Tiffany Most Exposed to Luxury Slowdown Outside US
Comment of the Day

January 04 2012

Commentary by Eoin Treacy

Tiffany Most Exposed to Luxury Slowdown Outside US

This article by Cotten Timberlake for Bloomberg may be of interest to subscribers. Here is a section:
China will expand 8.5 percent this year, the lowest pace in 11 years, the OECD forecast. Luxury-sales growth will ease in 2012 from a forecast of at least 20 percent in 2011, according to the Royal Bank of Scotland.

On Nov. 29, during its most recent earnings conference call, Tiffany cited “recent weakness” in Europe. Mark Aaron, a Tiffany spokesman, declined to comment for this story.

Sales will be unchanged this year at European stores open at least 12 months, according to Dorothy Lakner, a New York- based analyst with Caris & Co. She forecast a 12 percent sales gain in 2011. Same-store sales probably grew 26 percent last year at Tiffany's Asia-Pacific stores, she said. Lakner is calling for less than half that growth in 2012.

Expectation Reset

“There has been a reset of expectations,” said Lakner, who recommends buying the shares “given the strength of the brand.”

Weakening sales in Europe prompted Schick to cut his estimate for 2012 per-share profit to $4.01 from $4.10. Oppenheimer & Co.'s Brian Nagel reduced his estimate to $4.25 from $4.35. The average estimate of 22 analysts is $4.19.

Lakner dropped her Tiffany stock target price to $90 from $102 on Nov. 30. On the same day, Goldman Sachs Group Inc.'s Adrianne Shapira trimmed hers to $70 from $72. Tiffany closed on Dec. 30 at $66.26.

“For now, obviously the question is, ‘Does the softness continue?'” Lakner said. “Does it continue for a quarter? For several quarters?”

Eoin Treacy's view For the newly wealthy, luxury goods offer the opportunity to display their success. Cars, watches, bags, shoes, jewellery and perfume are often prized as status symbols and coveted by those aspiring to a higher standard of living. However, many of China's newly affluent upper middle class are burdened with overweight positions in property. The government is intent on reducing prices. Most people are not heavily indebted but those who bought in the last couple of years are likely to suffer negative equity. This is not a situation that encourages profligate spending. As long as monetary policy remains skewed towards tightening demand for luxury goods is likely to remain on a slower growth trajectory.

In 2010 there was a high degree of commonality across the luxury goods sector and they exhibited some of the best performing, most consistent trends. However, a large number lost momentum from the middle of 2011 and have spent the last six months ranging.

Tiffany hit a medium-term peak in July and posted its largest reaction since 2008 before finding support near $60 in August. It has ranged in a volatile manner since. The trend has morphed from a consistent advance to a choppy, relatively lengthy range. These are Type-3 top formation characteristics. While prices have held in the region of the MA, the primary consistency characteristics evident since 2009 have been lost. The medium-term uptrend could yet be reasserted but the case remains for the bulls to prove and prices need to hold above the $60 area.

Christian Dior, Swatch Group, LVMH, Burberry, Hugo Boss, Compagnie Financiere Richemont, PPR, Luxottica, BMW and Mulberry share similar characteristics.

Polo Ralph Lauren remains a relative strength leader. However, it has pulled back to retest the 200-day MA and needs an upward dynamic to suggest demand is returning to dominance. Coach also needs to continue to find support in the region of the MA if the medium-term upside is to continue to be given the benefit of the doubt.

Essilor International rebounded emphatically from the August intraweek low. It rallied back to retest the high over the last three weeks. A sustained move above €59 would reassert the medium-term uptrend.

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