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03/22/2019

Analysis: Crucial that Tiffany ‘holds its nerve’

After multiple quarters of good progress, Tiffany came back to earth with a bump in its final quarter. Admittedly, results were not terrible – with total revenue down by a fraction and sales in the Americas largely holding their own – but they stood in direct contrast to the healthy growth posted over the past year.

The weaker top line had an impact on the bottom line where operating income fell by 13.7%. Fortunately, a much lower tax provision meant that, despite this, net income increased by a blistering 230.4%. This provides a crumb of comfort among an otherwise lackluster set of results.

As disappointing as some of the numbers are, we still retain our confidence in Tiffany and the path it is taking to create a more modern and compelling brand. Much of the fourth quarter slowdown is attributable to factors outside of the company’s control, such as lower tourist spending and a reduction in domestic demand. However, we are concerned that these unfavorable dynamics will not dissipate quickly and may have a material impact on results in the new fiscal when Tiffany comes up against some very tough prior year comparatives.

Looking first at domestic demand, although this has slowed as some heat has come out of the economy, things have not dropped off a precipice. Moreover, the deterioration is mostly among middle and higher middle-income consumers; demand from higher-income demographics is largely unaffected. In our view, Tiffany should be able to cope with this change, especially if it pushes harder on some of its more moderately priced collections.

It is also crucial that Tiffany continues to add new domestic shoppers to offset the reduced demand from existing customer segments. Fortunately, it has the scope to do this: our consumer tracking data show that brand recognition and affinity continue to increase among younger consumers aged 35 and under. While there is further to go in converting this group to buyers, we believe Tiffany has significant potential to expand its reach, largely thanks to the refresh of its brand image. It is also worth noting that without this work to draw in a younger crowd, Tiffany’s final quarter numbers would have been significantly softer.

The dip in spending from tourists is a more challenging issue and it is not one that we see any easy resolution to – especially over the short term. Alongside a general slowdown in the global economy, including some specific problems in China, it is why we believe sales growth on both a comparable and total basis will be very shallow in the new fiscal year. The healthy clip delivered over 2018 will not be maintained.

Against this more pressured backdrop, it is crucial that Tiffany holds its nerve. The group has made enormous progress in reinventing its brand, launching compelling collections, and revamping its marketing. It is also now ramping up investment in operations and refurbishing its stores. As a result, it is a healthier and more successful company. However, the impact these things will have on the numbers is going to be more subdued in the year ahead. This does not mean the changes are not worth making or that the pace of reinvention should be slowed. To do this would be to undo all the progress to date and would, arguably, result in growth deteriorating further and faster.

Overall, we retain our confidence in Tiffany’s management and its strategy even though global conditions make us more pessimistic about the outlook.