Tiffany Learns the Hard Way: Diamond Demand Is Not Forever

 | Jan 19, 2016 | 12:52 PM EST
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Tiffany (TIF) shares have been falling like a rock.

On Tuesday, the sustained plummet of the luxury retailer accelerated, falling 5% after CEO Frederic Cumenal posted dismal sales numbers for the last two months, pointing to currency headwinds and waning tourism.

"In the holiday period, we continued to feel pressure from the strong U.S. dollar on the translation of non-U.S. sales into dollars and on foreign tourist spending in the U.S., which we expect will continue into 2016," he said in a statement. "We believe overall sales results were negatively affected by restrained consumer spending tied to challenging and uncertain global economic conditions, and we expect 2015 earnings to come in at the low end of our previously set range of expectations."

Tiffany's retail operations are widely exposed to international risks, with only 41% of its 307 store locations in the Americas, followed by 26% in the Asia-Pacific region, 13% in Europe, and a conspicuously disproportionate 18% in Japan. The Fifth Avenue, New York-based diamond retailer also has five stores in the United Arab Emirates and one in Russia.

This could help explain why Tiffany has so badly underperformed its peers recently, losing more than 28% of its market capitalization over the past 12 months, while Signet Jewelers (SIG) and online jeweler Blue Nile (NILE) are each down roughly 1% over the period.

However, Tiffany has still managed to maintain strong earnings in China, even in light of economic concerns about President Xi Jinping's ability to grow China's gross domestic product, Jefferies analysts said in a report Tuesday. 

"Despite macro pressures in the region, Tiffany continues to deliver strong sales growth in China," the analysts wrote. "We see significant opportunity for this region to continue to drive top-line growth through square footage expansion, as well as higher comps as brand awareness improves."

Demand in Japan has also been a substantial driver for Tiffany's sales, they said. Jefferies maintains a Buy rating for Tiffany and a $100 price target.

But many analysts are not so confident. Wells Fargo said in a Tuesday report that despite strong sales in mainland China, Tiffany discovered a "significant weakness" in Hong Kong and Singapore sales, and currency and tourism headwinds are likely to persist.

"Tiffany is one of the strongest brands in our group, but multiple macro headwinds (U.S. tourism, Chinese stock market, foreign exchange) may put significant pressure on sales and margins," a Wells Fargo analyst group led by Ike Boruchow and Tom Nikic wrote.

Wells Fargo maintains an Underperform rating on Tiffany, and a valuation range between $59 and $61.

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