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Dec 22, 2016

S3 BLACKLIGHT: Is President-Elect Trump Putting Coal in Tiffany’s Stockings?

Tiffany & Co.’s (TIF US) sales have decreased from a recent high of $4.2 billion in 2015 to $4.1 billion in 2016 and $4.0 billion projected for 2017. A majority of Tiffany’s sales are now generated abroad with only 47.5% in the Americas, 37.5% from Asia, 12.6% from Europe and 2.4% from other countries. The economic slowdown in the BRIC countries has had a twofold effect on Tiffany’s revenues, reducing both international sales as well as tourist sales in the Americas.

Tiffany’s flagship New York City 5th Avenue store’s sales makes up 10% of Tiffany’s total sales, with 40% of that total coming from tourist foot traffic. In addition to weaker tourist activity in general, the store has been affected by barricades and protestors spilling over from its next door neighbor, The Trump Towers. With 30% of Tiffany’s worldwide sales occurring in the 4th quarter, and in particular the holiday shopping season, any disruption to sales in its flagship store will have an effect on its overall bottom line.

Besides President-Elect Trump’s residence putting a damper on sales, his economic and trade policies will probably lead to a stronger U.S. dollar which in turn will negatively affect Tiffany’s bottom line revenues as well. International sales, which have recently grown to over half of Tiffany’s total revenues, will feel the double hit of lower overall luxury good spending and foreign exchange rate devaluation.

Tiffany is looking to offset some of these headwinds with an increased focus on e-commerce which only makes up 6% of their overall sales today, but with added marketing will hopefully rise to the 10% level. Marketing will also play a large role in refocusing Tiffany’s image away from lower end “trinkets” and silver jewelry and into high end statement jewelry pieces which although they have lower margins, may reinvigorate total sales.

Tiffany’s short interest is up 73% this year, increasing $548 million to $1.3 billion, which is a historical high for the stock. Tiffany’s stock price has had a roller coaster ride in 2016 even though it’s only up 3% for the year. We’ve seen a six month drop of 25% to a year to date low in June and a six month increase of 48% to a year to date high in December. Short interest hit the $1 billion mark for the first time at the end of July as Tiffany’s stock price began rebounding off its June year to date low of $57.48/share. Short interest continued trading in the $1.1 billion to $1.2 billion range from August to November as Tiffany’s stock price inched up to its December year to date high of $85.06/share. Tiffany’s short interest is up 7% this month as short sellers anticipate a weaker than projected holiday sales season. 

If we see TIF short covering in 2017, December’s spike in short selling was more technical in nature as traders were looking for a temporary reversal after TIF’s stock price hit $85 and needed consolidation in the high $70’s before continuing its rally and testing its next resistance point around $93.

If we do not see significant short covering in early 2017 we can assume that the spike in short interest is more fundamental in nature and investors are seeing stiffer headwinds than expected in the luxury goods sector and specifically in a lower margin player who is trying to re-establish its brand such as Tiffany’s.

TIF stock borrows are still trading at general collateral levels, the cheapest stock borrow rates for the easiest to borrow stocks. The $1.3 billion in outstanding stock borrows represents just over half the available shares there are to borrow on the street and it would take a tremendous increase in short demand for the cost to borrow TIF stock to increase in the near future. Rates should stay at G.C. levels until short interest hits the $2 billion mark.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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