The second half of 2016 has been great for Tiffany & Co (NYSE:TIF) investors. After posting better than expected Q3 figures, the stock rallied 5% in initial trading, hitting a 52-week high. While management downplayed the concerns related to traffic at the flagship store, there is perhaps reason to be more worried going into Q4.
Another SA author noted the security concerns at Tiffany's in an article published shortly after the election. Given that so much information has materialized in the weeks since then, it is important for investors to be up to date on the potential impacts to business at the flagship 5th avenue store.
While sales at the Manhattan location account for about 10% of overall revenue, it has been a noted area of growth for the company in the past year. In the Q2 conference call, management noted that increased sales at the flagship location were largely responsible for increases in US sales numbers. The election results present two potential obstacles to any growth at the Manhattan location.
First, Tiffany & co. is located at the corner of 57th and 5th in midtown. The location is among the most coveted (and expensive) retail spaces in the country. Trump Tower is next door, at 56th and 5th. The entire block next to the tower on 56th will be permanently closed to traffic over the next four years as Donald Trump will travel back and forth regularly. The Presidential transition team confirmed that the future first family will remain in Trump Tower until approximately Q2FY17. That means the main entrance to Tiffany's will be inaccessible for the entire holiday shopping season and beyond (shoppers can still enter at a side entrance on 57th street). All shoppers who wish to enter Tiffany's will go through a security screening check point on 57th street, according to the NYPD. At bare minimum, the sheer inconvenience is likely to have some impact on sales at the flagship location.
Additionally, protesters converged around Trump Tower in the days following the election. Given Donald Trump's penchant for inflaming tensions and reported embracing of chaos, it should be expected that protests will further erupt each time the President suggests something controversial. This will probably cause both New Yorkers and tourists to avoid the area. If crowds are large enough, those seeking to shop at Tiffany's may find it too challenging to enter the store. It only takes roughly two hundred people to snarl traffic on 5th Ave and block all of the entrances to Tiffany & co.
More concerning are the broader impacts. According to the company, about 40% of sales at the flagship are tourism dependent. A hallmark of the GOP presidential candidate's campaign was his plan "calling for a complete and total ban of Muslims entering the United States." That position has since shifted to "a ban on those traveling from countries compromised by terrorism." It is not entirely clear what that means, but travel restrictions on Middle Eastern nations would certainly have a negative impact on sales in NYC. More broadly, the nationalist rhetoric is likely to have an adverse impact on US tourism overall, especially to a location at the footsteps of Trump Tower. Any broader impact on tourism also has a dampening effect on other locations, most of which are located in tourist dependent locations.
While it is challenging to asses any material impacts that reductions in tourism, specifically from the Middle East, could have on sales, there is one clue that could be of help. The company has five reporting segments. The "other" segment includes ten locations based in the UAE and/or sales to retail partners in the Middle East. Same store sales in this segment, while immaterial to overall performance, were down 12% in Q3 and 19% ytd in 2016. This segment was the poorest performing in 2016. Certainly there can be many reasons for the sales downturn. Inflammatory rhetoric from the US could certainly have played a key role considering Tiffany & co is an iconic American brand. Overall, a tone of hostility towards Muslims could have a damaging impact on Middle Eastern tourism/travel to the US, especially to a city that is the home of Donald Trump. NYC has three Tiffany's locations and is the company's single largest market.
With fresh 52-week highs and a healthy P/E premium to the S&P 500, I would enter Tiffany's with a note of caution. The fourth quarter is likely to see the same sluggish sales that have hit the company in the past few years. On top of that, the flagship location should see material weakness given the congestion and traffic shut downs on 5th avenue. Investors should expect a small downturn in US based sales (in addition to currency headwinds and other factors not discussed here). With the higher levels of uncertainty, it may make sense to avoid Tiffany's in coming quarters.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.