Jewelers look abroad to boost sales as US slows

Thu Aug 28, 2008 3:47 PM EDT

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Rising sales in Asia and Europe boosted Tiffany & Co.'s second-quarter profit on Thursday, signaling that strong international demand for jewelry is helping offset U.S. economic weakness.

Fellow jeweler Zale Corp. posted a loss for its fiscal fourth quarter but forecast 2009 profit above Wall Street expectations and noted significant growth opportunities in Canada.

The softening domestic economy, which has crimped discretionary spending for many Americans, has jewelers focusing on international efforts to offset sluggish sales in the U.S.

At Tiffany, known for its signature blue box, second-quarter sales soared by double-digit percentages in Asia and Europe and helped lift the company's earnings above Wall Street expectations. Sales in Europe jumped 35 percent to $71 million, while sales in the Asia-Pacific region rose 17 percent to $214.2 million.

That helped counteract weakness in the U.S., where same-store sales declined 4 percent. Same-store sales are an important indicator of how a retailer is performing because it measures sales at existing stores rather than newly opened ones.

Tiffany's also raised its outlook for this year and now expects profit between $2.82 and $2.92 per share. Analysts polled by Thomson Reuters forecast earnings of $2.83 for the period.

The drop in U.S. same-store sales would have been worse without an influx of tourists. The company said travelers, especially Europeans, boosted U.S. sales growth, mainly at its flagship store in Manhattan.

That location accounted for about 10 percent of the company's total sales in the year ended Jan. 31. Sales there rose 5 percent in the second quarter, on top of a 31 percent increase last year, due to higher spending by international tourists.

"The 2 percent increase in total U.S. store sales was also more than entirely due to higher spending by customers from other countries," Mark Aaron, vice president of Tiffany's investor relations, said in a conference call. "Sales to New Yorkers were below last year, which should not be too surprising to anyone."

Stephanie Hoff, a senior retail analyst with Edward Jones, said Tiffany did better than people anticipated overall. "Even though the U.S. was weaker than expected, I think a lot of investors thought that could happen," she added.

At Zale, the jeweler recorded a loss of $4.9 million for the quarter ended July 31, compared with a profit of $1.5 million in the same period last year. Sales rose 6.1 percent to $456.2 million, as same-store sales also grew 6.1 percent.

President and Chief Executive Neal Goldberg said on a conference call that the company has expanded in Canada and market share opportunities are abundant.

"We have grown our Canadian store base where we are achieving much higher returns on capital and the economy is much healthier than we currently find in the U.S.," he said.

Looking ahead, some analysts are already wondering what the crucial holiday season holds.

Hoff expects a slowing global economy to crimp momentum, especially if the dollar strengthens and deters tourists from shopping in New York during the holiday season. Many Americans buy items like jewelry and engagement rings during the last month of the year.

Hoff also noted that even wealthier consumers are cutting back in the tight U.S. economy, as Tiffany's reported softness in sales of items priced above $50,000.

Meanwhile, costs are rising for jewelry retailers.

Tiffany's said precious metal costs are higher now than a year ago, with prices for platinum and silver up about 15 percent. The company also reported "low double digit" percentage increases in polished diamond costs, but said it has raised some retail prices to help offset that.

Shares of Tiffany rose $4.24, or 11 percent, to $43.85, while shares of Zale jumped $4.77, or 21 percent, to $27.92, and earlier set a 52-week high of $28.30.