiffany need to get bigger to create more scale and value?

Marie Driscoll: Tiffany can get bigger, expand internationally, and grow with the increased wealth around the world. Its strategy is to grow internally while entering new categories and expanding existing categories, such as watches and fashion jewelry. This is a strong American luxury brand truly differentiated in the global market. As its scales, its shareholder value is likely to increase as well.

CTFinancialNews: LVMH has been rumored as an interested acquirer. Should Tiffany be sold or could an activist investors successfully push them to be sold?

Marie Driscoll: As far as Tiffany being an activist investor target or a takeover candidate, that’s all just so speculative right now. And, LVMH presently has a lot on their plate. They have some 70 different and distinguished brands across six different sectors.

However, they are always on the prowl and Tiffany would be a great fit and would nicely compliment LVMH’s jewelry line. But LVMH, or any buyer for that matter, would have to pay a rich premium for Tiffany. Look at the 21.4% premium Ascena Retail Group Inc. paid last week for Ann Taylor. So sure, Tiffany could find itself in play.

CTFinancialNews: Your final thoughts.

Marie Driscoll: Expect new CEO Frederic Cummenal (as of April 1), who joined the jeweler in 2011 after a 15-year stint at LVMH where he was CEO of French champagne maker Moët & Chandon, part of LVMH, to maintain a growth strategy, keeping brand equity as the Holy Grail for continued long term profitable growth.