Tiffany sales in China down by 85% in 1Q
Tiffany & Co reported its financial results for the three months ended April 30, 2020 (1Q). Worldwide net sales as reported and on a constant-exchange-rate basis that excludes the effect of translating foreign-currency-denominated sales into U.S. dollars were below the prior year primarily as a result of the temporary closures of a substantial number of the Company’s stores around the world due to the Covid-19 pandemic.
Unlike calendar year-end companies, the Company’s first quarter began February 1, meaning that the Covid-19 pandemic affected its entire quarter. The significant decline in net sales resulted in a net loss in the quarter. In the first quarter, worldwide net sales declined 45% to $556 million and comparable sales declined 44%.
On a constant-exchange-rate basis, net sales declined by 44% as compared to the prior year and comparable sales declined 43%. These sales declines reflected closures of Company retail stores across all of its global markets at various times during the first quarter of 2020 due to Covid-19.
Net loss was $65 million, or $0.53 per share, for the first quarter of 2020 compared to net income of $125 million, or $1.03 per diluted share, in the prior year. Excluding certain costs recorded in the period related to the pending acquisition of the Company by LVMH Moët Hennessy - Louis Vuitton SE, pursuant to the Agreement and Plan of Merger, dated as of November 24, 2019 by and among the Company, LVMH, Breakfast Holdings Acquisition Corp. and Breakfast Acquisition Corp., as well as certain other non-recurring items, first quarter net loss was $64 million, or $0.53 per share.
On June 8, 2020, as a precautionary measure in order to maintain flexibility with respect to its liquidity sources and provide additional financial maintenance covenant headroom, the Company entered into amendments to its global revolving credit facility, the guaranty related to its Shanghai revolving credit facility and its various private notes.
These amendments primarily modify the financial ratio thresholds set forth in certain covenants included in the agreements governing these debt issuances through and including the Company’s fiscal quarter ending April 30, 2021.
Alessandro Bogliolo, Chief Executive Officer, said, “The character and strength of Tiffany & Co. have been tested many times over the past 183 years and, because of its exceptionally talented and devoted employees, the Company has always been able to persevere and succeed.
That is why we took balanced and appropriate steps, like much of the luxury industry, to protect our valued employees who are the heart and soul of the Brand. The entire Tiffany family has shown extraordinary agility and is fully committed to ensuring that the deep connection we have built with our customers is enhanced and strengthened during these difficult times.
While the first quarter was very challenging with sales and earnings significantly impacted by COVID-19, the impact of which we expect to negatively affect our full-year sales and earnings relative to 2019, I am confident Tiffany’s best days remain in front of us because there is evidence that the strategic decisions we took to focus on our Mainland China domestic business, global e-commerce, and new product innovation are paying off - even against the backdrop of a global pandemic. Let me expand, briefly, on each of these elements.
“First, while sales in key markets like the United States and Japan were down significantly during the first quarter, our business performance in Mainland China, which was the first market impacted by the virus, is indicative that a robust recovery is underway.
Retail sales in Mainland China were down approximately 85% and 15% during the first and second months of the quarter, but up approximately 30% during April, each as compared to the same period in the prior year. Moreover, that sequential strength has continued to accelerate with May retail sales in Mainland China up approximately 90% despite global net sales being down approximately 40% in that month as compared to May 2019.
This evidence not only leads us to believe that our global net sales will significantly improve over the balance of the fiscal year relative to our year-to-date performance, but also confirms that our decision to invest heavily in growing our domestic business in Mainland China was particularly prudent and well-timed, given the recent sharp decline in Chinese tourism abroad and the increase in local consumption. We are confident that Tiffany is now well positioned to benefit in the years ahead in this important market.
“Second, while first quarter sales were negatively impacted due to numerous store closures resulting from COVID-19, our global e-commerce business has performed well in the quarter due, in part, to last year’s complete re-platforming of the front-end of our e-commerce sites and our decision to stand up a sales-enabled website in Mainland China.
First quarter e-commerce sales were up 23% globally with key markets such as the United States and the United Kingdom up 14% and 15%, respectively. Additionally, sales through our Mainland China e-commerce portal have grown sequentially every quarter since the portal was launched last July.
Our strong global online sales trend has continued through May, with global e-commerce sales more than doubling those of May 2019, reflecting significant increases across every region, and bringing our global e-commerce sales up to approximately 15% of our total net sales for the fiscal year-to-date May period versus the 6% that global e-commerce sales represented in each of the last three full fiscal years.
“Finally, Tiffany T1 - our newly launched collection in rose gold and gold with diamonds - is off to a tremendous start with cumulative sales through the end of May matching our original projections despite a significant number of our stores being closed around the world. Based on our experience with the Tiffany HardWear and Paper Flowers launches, we believe it is likely that year one sales of T1 will eclipse year one sales for these two launches combined and may well exceed the sales of Tiffany T-Color, which was successfully launched last October and since then has been often out-of-stock due to overwhelming demand.
Mr. Bogliolo finished his comments by saying: “For these reasons, and as I stated earlier, I am confident that Tiffany’s best days remain ahead of us and I am excited we will be taking that journey with LVMH by our side. On the topic of the merger, we are pleased that there has been additional progress with the antitrust / competition process in the last few weeks; notably, we obtained clearance last week for the transaction from the Federal Antimonopoly Service of Russia and were notified in late May that the Mexican competition authority has declared our filing to be complete.”
Mark Erceg, Chief Financial Officer, added, “Tiffany has an investment grade balance sheet, has ample cash on hand and was in compliance with all debt covenants as of April 30, 2020. Nonetheless, we still took the decision (as have many other companies) to amend certain of our debt agreements in order to create additional financial covenant headroom given these unprecedented times.
These amendments were executed on June 8, 2020 and effect changes to certain provisions and covenants from the second quarter of fiscal 2020 through and including the first quarter of fiscal 2021, including, among other things: (a) an increase in the maximum leverage ratio under the Credit Facility, Shanghai Guaranty and our private notes, to 4.50 to 1.00; and (b) a reduction of the fixed charge coverage ratio test for debt incurrence in our private notes to 0.75 to 1.00.
Based on our current forecast, we believe that these amendments give us ample headroom during the effective amendment period to remain in compliance with our leverage ratio financial maintenance covenant, and to meet the fixed charge ratio test for debt incurrence.
The amendments are also permitted under the Merger Agreement. Finally, we have thoughtfully revised our plans to significantly reduce costs and dramatically lower our CAPEX spending by postponing selected projects for the year, versus our going-in plans, to help protect earnings and preserve cash.”
