With Flat Q1 Profit, Tiffany Lowers Forecast as U.S. Jewelry Sales Soften

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Elsa Peretti at Tiffany & Co.: Is this iconic jewelry match up destined to end? It could, according to an SEC filing made Wednesday by Tiffany.

New York—Stung by softening sales in the Americas and its New York flagship, Tiffany & Co. reported today a weaker-than-expected first quarter profit and lowered its full year forecast.

Meanwhile, in a filing with the Securities & Exchange Commission (SEC) on Wednesday, Tiffany revealed that it seeks to buy the intellectual property rights from designer Elsa Peretti, one of the company’s pillar brands. The two parties are at an impasse and Peretti has warned she may end the license if an agreement isn’t forthcoming.

For the quarter ended April 30, Tiffany posted net profit less than 1% to $81.5 million, or 64 cents a share, from $81.1 million, or 63 cents a share, in the year-ago period. (The company noted that the profit would have declined 5% excluding a 4-cent charge a year earlier related to relocating its New York headquarters.)

Net sales rose 7.6% to $819 million. Excluding foreign currency translations, comparable store sales were up 4%. In the Americas, which account for almost half of its total, sales were up 3% to $386 million with comparable store sales flat, a 1% increase in branch stores comps and a 4% decline at its New York flagship, which accounts for about 8% of sales.

“Regions outside the Americas performed generally as expected,” said Michael Kowalski, chairman/ceo. “The Americas region underperformed, continuing a soft trend that began in the last quarter of 2011 and compounded by the difficult comparison to substantial sales growth in last year’s first quarter.”

Tiffany’s earnings failed to meet the 69 cents a share that analysts’ consensus expected, but the retail jeweler surpassed their sales estimate for $817 million.

Softness in Sterling Jewelry Sales Continues

In a conference call with investors, Mark Aaron, Tiffany’s vice president of investor relations, cited several reasons for why sales lagged at in North America.

Referring to previous forecasts, Aaron said the “affected sales in the Americas, ranging from restrained spending by customers employed in the financial sector to substantial competitive discounting, which we believe has continued, to particular softness in entry-level silver jewelry price points tied to resistance to price increases. We think those factors are all still relevant.”

Foreign tourists business gave the company a modest increase especially in its stores in Hawaii and Guam. Tourists’ spending at its New York flagship, however, was equal to last year thanks to increased sales to Asian visitors who offset lower sales from European tourists. Combined Internet and catalog sales in the Americas increased 1%.

By region, Asia Pacific posted the biggest sales increase: 17% to $195 million. Excluding foreign currency exchanges, comparable store sales in Asia rose 10%. Japan saw a 15% increase in sales with a 12% increase in comparable store sales.

Sales in Europe increased 3% to $88 million with comparable store sales flat on a constant dollar basis “with no meaningful difference between the U.K. and overall continental Europe.”

Tiffany reported that gross margin narrowed to 57.3% from 58.3% due to high materials costs. Selling, general and administrative expenses increased 9% because of increased labor, store lease and marketing costs.

As for its upcoming quarters, Tiffany cautioned that sales would be slower and thus lowered its full year earnings forecast to $3.70 to $3.80 a share, from its previous estimate for $3.95 to $4.05 a share. The company also lowered its sales projection to a 7% to 8% increase, down from 10%. Analysts’ average estimate expects earnings of $3.98 this year.

“Although we are very early into the second quarter, worldwide sales are currently increasing by a low-single-digit percentage, reflecting difficult year-over-year comparisons and decelerating rates of economic growth in many countries,” said Kowalski, noting the company also faced strong comparisons against second and third quarters of 2011.

With the news of Tiffany’s lowered forecast, shares of the luxury jeweler fell to their lowest prices so far this year in early trading today.

Noting that Tiffany has had to increase retails as prices of diamonds and precious metals have risen in the last few years, Brian Sozzi, chief equities analyst at NBG Productions, said that may be hurting the company’s entry-level buyers.

Elsa Peretti Brand to Exit?

Classic cuffs designed by Elsa Peretti for Tiffany

“Tiffany is battling a host of external headwinds and years of price increases that are causing consumer pause,” Sozzi said.

Tiffany may have more trouble on its hands than sterling silver prices increases if Peretti bolts and ends her license agreement with Tiffany, where Peretti’s designs account for about 10% of Tiffany’s total sales.

According to the documents filed with the SEC, Tiffany made a firm offer to buy all her intellectual property rights, but the two parties have yet to reach an agreement.

Tiffany has been the sole licensee to make and sell Elsa Peretti designed jewelry and accessories under Peretti’s trademarks since 1974, and Tiffany receives royalties on all the Peretti sales.

Peretti, 72, has said warned Tiffany that she may terminate the license agreement if both parties fail to come to terms regarding the deal price.

Under its agreement with Peretti–which can be terminated by either party by written notice–Tiffany would have the right to keep producing and selling Peretti merchandise for six month after termination of the license, and could continue selling any inventory on hand even after six months.

While the loss of Peretti, one of the iconic brands at Tiffany, would be a major one to the company, “Tiffany’s management believes that potential losses in net sales could be substantially mitigated” by new products created, merchandised and marketed using the resources Tiffany now devotes to Peretti.

Tiffany stated it “has enjoyed significant success and profitability from its longstanding relationship with Ms. Peretti” and there can be “no assurance” whether sales from any new jewelry collections would “offset the results realized under the (Peretti) license agreement.”