Tiffany & Co. (TIF) was once considered a recession-resistant stock, since demand for high-end jewelry generally stays stable during market downturns. However, the financial crisis a decade ago still took a big bite of Tiffany's sales, and indicated that its average customers weren't affluent enough to withstand the global recession.

Tiffany faces a similar predicament now. Its first-quarter results showed that revenue fell 3% annually to $1 billion, marking its second straight quarter of negative growth, and its net income fell 12% to $125 million. Tiffany attributed those declines to two main headwinds -- a strong dollar throttling its overseas sales and soft tourist spending across its main markets.

A woman shows off her engagement ring.

Image source: Getty Images.

Tiffany can't do much about currency headwinds, but its heavy dependence on tourists is a bright-red flag. Let's see how softer tourist spending curbed Tiffany's growth over the past year.

How Tiffany lost its tourist shoppers

Tiffany's reported sales declined year over year across all four of its regions during the first quarter:

YOY sales growth

Q1 2018

Q2 2018

Q3 2018

Q4 2018

Q1 2019

























Data source: Tiffany quarterly reports. YOY = year-over-year. 

The strong dollar took a big bite out of Tiffany's sales in Asia and Europe, where its currency-adjusted sales actually rose 3% and 4%, respectively. Its constant currency sales remained flat in Japan but still fell 4% in the Americas.

Tiffany estimates that sales to tourists accounted for a "low double-digit" percentage of its U.S. retail sales, and those sales fell 25% annually due to fewer purchases from Chinese tourists. During the conference call, CEO Alessandro Bogliolo warned that those declines "were even more pronounced than declines in the second half of last year."

CFO Mark Erceg stated that Chinese tourism in the U.S. mainly declined during the second and third quarters of 2018, and that tourist visits from other countries "really started to denigrate in the fourth quarter and [have] continued since that time."

Those declines can be attributed to the Trump administration's tighter border policies and a strong dollar. International visits to the U.S. rose only 2% in 2018, according to the business journal Tourism Economics, with visits from Asia dipping nearly 1%. This pain could continue as the trade war escalates, China discourages its citizens from visiting the U.S., and Chinese regulators tighten custom checks for big overseas purchases.

A tourist visits a night market in Hong Kong.

Image source: Getty Images.

Tiffany claims that it's still generating "strong growth" within mainland China, yet growth there was offset by lower spending in other Asian markets -- which the retailer again attributed to lower spending from foreign (mainly Chinese) tourists. China's habit of restricting or banning tourist visits to other Asian countries amid diplomatic disputes (as it did with South Korea and Taiwan) could cause additional pressure.

Tiffany also attributed its soft sales in Japan to lower spending from foreign tourists. International visits to Japan actually rose nearly 6% annually in March, according to the Japan National Tourism Organization, but much of that growth came from Southeast Asian visitors, who generally spend less cash than their Chinese counterparts. Chinese visitor numbers stayed low as fewer cruise ships made stops in Japan.

The story was similar in Europe, with fewer Chinese tourists visiting major destinations like France. The yellow vest protests and strong euro likely exacerbated that pain.

What's Tiffany's turnaround plan?

Tiffany believes that its performance will rebound in the second half of the year as it launches new Tiffany T and HardWear products and pivots its focus toward local customers instead of tourists. It also expects currency headwinds to wane.

However, Tiffany's dependence on Chinese tourists won't wane anytime soon. As trade war tariffs exacerbate the Chinese economy's slowdown, fewer Chinese tourists will make big purchases at Tiffany's overseas stores. Meanwhile, its growth in China will also decelerate.

Therefore, Tiffany's situation probably won't improve in the near future. Investors looking for a luxury play should stick with LVMH (LVMUY -1.63%), which targets more affluent customers than Tiffany with a wider range of fashion products, spirits, and cosmetics. LVMH's sales surged 16% annually last quarter (11% organically), and it isn't heavily dependent on Chinese tourists flooding its flagship stores, as Tiffany is.