Tiffany Disappoints Today But Hopes A Strong Second Half Will Pull The Year Out

It was no surprise that Tiffany & Co. reported net sales were down for the second quarter 2019. That’s because sales during the same period last year were so high, rising 12% worldwide to $1,076 million.

This year’s second quarter net sales declined 3% (or -1% on constant-exchange-rate basis) to $1,049 million and comparable sales were off 4% (or -3% CER). With a weak showing first quarter too, Tiffany completes the first half of 2019 with net sales of $2,052 million, off 3% (-1% CER) from previous year of $2,109 million, with comparable sales down 4% (-2% CER). 

Net earnings were down as well, 6% lower than last year to $136 million this quarter. This brought net earnings for the first half 2019 down by 9%, from $287 million to $261 million this year. CEO Alessandro Bogliolo said in a statement that these net earnings exceeded the company’s expectations, but that isn’t saying much.

The Tiffany team is looking to the second half of 2019 to pull the year out and continues to expect worldwide net sales to increase in low-single-digits and net-earnings-per-diluted share to be the same. They’d better have some magic up their sleeve. Bringing this year ahead of $4,442 million that Tiffany did in sales last year will take some doing.

In the earnings call Bogliolo laid out the plan to achieve what appears to be exceedingly optimistic expectations.

First, the company is counting on new product introductions that are loaded for the later part of third quarter and early fourth quarter. These are hoped to bring more guests into the stores and onto the website for the holiday gift season. Last year’s new Paper Flowers introduced in May and its holidays Believing in Dreams campaign brought “meaningful increase in traffic and sales,” Bogliolo reported.

New launches so far this year include Return to Tiffany Love Bugs in gold and a new Tiffany True diamond engagement setting. These haven’t moved the needle much, but hopes are that these will pick up along with new Tiffany T and Hardware collection pieces and a men’s collection later this year.

While he hopes new products will boost second half 2019 sales, Bogliolo said it “may take until fiscal 2021 to properly refresh our product assortment, with enough newness to generate balanced and sustainable growth.” The ultimate aim is to achieve 15% of sales from new introductions. More than that, the company feels, would be distracting to its luxury market positioning.

Second, ten new stores, including one in Bombay, are coming online and there will be 17 renovated or relocated stores by year end. In addition the company will add Blue Box Cafes to stores in Shanghai and Hong Kong, which will be the first permanent cafes outside of New York. Bogliolo expects these locations to “generate substantial customer attention and traffic,” just as it did in New York City.

However, Hong Kong unrest threatens the company’s plans, as it has 10 stores located there and already lost six business days due to unexpected store closures. Hong Kong represents the company’s fourth largest single market, after the United States, Japan, Mainland China.

“We must acknowledge that the current situation is taking a toll on our business,” Bogliolo said. In terms of overall sales, Cowen’s Oliver Chen estimates Hong Kong represents approximately 6% of worldwide sales and predicts that sales there may decline from 10% to as high as 60% year-over-year if disruptions continue.

Third, Mainland China remains Tiffany’s sweet spot in terms of growth. To stimulate it further, the company began “disproportionately” increasing marketing spending and media penetration there. Bogliolo reported that these initiatives have “improved our overall brand power ranking in China from fourth to second place during the past year,” adding that “we believe these actions plus others have allowed us to dramatically improve our business among domestic Chinese consumers.”

On deck for China are openings or relocations of flagship stores in Beijing, Shanghai and Hong Kong, expansion of its duty-free store in Beijing airport, relocation of its airport store in Hong Kong, and enhancements to its e-commerce website in China.

In addition the company will launch a Tiffany brand exhibition to celebrate the brand’s 180-year history in Shanghai this September. “We expect these initiatives to drastically increase the awareness and the depth of knowledge about our brand among the Chinese, including importantly the millennial segment,” Bogliolo said.

Fourth, the company will focus on higher-end gold and diamond jewelry collections. To facilitate that it has reframed product imagery on all e-commerce sites and launched digital and social campaigns to “showcase gold and diamond jewelry collections more prominently.”

So far Bogliolo reports that “we are experiencing more momentum in gold, rather than silver.” However, platinum remains its number one metal, followed by gold and then silver.

This all sounds good but macroeconomic factors may continue to disrupt management’s plans. The impact of tariffs remains a big question. In a recent round of tariff increases, the company absorbed the tariffs without raising prices, but “whether or not we have to do something like that again, we will make that determination over the next few weeks and months,” CFO Mark Erceg said in the earnings call.

Further Tiffany is looking down the barrel of an increased sales consumption tax in Japan. It will go from 8% to 10% in October. In the past, such a sales tax increase has stimulated sales before taking effect, then depressed sales immediately thereafter. Whether the upcoming one will do the same is “hard to predict,” Erceg said.

The effect of reduced tourist spending is also a big unknown, impacting most especially Chinese tourist spending, but also hurting the company’s U.S. sales due to the strong dollar.

The Americas, its largest market by far, is particularly troubling with net sales off 4% in the second quarter, as well as through the first half this year. The company attributed much of that drop to lower spending by foreign tourists, but then there is lower spending by local customers as well.

Cowen’s exclusive Consumer Tracker study, conducted most recently in July 2019 among 2,500 consumers, found a dramatic year-over-year decline of 33.6% in second quarter store visits. Online traffic during the quarter was off by 30.8% as well.

In answer to an analyst’s question about results of the company’s newly revamped website, Bogliolo hemmed-and-hawed. “It is a work in process and especially when you change completely your platform, that has an impact on the search engine optimization because of the algorithms of Google,” he said. “It may take a few months in order to come back to normal efficiency.” He remains optimistic that online traffic will improve in the second half as the company’s most important season for online sales.

All in all, you can hardly blame Bogliolo, Erceg and the Tiffany team from being optimistic about the rest of the year. But to achieve promised results, it will require that all the unknowns break in the company’s favor, and that may be more than most can hope for or expect.