Check out the latest Tiffany & Co. earnings call transcript.
Shares of Tiffany & Co. (TIF) rallied 5% on Jan. 18 after the jeweler posted a holiday sales update. Tiffany's worldwide net sales fell 1% and its comps declined 2% in the final two months of the year, but both figures stayed flat year-over-year on a constant currency basis.
CEO Alessandro Bogliolo admitted that Tiffany's "overall holiday sales results came in short of our expectations" for "modest" year-over-year growth. However, Bogliolo also pointed out that Tiffany generated "double-digit" sales growth in mainland China.
Image source: Getty Images.
The positive news about China -- a sore spot for many US companies due to trade disputes, tariffs, and an economic slowdown -- indicated that Tiffany still had some irons in the fire. But can its momentum in China offset the softness of its other markets?
How much does China matter to Tiffany?
Tiffany doesn't disclose its sales in China separately. Instead, the country's sales are included in its Asia-Pacific region (which excludes Japan), which accounted for 29% of its worldwide net sales during the third quarter.
|
Q4 2017 |
Q1 2018 |
Q2 2018 |
Q3 2018 |
Holiday* |
|
|---|---|---|---|---|---|
|
Americas |
5% |
9% |
8% |
5% |
(1%) |
|
Asia-Pacific |
13% |
28% |
28% |
4% |
(3%) |
|
Japan |
2% |
17% |
11% |
2% |
4% |
|
Europe |
13% |
13% |
5% |
3% |
(4%) |
Year-over-year sales growth by region. Source: Tiffany quarterly reports. *Final two months of 2018.
Tiffany's growth in the Asia-Pacific region peaked during the second quarter of 2018 and decelerated significantly in the third quarter and the holidays as its "strong sales growth" in mainland China was offset by softer growth in other markets like South Korea. Tiffany stated that it achieved double-digit sales growth in China in the first two quarters of 2018, which "accelerated" on a constant currency basis in the third quarter. However, its total Asia-Pacific sales still fell 3% -- and stayed flat on a constant currency basis -- during the holiday quarter.
Therefore Tiffany's steep slowdown in the Asia-Pacific region in the second half of 2018 indicates that mainland China still doesn't generate enough growth to offset the softer demand for Tiffany's products in other Asian markets. That's why Tiffany hasn't carved out China into a separate region like Japan: Its growth, though it sounds impressive in year-over-year percentages, just isn't significant enough to move the needle.
The headwinds and tailwinds in China
Tiffany's Chinese sales could still be stung by higher tariffs, and Bogliolo admitted the long-term impact was "impossible" to gauge during last quarter's conference call. A weaker RMB and a slowdown in the Chinese economy would exacerbate that pain and make Tiffany's products even pricier to local consumers.
Image source: Getty Images.
On the bright side, Tiffany is beefing up its e-commerce presence in China with partnerships with Alibaba (BABA 0.28%) and Tencent (TCEHY 0.10%). It sells its products on Alibaba's Tmall Luxury Pavilion for luxury goods, and it operates digital pop-up stores on Tencent's WeChat, the top mobile messaging app in China.
Last quarter Bogliolo declared that Tiffany's "resonance across digital and traditional media all over China [was] spectacular." The company also recently launched its Paper Flowers jewelry line, which targets younger shoppers, in Shanghai. To streamline its business and cut costs, Tiffany rolled out new IT tools that help it manage orders, inventories, and payments in China.
Tiffany believes the expansion of its domestic Chinese business will shift some of the overseas spending from Chinese consumers back to China. That strategy could throttle its sales in regions supported by purchases from Chinese tourists, but it could also give the company a clearer view of its regional performance, stabilize its growth, and build the foundation for a broader expansion across China.
But Tiffany's growth is still decelerating
Tiffany's holiday sales update was encouraging, but its growth is still decelerating. It expects its revenue to rise 6%-7% this year, and for its earnings to grow 13%-16%. Next year, analysts expect its revenue and earnings to rise just 5% and 8%, respectively.
This indicates that the growth spurt Tiffany experienced under Bogliolo, who took the helm in 2017, is losing its momentum. Nonetheless, the stock doesn't look expensive at 17 times forward earnings, and it pays a decent forward dividend yield of 2.6%. Over the long term, Tiffany's expansion efforts in China could pay off -- but the region's growth just isn't significant enough to offset its other challenges yet.
