Both overall and comparable-store sales growth at Tiffany came in flat during the last quarter, neither metric helped by the challenges in Hong Kong which overshadowed strong trading in the Chinese mainland.
However, putting Asia to one side, it is clear that Tiffany’s main difficulties are coming from the US and European markets where it is struggling to generate growth.
Similar to last quarter, sales in the Americas were down by 4 percent on both a total and same-store basis. Much of the slide is down to lower spending by tourists – something that has dogged the company for a few quarters and which we see as an ongoing issue as the firm enters the holiday period. Domestic demand slipped, mostly among middle-income shoppers who are cutting back on expensive, unnecessary purchases. Tiffany has not been able to entice them with its latest collections and we continue to see defections away from luxury to niche mid-priced brands which are less expensive but still offer stylish and fashionable products.
While Tiffany’s customer share among the more insulated higher-income groups remains stable, the ongoing decline in share among middle-income shoppers is worrying. Tiffany is reliant on these customers to drive growth and the future trajectory of the economy suggests that shoppers in this segment are likely to become even more cautious and reluctant to spend next year. This includes more affluent millennial consumers that Tiffany has been trying to court.
While brand awareness and favorability among this cohort has increased, this has not translated into purchases, partly because of a reluctance to spend large amounts of money and partly because some of the early sparkles of more youthful marketing has started to wear off.
All of this leaves Tiffany in a difficult position. Within its core markets, sales to tourists are falling, a large part of its customer base has become more reticent about spending, and it is not replacing these losses with new customer groups. The softer sales numbers that result from such a dynamic are also having an impact on the bottom line where net income fell by 17 percent over the prior year.
LVMH is inheriting challenges
Tiffany’s weakness does not undermine the various changes the group has made over recent years, nor do they devalue the brand. However, they show that LVMH, which will take control of the company in the first half of next year, is inheriting a group where much more effort is needed to engineer future growth.
The hope of LVMH will be that this position can be counterbalanced by driving higher sales overseas via a more effective distribution strategy. However, this will take time to engineer so in the short term Tiffany will remain exposed to a weaker performance.
Unfortunately, it does not look like the holiday period will provide any respite for Tiffany. Our data continues to show that jewelry will not be a winning category over the holiday period, mostly because of rising economic concerns and prioritisation of more practical gifts. Fortunately, this will be mitigated, at least in part, by the softer comparative results that Tiffany will come up against. Even so, we are not optimistic that growth will return to the levels being delivered a year or so ago.
In short, LVMH has bought a solid brand that will nicely complement its existing portfolio. However, it paid full price for a business that still needs a lot of work to reach its potential.
