Time's Up for Tiffany

Luxury jeweler Tiffany (NYSE: TIF  ) ran out of time in its spat with watch maker Swatch, and will now have to pay big bucks for breaching a joint venture agreement.

Turn back time
Created in 2007, the Tiffany Watch partnership was seen as a timely way for both jewelers to cash in on the growing high-end watches, potentially generating up to $500 million in sales annually. Considering the luxury watch and jewelry market was seen as representing some 16% of the total luxury market in 2007, with expectations it could grow to 18% by 2012, that didn't seem unreasonable. Having the other's back would allow Tiffany and Swatch to confront formidable rivals such as Swiss watch makers Richemont and Rolex, as well as German companies such as Uhrenfabrik Junghans, all of which were viewed as the industry's most important manufacturers.

Yet what was supposed to last for 20 years instead began to fall apart rather quickly, and came to an abrupt end in 2011 with both sides acrimoniously hurling accusations that the other failed to live up to its end of the bargain. However, an arbitrator ruled last week that Tiffany was the bad actor and found it liable for damages totaling $449 million. That will cause the luxury jeweler to take a fourth-quarter charge of $295-$305 million. It also caused Tiffany to lower its full-year earnings guidance to a range of $2.30-$2.35 per share from a previous forecast of $3.65-$3.75 per share.

Time on its hands
Tiffany still wants to increase its presence in the watch market. Now comprising about 1% of its revenue, watches will be marketed through the Tiffany brand. Where watches had once been about 8% of Tiffany sales, the retailer continues looking for ways to jump-start growth.

Analysts estimate the global watch market can hit $46.6 billion by 2017, largely on the back of renewed strength in luxury watches, but also because mid-tier makers like Fossil (NASDAQ: FOSL  ) have their own line of timepieces and make watches that can be rebranded. Fossil has paired up with hot fashion retailer Michael Kors (NYSE: KORS  ) and recently said its sees the partnership as key to building on its lead in the aspirational luxury niche.

Movado (NYSE: MOV  )  has staked out a similar branding strategy with Coach (NYSE: COH  ) , though the leather goods retailer is still in the early stages of transitioning to a lifestyle brand and has stumbled in the process. Movado's earnings grew by a third this past quarter as the pair relaunched their line, but gross margin took a hit because of the handbag maker's lower price points.

Swatch is ready to bounce back, too, having bought Harry Winston Diamond earlier this year in a bid to reverse the slowdown in sales growth, but the watch maker hopes for some gain from a resurgence of the luxury end of the market in Europe and the U.S. that's being driven by the global economic recovery and rising discretionary incomes. 

Killing time
The U.S. has been the spit and polish in Tiffany results for years, but same-store sales were only up about 1% this past quarter so it is turning to international markets, particularly China, for succor. While the austerity measures imposed by the Chinese government creates a certain level of risk, even Coach has been able to cash in on the desire for affordable luxury there.

The jeweler has sufficient capital on hand to pay out the judgment against it, though it is still exploring options. And though the Swatch ruling is a bit of a hinderance, Tiffany is only temporarily resetting the clock on its growth objectives. 

No time like the present
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