Luxury brands are betting shoppers will buy into the notion that their products are worth top dollar this festive season and recent quarterly results from Tiffany & Co. seem to support that theory.
Tiffany reported a larger-than-expected profit in the third quarter and revised its outlook for the year as consumers eye upscale jewelry shop windows ahead of the holidays.
Tiffany stock jumped nearly 6% after the company reported strong overseas sales, combined with slowly improving sales in the recession-ravaged U.S.
"We were pleased to see that the rate of sales decline in the U.S. lessened as the year progressed," said Tiffany CEO Michael Kowalski. "At the same time, many countries in Asia-Pacific and Europe achieved considerably better-than-expected sales."
The positive results came in one day after Tiffany's largest U.S. competitor Zale Corp. reported smaller losses than anticipated and just one week after upscale U.S. department store Saks Inc. posted a surprise profit for the latest quarter.
Similarly, U.S. handbag giant Coach Inc. recently announced better growth projections for the year.
Tiffany, like all retailers, has struggled during the global economic downturn as consumers tightened their purse strings. As a result, North American big box, discount and grocery stores have resorted to drastic prices cuts to lure shoppers. Metro and Loblaws, Sears and Walmart Canada have all gone head-to-head in price wars.
Luxury brands however, have done quite the opposite. Instead, exclusive shops have opted to shrink inventory levels to avoid offering steep discounts. Tiffany's inventories were down 6% from year-earlier levels.
"This reduction is consistent with management's objective, which is to reduce inventories by a single-digit percentage in the full year," Tiffany's third-quarter report released Wednesday said.
And the strategy seems to be working. So much so, Tiffany raised its outlook for full-year profit from continuing operations to between $1.88-$1.98 US per share, up from $1.65-$1.75 US per share.
John Torella, a senior partner at J.C. Williams Group Limited retail consulting firm, said trimming stock is one of the most common ways luxury retailers protect their bottom line.
"Any discounting runs the risk of jeopardizing the brand," he told QMI in a telephone interview from Toronto.
Torella pointed to Canadian high-end stores such as menswear retailer Harry Rosen and Birks Canada jewelry and gifts who are working in the same vein of slashing operating costs and reducing inventories. The idea is to cut costs while keeping the shopping experience consistent, he said.
With lower inventories retailers are also adding pressure on consumers to shop early this holiday season, creating a fabricated buying frenzy around the hottest items.
"As you get deeper into the Christmas season...you run the risk they're not going to have inventory," Torella said.
"But there's a fine line because you also give up, to a certain degree, some sales opportunities."
