Tiffany's: Your Family Jeweler For Generations - And That's The Problem

| About: Tiffany & (TIF)

Summary

Millennial shoppers eschew classic designs and brands as tired and ubiquitous, and tend more toward custom or small-run boutique jewelry.

Higher penalties and taxes on Chinese luxury purchases from abroad will hurt U.S. and Japan sales.

Tiffany's ad campaign and brand strategy does nothing to make over the brand to appeal to younger consumers.

A Mature Brand
Tiffany's (NYSE:TIF), an jewelry brand made famous in the gilded age, has mostly run its course. Those of us old enough to remember Breakfast at Tiffany's from our childhoods (and more for Henry Mancini's haunting "Moon River" than the movie) are decidedly long in the teeth. Younger consumers are less drawn to the brand than we were. (And we were less drawn to the brand than our parents were.)

As a luxury brand retailer, Tiffany's will likely appeal only to an effete few rising millennials in the upper-income strata, but even there will suffer the competition of other upscale luxury brands like Cartier, or from boutique and custom jewelers that produce more unique brands.

The company is on a long, slow slide to oblivion with markedly decreased sales.

Even in Asian markets, where consumers largely take their cues on tastes and fashion from their American counterparts, sales were disappointing. While the company claimed boosts in sales in Korea and China, the decline in Hong Kong sales more than offset those gains.

Japan, which is a separate segment from the rest of Asia in Tiffany's financial reporting, was the sole bright spot in the 2016 Q1 earnings report, with an increase in comps of 5% that the company claims came from "domestic customers". But I find that claim very hard to believe.

Chinese have been snapping up bargains in Japan as tourists; the yen grew weaker relative to the yuan; and Chinese tourism in Japan was up substantially in calendar Q1 2016. China's higher tax on daigou (grey-market purchases made abroad for purchasers in China) took effect only from April 8th, so it would have affected only less than a month of Tiffany's Japanese results for fiscal Q1 2016, ended April 30th. Indeed, the looming tax increase likely benefitted Tiffany's purchases by Chinese visitors to Japan in the first two months of the fiscal quarter as Chinese made purchases before the tax increase took effect. I'm inclined to believe that Japan's comps will be down considerably in Q2.

First-Quarter Numbers
Turning to the rest of the numbers for Q1 2016:

  • Net sales decreased 7% to $891.3 million in the three months ("first quarter") ended April 30, 2016, and comparable store sales decreased 9%. On a constant-exchange-rate basis (see "Non-GAAP Measures" below), worldwide net sales decreased 7% in the first quarter due to sales declines in all regions except Japan, and comparable store sales decreased 9%.
  • Earnings from operations as a percentage of net sales ("operating margin") decreased 2.6 percentage points, as an increase in gross margin was more than offset by a lack of sales leverage on selling, general and administrative ("SG&A") expenses.
  • Net earnings declined 17% to $87.5 million, or $0.69 per diluted share, due to the decline in net sales as well as higher SG&A expenses. The decline in net earnings included an income tax benefit of $6.6 million, or $0.05 per diluted share, as a result of the conclusion of a tax examination.
  • Inventories, net decreased 2% from April 30, 2015.
  • The Company spent $78.1 million to repurchase 1.2 million shares of its Common Stock.

The Outlook
Tiffany's strategy is stumbling and will likely fail, given the tendency of millennials to be iconoclasts and their embrace of technology.

  • The company's turn-around strategy focuses on advertising, but it celebrates Tiffany's iconic (and ubiquitous and widely copied) 130-year-old six-point solitaire setting instead of hipper, newer, branding that appeals to the majority of young brides-to-be.
  • Tiffany's is hoping to build out its watch brand against long-standing luxury brands like Baume et Mercier, Rolex, and Breitling when millennials are more inclined to use their Apple (NASDAQ:AAPL) iPhone or iWatch for timekeeping. (Look at the wrists of Brooklyn hipsters. They rarely have watches.)
  • While Tiffany has won awards for its digital marketing, such selling is challenging for jewelers generally and on-line sales only account for 6% of Tiffany's sales.
  • Tiffany's efforts to move into the $500 price range risks commoditizing their premium brand.
  • Like many companies, Tiffany's is using financial engineering like dividend boosts (without accompanying earnings increases) and stock buy-backs to boost shareholder returns.

Refreshing the Tiffany Brand

To appeal to lower-cost customers, as it intends to, Tiffany would do better to break out the "Tiffany" luxury brand into a lower-cost "Tiffany" retail brand (call it "Tiffany Fifth Avenue"), much in the fashion that Armani created the "Armani Exchange" of lower-cost goods that still carry an echo of its luxury brand name.

The "Tiffany Fifth Avenue" brand could appeal to younger, less affluent consumers. It also carries with it the ability to license the Tiffany's brand across a wider spectrum of upscale consumer products that enhance its brand awareness.

Tiffany's should dump the "old and cold" advertising campaign about its six-point diamond and instead pursue an earned-media and paid campaign using high-profile, wholesome celebrities like Taylor Swift, Katy Perry, Selena Gomez, or Jennifer Lawrence with custom-designed jewelry for their concerts, tours, and awards shows.

Tiffany's should make its jewelry readily available to successful movie franchises where luxury and affluence is commonplace, such as the James Bond genre, in exchange for prominent credits and advertising of the movie.

Tiffany's can stick with its iconic "baby blue" trade dress, but the Tiffany logo might benefit from an enhancement in a lower-cost, ancillary ("Tiffany Fifth Avenue") brand.

Summary

Tiffany needs to rethink its staid, legacy, brand image to bring it into the 21st Century and to reach out the young people that buy its signature diamond solitaires and wedding rings and baby keepsakes. I don't think the company can continue without a completely new brand strategy that raises and modernizes its brand strategy for younger consumers.

Author's note: My commentaries are mostly in the consumer discretionary space and, most often, tend to be event-driven. I also write mostly from a management consulting perspective for companies that I believe are underperforming; that is, I sometimes lay out strategies that I would recommend to the company to improve its business and strategy were they clients. I think this approach lends special value to contrarian investors who see the opportunities that I do in companies that are otherwise in downturn. My opinions with respect to the company here, however, assume the company will not change.

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