TIF Tiffany and Co

By Suzanne Kapner 

Tiffany & Co. bet on tourists flocking to its flagship city stores to pay a premium for its jewelry, making it an attractive takeover target to a luxury giant. Now, with tourism decimated due to the coronavirus pandemic and LVMH trying to back out of the deal, the jeweler faces the prospect of reinventing itself in a brave new retail world.

Tiffany got just 6% of its sales from e-commerce in each of the last three fiscal years. That figure shot to 15% for the six months to July 31, a period when its stores were temporarily closed due to the health crisis. Still, analysts say Tiffany is playing catch-up on the digital front at a time when consumers, nervous about visiting physical stores, are shifting more of their purchases online.

A union still might happen. Tiffany has filed a lawsuit in Delaware to compel LVMH Moët Hennessy Louis Vuitton SE to either complete their marriage or pay damages. The owner of Louis Vuitton and Fendi said it no longer wanted to buy Tiffany because the deal was being dragged into the middle of trade disputes between France and the Trump administration.

If Tiffany were to remain independent, it would fare better than other luxury chains that have been upended by the pandemic. Unlike Neiman Marcus Group Inc., which filed for bankruptcy in May, the jeweler doesn't have excessive debt or a history of losses. Tiffany, which had $4.4 billion in revenue last year, had about $400 million in net debt as of the end of July.

Tiffany will need to reboot in a landscape vastly different from the one of spring 2019, when it began an ambitious renovation of its iconic store on Manhattan's Fifth Avenue. Tiffany doesn't break out sales from tourists, but analysts say the location relies heavily on foreign and domestic visitors. Even local residents are venturing out to stores less, as health concerns persist.

The pandemic poses specific challenges to a luxury retailer like Tiffany since many of the items it sells are occasion based. Some couples postponed weddings during the lockdown. Many wealthy households have shifted their spending to home improvements, including adding pools, as they work from home and spend less on travel or entertainment. Tiffany said sales of engagement jewelry fell to $343 million in the first six months of the current fiscal year, down from $557 million a year earlier.

"Luxury is about being seen wearing certain products, including jewelry, " said Neil Saunders, a managing director of research firm GlobalData PLC. "As people stay home more, the need for purchasing these items has dissipated."

Analysts said Tiffany can succeed as an independent company, and may even attract other suitors down the line. But if the deal falls through, "they will not benefit from the firepower of being owned by the largest holding company in the luxury space," said Erwan Rambourg, the co-head of global consumer and retail research at HSBC.

One rationale for LVMH's initial interest in Tiffany was to accelerate a turnaround that was already under way. Tiffany ousted its chief executive in 2017 and replaced him with former Diesel boss Alessandro Bogliolo to modernize the 183-year-old jeweler. Mr. Bogliolo had previously spent 16 years at Bulgari, the jeweler that LVMH acquired in 2011.

Under Mr. Bogliolo, Tiffany hired actress Elle Fanning to star in ads designed to appeal to younger shoppers. The company also set about updating stores, including its Manhattan location, which it had occupied since 1940 and had been immortalized in the film "Breakfast at Tiffany's" starring Audrey Hepburn. It also was building stores in several Chinese cities, looking to tap into the country's rising middle class.

Tiffany overhauled its U.S. and Chinese websites last year, which enabled it to quickly boost online sales during the pandemic.

LVMH executives had viewed Tiffany as a "sleeping beauty," a brand with great promise, but one that hadn't fully realized its potential, according to people familiar with the situation. The French conglomerate made an unsolicited approach to buy the U.S. company, ultimately agreeing to pay $16.3 billion in cash.

LVMH planned to increase marketing at Tiffany and provide more money to fast track its strategy, which included launching more new products, upgrading boutiques and making the brand more appealing to millennials, the people said.

Then the pandemic hit, and Tiffany's sales fell 45% to $556 million for the three months ended April 30, when most stores were closed. The company swung to a $64.6 million loss in the period.

While business improved in the most recent period, sales and profits are still below year-ago levels, falling 29% in the three months to July 31. The company returned to a profit of $31.9 million, driven by a surge in online spending and a rebound in China. But that is well below the $136.3 million earned in the same year-earlier period.

Tiffany has since reopened most of its stores and said sales trends improved in August. The company has predicted higher profits in the holiday quarter than a year ago, but it will be entering a holiday season unlike any other.

Write to Suzanne Kapner at Suzanne.Kapner@wsj.com

(END) Dow Jones Newswires

September 09, 2020 17:03 ET (21:03 GMT)

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