The stock market is
continuing its reversal off the December lows, buoyed by reports that the U.S.
and China may come to a new trade agreement. The prospects for a trade war
truce are also having a positive impact on luxury jewelry company Tiffany &
Co.(TIF 89.74, +4.48, +5.25%), which reported soft holiday sales and issued downside FY19 (Jan.) EPS
guidance before the open.
The health of the Chinese consumer is integral to TIF's financial performance. Therefore, any progress made towards a resolution on trade with China would represent a significant positive development for the company and its stock.
Taking a look at TIF's press release, the company reported that net holiday sales fell by 1% to $1.04 bln with comparable sales declining by 2%. Furthermore, the company said that it expects FY19 EPS to come in at the lower end of its prior guidance range of $4.65-$4.80. The current consensus is for EPS of $4.77.
TIF's downbeat report comes on the heels of Signet Jewelers (SIG 25.44, +0.31, +1.23%) disappointing release yesterday in which the owner of Kay Jewelers, Jared, and Zales lowered its Q4 EPS guidance as same store sales declined 1.3% for the 9 weeks ended January 5.
For its part, SIG
pointed to an intensifying competitive environment and lower than anticipated
store traffic as the primary culprits. Similarly, TIF mentioned a softening in
demand from local customers in its Americas market, with net sales lower by 1%
yr/yr in the region on flat comparable store sales. TIF believes that its
customers may have been influenced more than expected by the macroeconomic
uncertainties and market volatility.
TIF and SIG are not the first luxury retailers to issue disappointing results and offer a more cautious outlook recently. For instance, on November 7, high-end fashion retailer Michael Kors -- now Capri Holdings (CPRI) -- cut its fiscal Q3 EPS and FY19 comparable store sales guidance, citing particular weakness in Europe where sales declined by double digits in 2Q19. From a product standpoint, fashion watches have been a notable weak spot for CPRI, lining up with what we are seeing at the jewelry companies.
Also, on January 10, Macy's (M) lowered its FY18 net sales growth, comparable sales growth, and EPS guidance, commenting that it also experienced under-performance in its fashion jewelry and fashion watches.
Putting this together, we have four luxury brand companies that have each reported slower than expected sales for higher end jewelry/watches. The obvious conclusion that can be drawn here is that wealthier consumers, traditionally believed to be largely immune to economic turmoil, have pulled back on spending. There are other factors at play, including currency headwinds and investments in digital channels to better compete, but, clearly, the stock market tumble in December spooked some consumers.
Circling back to TIF, hopes of a new deal with China are offsetting its company-specific bad news, at least for the moment. In its press release, management stated that sales in mainland China were actually still quite strong, up double-digits. However, net sales in the Asia-Pacific region fell by 3% due to softness in certain markets that are dependent on foreign tourist spending. Specifically, Chinese tourism slowed down appreciably as people there have opted to forgo travel plans, speaking to economic anxiety. Asia-Pacific accounted for 26% of total world-wide sales in 2017, while sales in Greater China represented approximately 60% of Asia-Pacific's sales.
With this in mind, it's not difficult to see how a new trade deal with China, and the lifting of tariffs, would funnel through to TIF's business. The elimination of tariffs would ease pressures on economic growth, improve consumer sentiment, and theoretically drive more sales for luxury goods like jewelry and watches. Additionally, the recovery in the U.S. stock market should be another positive catalyst for these retailers. TIF and other high-end retailers are facing a variety of headwinds, but, a positive resolution to the trade tensions with China would remove a significant one.