Around the World in 20 Minutes
The Tiffany conference call earlier this week was instructive, if not merely for illustrating in hard numbers the widening income gap between the fortunates in this country and the less-fortunates (Tiffany’s fastest growing items last quarter were in the $20,000-and-up range—eat your heart out, Wal-Mart), then for likewise demonstrating the impact of the worldwide liquidity bubble causing bull markets in stocks, copper, oil, gold and labor, among other things, on consumers outside our borders. Meanwhile, the bond market expects Fed Chairman Bernanke to start slashing interest rates merely because Miami condominiums are in surplus.
Rather than paraphrase and summarize management’s own, excellent discussion of the situation, I thought it better—not to mention easier—to simply reprint the key portions of the call, especially the discussion of sales growth in Asia ex-Japan (up 17%), Europe (“strong”) and at new stores in the U.S. (“robust”).
[Note that Tiffany conference calls do not include the usual Q&A session, so in order to get yourself in the mood, just say to yourself (while you read it) things like “great quarter, guys,” “congratulations on a great quarter,” and my all-time favorite, which usually comes after a rambling, nit-picking dissection of something inane, like a sixteen-basis point delta in the reported gross margin versus the analysts’ so-called models: “how should we think about that?”]
Sales rose nicely throughout the quarter with comps increasing 6% in August, 7% in September, and 4% in October. For comparison, you should note that U.S. comps in last year ‘s third quarter had increased 5% in August and 8% in both September and October. From a geographical perspective, sales in the New York flagship store rose 13% on top of a 12% increase a year ago. We were pleased to finally complete the multi-year renovation of our New York flagship store during the quarter, and the reaction of our customers has been quite favorable. In addition, comps in the seven New York area branch stores rose 6%. Branch store comps around the U.S. rose 4% and there was no particular geographical concentration of strength. For example, a few stores with the largest percentage increases were in Seattle, Palm Desert, Houston, Coral Gables and Charlotte with varying degrees of change in other markets. However, the softest region was in the Pacific, where we continue to experience sales declines in Hawaii and Guam. Our price stratification analysis for the U.S. indicated that the greatest growth occurred in sales and transactions over $20,000 and over $50,000 which as many of you know, occur at lower gross margins.
In terms of customer mix, the majority of the comp store sales growth came from higher sales to local market customers, which was also true for the New York flagship store. Lastly, we are experiencing robust performance in the new U.S. stores we’ve opened in 2006 in Indianapolis, Nashville, Atlantic City and Tucson. We will wrap up our U.S. store expansion for the year when we open a beautiful store on the big island of Hawaii tomorrow. Also in the U.S, sales in the direct marketing channel rose 11% in the third quarter which was slightly above our expectations and was on top of a 4% increase last year. Growth was generated by increased numbers of orders and increases in the amount spent per order…. Let’s now look at international retail sales which rose 9% in the third quarter but included some very divergent results. The 9% growth was on top of a 7% increase last year and was pretty much in line with our expectations. There was minimal currency translation effect in the quarter, and on a constant exchange rate basis which excludes the effect of translating local currency results into U.S. dollars, international retail sales also increased 9% in the quarter while comparable international store sales rose 4%. My following comments will refer to sales on a constant exchange rate basis. The international retail channel is composed of several distinct regions with approximately half of the channel sales in Japan while the other half includes the rest of Asia Pacific, Europe, Canada and Latin America. Total retail sales in Japan in the third quarter declined 3% as a decline in unit volume was only partly offset by an increase in average price and mix…. Recent economic reports confirm that the Japanese economy is growing, although it appears that the environment for consumer spending is challenging…. Sales growth was notably better in the other half of international sales, continuing the strong trends from the first half of the year. In the Asia Pacific region outside Japan, a 17% increase in comparable store sales in the third quarter was above our expectations and was on top of a 4% increase last year with notable strength in Hong Kong and Australia. We’re also pleased with Tiffany’s growing presence in China, with new stores opened this year in Beijing and Macau and a second store in Shanghai opening in December. Asia Pacific comps have gained 21% year-to-date. Sales in Europe were also strong. Comparable store sales rose 21% in the quarter, which compared with a 1% decline last year and was above our expectations. London represents more than half of our European sales and we noted considerable strengthen all four stores there, as well as strength in our stores in Italy, France and Germany…. European comps have increased 20% in the year-to-date. Rounding out international sales in the third quarter were solid increases in Canada and Latin America, and we are very much looking forward to opening a prominent Tiffany & Co. Store in Vancouver next week. Finally, Tiffany’s other channel of distribution, which has several components, posted a 23% sales increase in the third quarter. More than half of that growth came from a meaningful and expected increase in wholesale sales of diamonds that are below our quality standards. As you know, our objective for these wholesale sales is to simply recoup our cost…. From an overall merchandising perspective, the sales strength in the quarter was concentrated more toward higher-end jewelry. There was substantial growth in diamond statement jewelry as well as in fine jewelry such as our Swing and Legacy collections with diamonds and colored stones; and, we saw double-digit growth in engagement jewelry in the U.S. and many international markets except Japan.
“Great quarter guys!”
“Congratulations on a great quarter!”
“Mr. Bernanke, Tiffany saw strong growth in Europe, robust performance in new U.S. stores and 17% sales growth in Asia, while the bond market expects you to cut interest rates—how should we think about that?”
Jeff Matthews I Am Not Making This Up
© 2006 Jeff Matthews
The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.