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Tiffany will focus on domestic business in China as tourist spending weakens

Tiffany & Co. is responding to a decline in spending by Chinese tourists by focusing on building its local Chinese business with the launch of an independent e-commerce site in China and plans to open new stores in Greater China in 2019, according to the company's CEO and Director Alessandro Bogliolo.

"Tourism has been the more volatile and the more difficult part of our business. We've been affected by [a] negative trend in tourism sales, notably to Chinese tourists, but in general, for example, the very strong U.S. dollar towards the end of the year didn't help not only with Chinese but also with the South American tourists and others," Bogliolo said on a March 22 call discussing the company's fourth-quarter and fiscal-year 2018 results with analysts.

Sales attributed to foreign tourists in Europe declined in the fourth quarter and fiscal 2018 as the total net sales declined 3% to $162 million in the fourth quarter and rose 3% to $504 million in fiscal 2018 in the region. The retailer also reported a decline in tourist spending in the fourth quarter in the Americas as net sales in the same period were flat but rose 5% to $2.0 billion in fiscal 2018.

The jewelry retailer credited its 13% net sales growth in fiscal 2018 in the Asia-Pacific to growth in Greater China as well as other countries in the region. Even as sales in the region fell 1% in the fourth quarter, the retailer reported sales growth in mainland China.

While Bogliolo said the retailer will continue to offer its products on third-party websites, he did not provide the specific number of stores the company plans to open in China.

The company said it expects a decline in net earnings in the first half of fiscal 2019 attributed to expected sales pressure from lower foreign tourist spending and a stronger U.S. dollar, and expenses associated with investment spending that began in 2018.

One of the projects Tiffany is investing in is the remodeling of the retailer's New York City flagship store which is expected to wrap up by the end of 2021. The remodeling is expected to increase SG&A expense by 10 cents to 15 cents per share in 2019, 2020 and 2021, up from the increase of 7 cents per share in 2018.

"It's not driven by an expectation of sales disruption, it really comes down to a number of things. It's the incremental rent for the temporary space, it's the accelerated depreciation, a shift associated with the project itself because now that we're transforming elements of the existing store," company CFO and Executive Vice President Mark Erceg said on the same call. "There are certain expense dollars related to some consultants and others that really can't be capitalized, those are the three elements that come into play as it relates to that."

The jewelry retailer will also have the grand opening of a new store in Washington, D.C., in late March.