Jewelry retailer Tiffany warns of lower sales

Jewelry retailer Tiffany & Co.'s sales slumped in the third quarter as the strong U.S. dollar and lower spending by tourists took a toll on the company's performance entering the crucial holiday shopping season.

Tiffany's net earnings also took a hit, falling 8% to $91 million when factoring out a key debt payment, amid mounting indications of challenges for luxury retailers.

The company warned investors that its net earnings for the fiscal year ending Jan. 31 would be 5% to 10% lower than the previous year.

The dollar "is definitely a big factor," S&P Capital IQ equity analyst Efraim Levy said in an interview. "But there's also some general retail softness in the U.S. itself."

Investors appeared concerned for a moment, driving down Tiffany shares by 2% in pre-market trading. But the shares rallied later, rising 3.7% to $79.36 at 1:17 p.m.

"As expected, the strong U.S. dollar continued to put pressure on our financial results, specifically from the translation of non-U.S. sales into dollars and on foreign tourist spending in the U.S.," Tiffany CEO Frederic Cumenal said in a statement. "In addition, we believe that volatile, uncertain economic and market conditions in the U.S. and other regions are affecting consumer spending, causing us to maintain a cautious near-term outlook."

One reason for optimism is  lower diamond prices, which improves the company's profit margins because the company does not have to pay as much to acquire the materials for its jewelry.

Diamond prices are down 15% for the year,  Credit Suisse analyst Guillaume Gauville reported Nov. 9 in a research note.

"The lower prices on diamonds does help Tiffany’s, but there’s a lag on the benefit, so I think it will help more in coming quarters than it did in this quarter," Levy said.

For now, the strong U.S. dollar is undermining Tiffany, which would have posted a 4% worldwide sales gain if currency exchange rates hadn't made a difference. When the U.S. dollar is strong, it's more expensive for foreign tourists to shop at the luxury retailer.

Tiffany's net sales fell 2% to $938 million for the third quarter. Sales at stores open at least a year — a figure often examined as a gauge of a retailer's health — fell 5% worldwide for the quarter. When excluding currency effects, same-store sales would have increased by 1%.

Some luxury retailers are feeling similar pains.

For example, Nordstrom recently downgraded its outlook for its current fiscal year, lowering its forecast for sales at stores open at least a year from a range of 3.5% to 4.5% to a new range of 2.5% to 3%.

"I am cautious on luxury retail," Levy said. "The stock market is still pretty close to its highs, so the wealthy segment of the market, you would think, would be (spending) on these items and they're not. They're apparently choosing other areas, whether it's luxury vehicles and autos or other experiences."

Follow Paste BN reporter Nathan Bomey on Twitter @NathanBomey.