Thursday, January 21, 2016

Luxury Retailer Sinks Into The Quagmire.

Wolf Richter wolfstreet.com, www.amazon.com/author/wolfrichter
Brick-and-mortar retailers are sinking into a quagmire – even luxury retailers, like Tiffany and Company.
So, sure, they’re still looking pretty good when compared to the oil and gas industry, which is in a depression, laying off well-paid people, from director-level engineers to roughnecks. Contractors are out of work. Revenues are plunging. Losses are piling up. Cash is running out. Bankruptcies and debt restructurings are now a common occurrence. The junk-bond bubble that funded the US drilling boom is imploding. Banks are starting to recognize losses on their loans. But the sector has been through this before. It’s temporary. When the price of oil rises again, the survivors and new players will thrive, hire, and expand.
That’s not the case with brick-and-mortar retailers.
But it’s a slow process. Some bigger operations have already gone bankrupt recently or have defaulted on their debts. Junk bonds that fund much of the industry are swooning. Liquidity is drying up. And many private equity firms that bought these retailers during boom times and loaded them up with debt are now stuck with them [Defaults and Restructuring Next for Retailers].
Among the list of brick-and-mortar retailers to warn of crummy holiday sales is luxury jeweler and specialty retailer Tiffany and Company. It reported this morning that sales during the holiday period fell 3% on a constant-currency basis: 5% in the Americas and 6% in the Asia-Pacific region. Sales at stores that were open at least a year dropped 5%. And it lowered its guidance.
So it will do what American companies do best: There will be an undisclosed number of job cuts, and there will be “occupancy reductions” at its corporate office. This cost cutting will cost the company about 4 cents per share in the current quarter.
Shares fell 5.1% today to $64.22. They’ve plunged 41% from their all-time high of $108.68 at the end of December 2014.
Scrambling to not fall too far behind reality, analysts unleashed a hail of downgrades, including Cowen & Co. which slashed its price target from $90 to $75 and Nomura which chopped it from $100 to $90.
Tiffany is selling to the privileged, to the beneficiaries of QE’s “wealth effect” in the US and around the globe. It’s selling to people who benefited from the astounding debt-funded booms in Asia and elsewhere over the past few years. Has the recent stock market rout dented their purchasing power, or their willingness to splurge?
Tiffany blamed the “pressure from the strong US dollar”; it blamed “foreign tourist spending” at its stores in the US; it blamed “restrained consumer spending tied to challenging and uncertain global economic conditions.”
But this has been Tiffany’s song and dance for a while. A year ago, on January 12, 2015, Tiffany’s shares plunged 14% and three days later hit the $85-range, down 21% from their all-time high two weeks earlier.
The problem back then? It had reported  lousy holiday sales; it had lowered its outlook; it had blamed “significant headwinds from the stronger US dollar” along with “other global economic pressures.” Copy and paste.
But wait… Stock markets were booming back then. The China bubble was in full swing. Asian millionaires were printed on an hourly basis. European stocks were on steroids. Even the S&P 500 was still trudging toward its high.
But it’s been getting tougher for brick-and-mortar retailers, and a slew of them warned since November that holiday sales would be crummy, and some warned more recently that holiday sales were in fact crummy. Some, including Gap and Wal-Mart, are shuttering some of their stores.
Tiffany faces some jewelry-industry issues: “Jewelry is no longer at the top of the Christmas list,” Neil Saunders, CEO of research firm Conlumino, wrote in a note to clients, cited by Business Insider. “For a brand like Tiffany, where lavish gifting is an important driver of buying, such a trend is distinctly unhelpful.”
There are Tiffany-specific issues, including that it faces a “more competitive environment for jewelry and the rise of other brands,” Saunders said. “Against this backdrop Tiffany has lost some of its relevance, especially to more moderate-spending shoppers.”
Then there are issues all retailers struggle with: Millennials, the largest demographic these days, tend to spend more on experiences and less on things, including expensive baubles. And retailers are facing strung-out American consumers. But Tiffany isn’t actually targeting strung-out consumers. It’s targeting the wealthy.
And here’s the problem for all our beleaguered brick-and-mortar retailers: online sales this holiday season jumped 12.7% to a record $83 billion, Adobe Systems reported today. And when push came to shove right before Christmas, with delivery perhaps uncertain, the buy-online-pick-up-in-store option kicked in. So it’s not like Americans have stopped shopping. They might shop a tad less, but they’re shopping increasingly online.
That’s a structural problem that is gnawing its way into all retailers’ earnings reports. It will never go away. It will only get worse. So they drag out the “strong dollar,” “global headwinds,” “warm weather,” or whatever other less indigestible excuses they can find. And companies can simply copy and paste last year’s excuses into the next earnings warning rather than admitting that online sales are gradually but relentlessly eating their lunch.
So with impeccable timing – the very morning the Commerce Department reported declining retail sales – Wal-Mart Stores disclosed in an SEC filing that it was “committed to growing,” but was “being disciplined about it.” Read…Wal-Mart Rubs Salt on Deepening Retail Wounds

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