Here’s What Tiffany & Co Needs To Do To Claw Its Way Back To Profitability

Tiffany's, Wall Street

[credit provider=”Richard Drew / AP “]

The markets and business press rang in Tiffany’s blue year a week late today with reports that “Tiffany tumbled 10 per cent to $59.99 at 10:17 a.m. in New York for the biggest intraday decline since Nov. 29” on reports that “the world’s second-largest luxury jewelry retailer reduced its annual earnings forecast, hurt by slowing holiday sales growth across all regions.” And while “the New York-based company plans to release final results March 20,” and market-watchers and jewelry-lovers alike were generally surprised by the news, the signs of Tiffany’s demise have been coming down the diamond-and-pearl pike for years.

Here’s why:

  • Overexpansion: Much has been made of Tiffany’s focus on expansion in the European and Asian markets – areas facing probable recession.  And while “the debt woes and fiscal crisis in Europe have hurt not only Tiffany,” the luxury retailer’s aggressive expansion plans – outlined in its 2010 Shareholders Report –  at the exact time the global credit and debt markets commenced contracting has predictably led to less-than-ideal economic results.
  • Poor Commodities Management: Like many of its luxury-goods-and-retail brethren, Tiffany’s bottom line took a massive hit the past few years line, due to volatile/high commodities prices.  While the retailer raised prices to “offset the cumulative effect of two years of sharply rising costs for diamonds and precious metals,” “‘the affluent shoppers have certainly picked up spending, but there’s no question that Wall Street bonuses are leaner,'” a fact which led to decline in U.S. sales.  In short, Tiffany’s attempt to remedy gross margin issues through increased prices on “high-ticket” items has driven away both potential customers and potential for profit.
  • Focus On Profits, Not Profitability – Tiffany, like most retailers, suffers from that age-old retailer-plague: a focus on top-line growth at the expense of bottom-line health.   A drive to expand both product lines (anyone remember the Return to Tiffany’s lower-market push a decade ago? – but more on that below) and consumer markets has stretched the luxury retailer thin, driving up revenue while sharply cutting into gross margins.  This strategy –one employed by almost every retailer, regardless or size or product, at one time or another – often results in strong revenue numbers which, during “good” times, mask shrinking margins, which means a weaker financial structure.
  • Positioning: Full confession: this observation leans more qualitative than quantitative.  Approximately 10 years ago, Tiffany bombarded a newly-affluent domestic (and global) middle class with the “hot” Return to Tiffany’s segment – a line of “reasonably” affordable jewelry pieces (starting at approximately $100/item), which gave consumers a glimpse of the experiential Tiffany lifestyle without the Tiffany price-tag.  Gone, then, were the days of this exclusive retailer, replaced by “man-on-the-street” access.  In short, Tiffany no longer possesses that “perfect sheen” of the untouchable – and I, in turn, can say personally that should I find an extra $10K+ in my wallet set aside for luxury jewelry, I’ll think twice before plunking down for an item from the store hawking $100 bracelets in lieu of hitting up Bulgari, etc.

So what’s the answer to Tiffany’s earnings blues?  Like many retail clients with shrinking profit margins we here at ACM Partners work with, Tiffany must first shrink its revenues to expand its profits.  Furthermore, a reassessment of product placement and strategy, combined with a reevaluation of expansion into the European market, would undoubtedly do wonders for the struggling retailer.  Either way, let’s hope the shine returns to the grand-daddy of American jewellers.

Margaret Bogenrief is a partner with ACM Partners, a boutique crisis  management and distressed investing firm serving companies and municipalities in  financial distress.  She can be reached at [email protected]