Can Tiffany (TIF) be the crown jewel LMVH has long searched for? The U.S. jeweler, which is being pursued by the French luxury group for more than $16 billion, is set to report third quarter fiscal 2020 earnings results before Thursday’s opening bell.
One of France's most famous companies with its marquee brand Louis Vuitton, LVMH is looking to augment its luxury space empire. And by offering $135 per share, this deal amounts to about 35% premium to Tiffany’s closing price on October 25 when the news of the deal was first made public. Would it (should it) be enough to satisfy shareholders given the many concerns Tiffany has faced over the years regarding its performance?
For LVMH, the fact that it is willing to make such an offer amid the economic pressures the company faces in both the United States and in Europe underscores the value LVMH sees in Tiffany’s assets, namely Tiffany’s portfolio of patents that comes with the Tiffany brand such as its robin's egg blue boxes. On Thursday this will likely be the most-pressing topic beyond the top- and bottom line numbers.
For the quarter that ended October, Wall Street expects the New York-based company to earn 85 cents per share on revenue of $1.04 billion. This compares to the year-ago quarter when earnings came to 77 cents per share on revenue of $1.01 billion. For the full year, ending February, earnings are projected to rise 2.1% year over year to $4.85 per share, while full-year revenue of $4.48 billion would rise 0.8% year over year.
Tiffany relies on strong global economic expansion to sustain its sales capabilities in both developed markets like the U.S., Europe and China as well as in emerging markets. However, some believe that the global economic is in the final few years of expansion, if not on the verge of a recession. If (or when) a recession occurs, luxury goods such as those sold by Tiffany will be among the first consumers are willing to cut. And there was some evidence of this in the second quarter.
Although the company did beat on the bottom line, it not only missed on revenue, but comparable sales fell 4%. On a constant-currency basis, comps were down 3%, compared to the 1.9% decline analysts were expecting. Consolidated Q2 revenue were down 3%, owing to a 4% decline in the Americas and Europe. The company suffered from a familiar foe — its gross margin which again fell 130 basis points to 62.7% of revenue. Analysts were expecting gross margin of 63.5%.
The company attributed the gross margin decline to changes made in sales mix as it shifted toward higher price point jewelry. In other words, there continues to be various industry-specific and company-specific headwinds Tiffany is dealing with. These metrics highlight the reason Tiffany shares have underperformed the S&P 500 over the past five years and ten years.
As for today, aside from economic pressures, there has been the U.S.-China trade war and increased competition from other luxury brands that has pressured Tiffany’s business. Many of these headwinds won’t immediately improve. As such, I believe Tiffany investors have been presented a very good deal by LMVH.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.