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Tiffany keeps sparkle despite euro zone crisis

Tiffany’s ability to weather a slowing global economy demonstrates why investors are seeking refuge in luxury retailers.

MIKE BLAKE/Reuters

Tiffany & Co. stock surged Monday, highlighting the remarkable resilience of the luxury goods sector despite a slowing global economy.

The jewellery retailer's stock jumped 7.2 per cent after it announced that sales at stores open at least a year had dropped only 1 per cent – a smaller decline than many analysts had expected. In Europe, comparable-store sales actually increased 2 per cent despite the euro zone crisis.

The upscale chain's ability to weather a slowing global economy demonstrates why many investors have sought refuge in retailers that cater to the planet's wealthiest 1 per cent.

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The S&P Luxury Goods Index has jumped 352 per cent from 2009 lows as investors have bought into the notion that people who are willing to spend $20,000 (U.S.) on an overnight bag are not affected by inconveniences such as global recessions.

Unprecedented wealth creation in China over the past decade has been a major driver behind the impressive performance of the luxury sector. According to Forbes magazine, China's economic miracle has created 271 billionaires (in U.S. dollar terms) and a much larger number of millionaires over the past decade.

The swelling numbers of new consumers for high-end jewellery, spirits, leather goods and luxury autos have provided a powerful boost for makers of the most expensive goods. Asian revenues at Louis Vuitton Moet Hennessy climbed from $1.6-billion in 2003 to $6.4-billion in 2011.

To be sure, recent data from China and Asia have sparked worry. Casino revenues in Macao, a popular vacation destination for wealthy Chinese, are viewed as an important indicator of future spending among the world's ultra-wealthy. Revenues in June, the last available, showed a sharp 12 per cent decline from the previous month.

Tiffany cut its annual profit and sales forecast Monday for the second time this year, reflecting weaker demand in the U.S. market. Sales at the retailer's flagship store on Fifth Avenue in New York dropped 9 per cent.

However, Tiffany still believes its global net sales will increase as much as 7 per cent this year. That is down from the 10 per cent it had originally projected, but still a healthy increase by most retailers' standards.

Many analysts remain confident that the luxury goods sector will shrug off any downturn. Credit Suisse analyst Rogerio Fujimori projects that luxury goods retailers will be able to grow their sales by 6 per cent in Europe in the second half. In Asia, he expects sales to slow, but growth to remain "robust" at 15 per cent.

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Mr. Fujimori notes that many stocks in the sector are relatively cheap at 15 times forward earnings. He favours companies with revenue streams from many regions and prefers retailers to wholesalers. His top picks include Louis Vuitton Moet Hennessy and Burberry Group.

However, analysts note that the sector's fortunes could change quickly if China's economic growth takes a sudden turn for the worse.

"I feel like I'm having a black tie party on the top of a volcano. The volcano is China," said Johann Rupert, CEO of luxury watchmaker Richemont et Cie.

With files from Bloomberg News

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More

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