Factors driving Tiffany’s profitability
Lower sales and increased competition are pressuring jewelry retailers’ profitability, while adverse currency movements are putting dents in company margins. But despite its lower sales, Tiffany (TIF) managed to generate healthy margins during its last quarter as lower input costs (mainly stemming from lower diamond acquisition costs) and price restructuring initiatives boosted profitability.
Last quarter, Tiffany’s gross margin expanded by 80 basis points to 62.0%, while its operating margin increased by 110 basis points to 16.2%.
By comparison, lower sales and higher promotional expenses dented Signet’s (SIG) margins. Signet’s gross margin fell 300 basis points to 35% on account of a decrease in sales, which more than offset the higher merchandise margins. SIG’s operating margin fell 520 basis points to 8.2%.
Movado’s (MOV) adjusted gross margin witnessed a decline last quarter due to a reduction in sales and adverse currency fluctuations.
The overall soft sales environment fueled by weak consumer spending and currency headwinds will likely continue to hamper the profitability growth of jewelry retailers. But Tiffany’s management has projected that its bottom line will increase in the mid-single-digit range for fiscal 2017. The company expects to generate higher gross and operating margins driven by lower input costs, productivity savings, and a favorable mix, which should supplement EPS (earnings per share) growth.
But the outlook remains bleak for TIF’s peers. Signet’s management has called for a YoY (year-over-year) decline in its bottom line for fiscal 2017. The company is taking measures like streamlining operations, closing underperforming stores, and using better discount control mechanisms. But weak store traffic, increased competition, and adverse currency movements will likely remain a drag.