(IDEX Online) - Tiffany’s sales during the depth of the recent recession plummeted by double-digit levels, and it looked like high-spending shoppers had turned off their spending spigot.

 

Some industry observers opined that consumers would never return to Tiffany or other jewelry stores: they contended that the “New Normal” shopper would be looking strictly for “cheap goods” (also termed “value,” but “cheap” is what those observers meant).

 

Today, the tables have turned, based on results from the company’s third fiscal quarter ended October 2010:

 

·        Tiffany’s sales are up strongly, and running ahead of the industry average in the U.S. market as well as globally.

 

·        Tiffany’s average ticket is rising, both in the U.S. and in virtually all of its worldwide markets.

 

·        Unit sales are up in most markets.

 

·        Tiffany’s sales of merchandise priced about $500 in the U.S. showed mostly double-digit sales gains in its third fiscal quarter. In contrast, sales of silver jewelry and jewelry with price points below $500 declined. Clearly, Tiffany’s customers opened their “spending spigot.”

 

·        Tiffany’s sales of engagement jewelry remain strong. Despite media claims to the contrary, the annual number of marriages remains stable.

 

·        Demand for Tiffany’s designer jewelry has increased, after waning during the recession.

 

·        Demand for statement jewelry has improved significantly in Tiffany stores from the softness seen in the recession.

 

·        Initial acceptance to Tiffany’s new leather accessories has been above expectations.

 

·        Tiffany’s new yellow diamond collection is generating solid sales.

 

·        Demand for Tiffany merchandise strengthened, despite broad-based retail price increases earlier in the year. Tiffany clearly has pricing power, and consumers are willing to pay to obtain the brand (and the blue box).

 

·        Sales trends improved throughout the third fiscal quarter in the Americas: August same-store sales rose by 1 percent, September same-store sales were up by 6 percent, while October sales rose by a strong double-digit level of +10 percent.

 

·        Tiffany management noted that sales and earnings were above expectations in the third fiscal quarter; they also predicted that fourth quarter revenues and profits would likely be above earlier forecasts.

 

We’ve said it before, and we’ll say it again: the recession of 2007-2009 will not derail consumers’ inherent cultural affinity for jewelry. Tiffany’s third quarter financial results support this statement.

 

And, in the case of Tiffany, its globally-diversified store base of 215 company-owned stores (93 in the Americas, 56 in Japan, 49 in Asia-Pacific, and 27 in Europe) have helped the company weather the rolling recession better than most other jewelers.

 

Third Quarter Financial Highlights

The following table summarizes Tiffany’s third fiscal quarter (August, September, October 2010) financials.

 

Source: Tiffany & Co.

 

The following table summarizes revenue gains by geopolitical region of the world. While the company no longer reports U.S. sales – they are included in sales of the “Americas” which comprises Canada, the U.S., Mexico, and Brazil – Tiffany’s sales in the U.S. represented 91 percent of the total sales in the Americas region in 2009. It is safe to assume that they are probably 90 percent or so of the Americas region’s sales in 2010. In short, when you see sales for the Americas, you are essentially seeing sales for the U.S.

 

Source: Tiffany & Co.

 

Tiffany management noted that its sales growth in the Americas region was driven by increased demand from overseas visitors as well as local customers, though overseas customers were responsible for a majority of the revenue increase. This indicates that global markets beyond the U.S. appear to be showing a more rapid recovery than the Americas market. The trend in Europe was the reverse of the U.S. trend: sales to local customers were stronger than sales to foreign visitors.

 

Tiffany’s sales in a category called “other” (not included on the table above) were up 26 percent in the third quarter primarily due to increase wholesale sales of Tiffany merchandise to third party distributors in emerging markets such as Russia and the Middle East. Trading activities related to rough diamonds are also reported in “other” sales.

 

Tiffany Expansion Continues

During its third fiscal quarter, Tiffany opened new stores in Baltimore, Maryland and in Santa Monica, California. In early November, it opened a new jewel salon in the New York Fifth Avenue Flagship store where high-spending clients from all over the world can see the company’s statement jewelry in a luxurious new environment.

 

During the fourth quarter, Tiffany plans to open new stores in Jacksonville FL, Houston, Texas and Los Angeles, California. It also has new stores opening in China (its fourteenth unit) and Korea in the fourth quarter.

 

In Europe, the company recently opened its ninth store in London, and it just opened its second store in Barcelona Spain.

 

Overall, the company plans to open 14 units globally in 2010, with one closing, for a 6 percent increase in the number of company-operated stores. We expect the company to operate about 223 stores at the end of the current fiscal year (January 2011).

 

While the company has not released its store opening program for 2011, management says it is “looking at quite a number of attractive markets, and will accelerate the rate of stores openings.”

 

Retail Prices Likely to Increase

Tiffany management indicated that rising platinum, silver, gold, and diamond prices will cause the company to raise its retail prices in early 2011.

 

Other Financial Trends Solid

During the quarter, Tiffany’s gross margin rose 3.7 points to 58.5 percent; this was above management’s expectations. Three factors drove higher margins: 1) price increases implemented earlier in 2010; 2) manufacturing efficiencies; and, 3) sales leverage of fixed costs.

 

In 2009, about 60 percent of Tiffany’s sales came from goods that it manufactured internally, a number that is expected to continue to rise modestly each year for the foreseeable future. The company broke ground for a 25,000 square foot production facility in Lexington, Kentucky earlier this year. This facility is expected to employ about 125 workers, when it is in full operation.

 

Tiffany’s balance sheet remains strong, with a solid capital structure. Total debt was a modest 27 percent of total capitalization. Inventory turn remains stable at about 0.7x annually and inventory per store is up modestly primarily because of demand for higher-priced goods.

 

Conclusion

While IDEX Online research is no longer in the business of picking stocks, it seems to us that TIF shares may be appropriate for investors to purchase and put away for their children and grandchildren. For jewelers, Tiffany’s model is one that should be studied closely: it is highly successful.