Tiffany & Co (TIF)

Although Tiffany products are still popular with consumers, widespread layoffs and the recession have led to a decrease in consumer spending. Although the New York flagship store is still a popular tourist location, rising airline ticket prices and the weakening global economy served to decrease traffic. In November, Tiffany forecast its fourth quarter same-store sales would decrease 25 to 35 percent, with worldwide same-store sales decreasing 13 to 20%.

Back in late August 2009, Tiffany & Co. (NYSE: TIF) was certain it would be making a profit in the upcoming holiday season. Today, they’re not nearly so optimistic. In fact, the famed jewelers are downright gloomy, as it announced that its profits fell 76% during the 4th quarter, thanks to a mixture of store-closing costs and demand that quite simply wasn’t there.

Sales dropped 20%, from $1.05 billion to $841.2 million, which brought shares down 25 cents. Those losses have had equally negative affects on Tiffany’s cheer and good will, as it’s now forecasting another sales drop of about 11% for the year.

Part of the reason why it was so optimistic before was that even while U.S. sales were notably down as people began cutting costs and therefore forsaking their customary sparkles and bling, Tiffany was excited about its international potential. I found that optimism difficult to grasp back then as well, with Japan even then flirting with recession, England beginning to realize its own housing market mistakes, and larger Europe experiencing the first pangs of doubt as well.

Those signs of oncoming trouble are full-fledged facts now, with North and South American sales falling an average 29% (The New York store fell an abysmal 34%), while European sales tumbled 2% and the Asia-Pacific region dropped 3%. So there’s no more point in denying the obvious.

CEO Michael Kowalski has already issued the orders to cut his global staff by 10%. “We have not yet seen signs of an upturn in our business,” he said. “Tiffany has clearly not been immune from global economic turmoil in recent months and we are taking a cautious view to business conditions in 200

TIF reported strong earnings recently.

"Although it good for investors to see earnings expectations move in a positive direction, it seems that management was intentionally “sandbagging” by issuing guidance that was obviously too conservative in order to be able to raise that guidance midway through the year.

This is an old trick and shouldn’t surprise any seasoned investor. Furthermore, even if the company hits the high end of this range, $1.75 per share still represents more than a 25% decrease from the earnings seen in 2008.

Looking carefully at the quarterly numbers, it appears that the US remains the company’s problem area with comparable US stores seeing a sales decrease of 27%. Company wide, the net sales were down 16% compared to the second quarter last year. The decline is especially disappointing considering there were an additional 15 stores in the mix compared to the 196 stores open at this time last year. Currently the store breakout is 88 location in the Americas, 99 stores in the Asia/Pacific region, and 24 in Europe." ^[1]

Commodity Prices. Tiffany has been facing lower margins as it moves from the high-margin silver jewelry to lower-margin high-end jewelry. If commodity prices continue to rise, the company will experience further declines in profitability.

Stagnant Stock. The stock price has remained relatively flat in the past seven years even given positive macroeconomic conditions and high stock returns in other luxury goods companies.

Tough Competition. Tiffany's US business faces serious competition from many fronts, including online retailers like Blue Nile and high-end jewelers like Bulgari.

Earlier this month Barron's said Tiffany's stock is undervalued and will recover in 2010 - My response - Recovery in 2010???? Ok, if you think your bonus will be the same in 2010 as it was in 2007 or you will even have a job since the millions of unemployed people searching for jobs are finding it nearly impossible to find a job after 6 to 12 months of searching and let alone a job that will pay a salary even close to what they were making in 2008! Not to be a grinch but the last four years have been a complete bubble the like I hope to never see again and we are coming back to reality now and a Tiffany's recovery in 2014 would have been much more believable unless all the sudden home prices spike through the roof and people make the same mistake of leveraging up to their eye balls and buy stuff they don't need and can't afford again! Hopefully Barrons is right but this is likely a fundamental change in consumer spending habits that should have occured a long time ago and will take another huge economic bubble to get Tiffany's earnings back up to the level of 2007 or even 2008.