The investment being made by Tiffany & Co. (TIF, Financial) in its store refurbishment program could lead to improving profitability in the long run. Although it is causing higher costs in the near term, it could create a business with higher customer satisfaction and a larger competitive advantage over rivals.
New store openings may also boost its financial performance, while omnichannel investment and new products could catalyze its long-term growth. A focus on innovation may provide improved sales productivity.
Having gained 19% in the last year, the company’s stock price has outperformed the 8% rise of the S&P 500. Further capital growth could be ahead for the consumer goods business.
Store focus
New store openings could catalyze Tiffany’s financial performance. In the most recent quarter the company increased its store count by 2.6% to 320 locations. Its focus continues to be on the Asia Pacific region, with the company enhancing its store base in China so that it now has 34 locations in the country. It also expanded its European store base, entering the Scandinavian market while increasing its exposure to the Middle East via a new store in Abu Dhabi.
Alongside new store openings, the company is refurbishing existing sites as it seeks to create a more appealing customer experience. It has a global display enhancement initiative that has already brought a new look to its Chicago store and is expected to have impacted all North American stores by November. The program will then move onto other regions across the globe. As part of this, its flagship New York store is set to undergo a complete renovation that will be completed by the end of 2021. The end result of store refurbishments is expected to be significantly higher store sales productivity.
Innovation
The company’s focus on innovation has included a pop-up store in London’s Covent Garden. It also plans to launch a pop-up online store in China following the success of a similar operation in the country that proved popular among customers. Its continued focus on enhancing omnichannel experiences across its regions could resonate well with customers at a time when they are demanding a more seamless buying experience from their favorite brands.
A refocused marketing effort from Tiffany highlights its ability to adapt to changing consumer demands. It is focused on offering increased personalization to customers through its "make it my Tiffany" program. This allows customers to create one-of-a-kind designs that can then be engraved onto jewelry and charms. It already offers a personalization service in around 100 of its stores and plans to roll it out globally over the near term. Alongside its "Tiffany True" engagement jewelry design and "Paper Flowers" collection for younger customers, this could provide the company with an improving competitive advantage versus its rivals.
Risks
The investment being made in areas such as store refurbishment is leading to a significant increase in SG&A expense. In the second quarter it increased 20% versus the same period of the previous year. The company expects SG&A costs to remain elevated over the near term and to grow at a faster pace than sales in the current fiscal year. The decision to transform its flagship store in New York is expected to lower earnings per share in fiscal 2018 by 7 cents. Total costs on a per-share basis for the refurbishment are expected to be between 10 cents and 15 cents per year over the three-year construction project.
While the company’s investment plan is expected to raise costs in the near term, it has the potential to strengthen its brand and pricing power in the long run. In the second quarter of the year its gross margin increased 150 basis points to 64%. The company delivered a gross margin increase across all of its lines, with tourism sales and sales to local customers forecast to improve. With a stronger omnichannel offering and an improved customer experience, a further gross margin increase may be ahead.
Outlook
An increase in the number of stores has the potential to catalyze Tiffany’s sales performance. This could be complemented by store refurbishment, as well as investment in its omnichannel experience. With the company continuing to innovate through pop-up locations as well as new marketing campaigns that are resonating well with customers, its competitive advantage could improve.
Although higher investment means increased costs and a lower operating margin, short-term pain could lead to long-term gain. Therefore, after outperforming the S&P 500 in the last year, further stock price growth could be ahead.
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Key Takeaways From Tiffany & Co.’s 2nd-Quarter EarningsÂ
