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Monday, January 14, 2013

Tiffany Trends


In an earlier post or two, I noted some absurd statements in reporting in the New York Times.  In this post, in my own version of the "fairness" doctrine", I will make a similar point about a statement in the current Barron's.

Kopin Tan, one of their leading columnists, and someone who is always worth reading, writes: "Ho-hum sales from Tiffany (ticker: TIF) and Ruby Tuesday (RT) suggest consumers facing higher payroll taxes are cutting back."

I don't think TIF's sales are much affected by anxiety over US payroll tax increases!  To begin with, a majority of its sales are outside the US.  In its 10-K for FY11, TIF says "sales in the Americas were 50% of consolidated worldwide net sales, while sales in the U.S. represented 90% of net sales in the Americas."  So U.S. sales in the prior year were only 45% of its revenues.  So at most 45% of its sales would have any impact at all from US taxes.  In addition, a meaningful amount of sales by US stores, particularly the flagship in NYC, are to non-US buyers. 

And I don't think US payroll taxes make up a large part of the tax bill of the typical US TIF customer.  I do think income taxes and excise taxes on investment income would be important to TIF customers in the US and it is possible the approach of substantial  tax increases on upper income earners in the US affected purchases.  But that won't explain why TIF's sales growth collapsed across all regions.  In each of 2010 and 2011, all regions except Japan experienced double-digit sales increases, but in 2012, each region except Japan has had single-digit sales increases that were less than one quarter the prior year's growth.   

As for what explains the global drop in sales, I think there was a lot of disruption and uncertainty around the world in 2012.  In the Middle East, there was the Arab Spring; In China, a slowdown and a change in leadership; in Europe, the PIIGS crisis and its macroeconomic effects; in the US, an election and a looming tax rise.  Each of these could curtail discretionary spending  by the wealthiest slice of each nation's or region's population. 

I looked at a few indexes of equities, commodities and macroeconomic variables over the last three years to see if there was any obvious correlation with TIF sales growth in that period.  Gold displayed decent correlation until 2012, when it had a much better year than TIF's sales.  The best annual correlation was the 200-day / 40 week moving average of crude oil (the data I looked at was $WTIC, but I would assume since it's just percentage change I am looking at, Brent would show a very similar pattern).  I can't easily generate a chart that shows the correlation, sorry.  But that MA rose by mid to high teens in both 2010 and 2011 but was basically flat in 2012, matching TIF's Y/Y change in sales reasonably well, both directionally and in order of magnitude.  That makes sense, as the price of oil is relevant to Middle East wealth and also somewhat indicative of global economic activity, and TIF sales would logically be affected by those factors as well.   

Do note that the above is only talking about changes in TIF's sales growth, not changes in TIF's stock price.  The stock price tends to be fairly correlated with the gold price over time, with periodically wider swings.  (I was not able to embed the chart that showed this, sorry, but you can re-create it at http://www.bloomberg.com/quote/TIF:US/chart by adding GLD as the comparison and selecting either the 3Y or 5Y tab; you may find the mean reversion pattern interesting).  Which also makes sense -- as a seller mainly of processed precious metals and minerals, jewelers are the last step in the "downstream" portion of the metals and mining industry, much as gas stations are the last step in the "downstream" portion of the oil and gas industry.  So the commodity's price is a huge component of what the customer is buying in each case; the next question is how much can the retailer pass through to keep profit margins up.   And a big portion of TIF's sales are for special occasions, such as betrothals, anniversaries, and so on, and many of their customers are wealthy, so there is some inelasticity of demand and thus TIF has some ability to pass on price increases in precious metals and minerals, as long as things are going well for wealthy persons around the world.

I should note I have no position in TIF and this is obviously not a recommendation of any kind regarding trading.