In light of increasingly difficult economic circumstances globally, we are adopting a more cautious viewpoint on shares of Tiffany & Co. (NYSE:TIF).
Previously, our thesis on the stock was predicated on continued execution on the business model, in terms of gross margin management and operating expense discipline.
Moreover, we believed that U.S. retail sales on the high-end consumer side would remain resilient in 2H08 and into 2009.
But, upon a review of the inputs to our thesis, the following economic variables are serving as deciding factors in a ratings reversal.
- U.S. consumer spending patterns on discretionary goods across all spectrums (high-end, middle-income, and low-income) has downshifted further; we attribute this to continued job losses and strained household balance sheets.
- Strengthening of the dollar versus foreign currencies may mitigate future foreign tourist spending at Tiffany's flagship store locations (notably New York).
- Japan, which has historically been a challenging market for Tiffany, has seen its economy perhaps enter a prolonged recession; this will greatly impact Tiffany's sales trends, and perhaps lead to additional store closures.
Key items to consider:
- Approximately 31.0% of Tiffany's branch store locations operate in the hard hit U.S. housing regions of California and Florida.
- Approximately 17.0% of Tiffany's net sales are derived from Japan (2.0% Tokyo flagship store alone).
- Consensus earnings for 2H08 and FY09 have been on a downtrend in recent weeks.
Written by Brian Sozzi, a Research Analyst for Wall Street Strategies (www.wstreet.com) specializing in the apparel/hardline goods sectors of the retail industry.