Tiffany & Co

The history of Tiffany & Co goes long way back to 1837, when they were the infamous retailer, designer, manufacturer and distributor of luxury items. The company started its initial niche product mostly in jewellery, especially diamonds. In 1979, Avon, a well known cosmetics marketer acquired Tiffany and expanded the businesses to a larger middle class market. Despite having higher sales resulted from the strategy, that is door-to-door marketing, operating expenses also increased but significantly higher as a percentage of sales. This strategy was not working for Avon and decided to put Tiffany up for sale. Offers by the management of Tiffany’s were the most attractive the deal was in form of Leverage Buy Out (LBO). The equity shares distributed to three key investors that are Management (20%), Investcorp (49.8%) and lastly General Electric Credit Corporation (GECC) (25.7%). Although the LBO ended up well initially, the company was tight up with very tight cash flow. The management aware that the company has big potential in the future but require a lot of cash, thus, resorted to public offering at the price of USD15 per share in 1987. Tiffany had open few retail stores in marked location starting from 1986 in London, expanded to Switzerland, Germany, Hong Kong, and generally across the globe few years later.  However, in Japan, Tiffany was unable to really capture the market where the sales from the country only accounted about 1% of total Japanese jewellery market. To make things worse, when the Japan’s economy slowed in the early 90s, Tiffany’s sales followed through, this was then when the management decided to restructure its Japanese operations. Tiffany’s entered to a new agreement with Mitsukoshi in 1993– principal retailer of Tiffany’s products in Japan, purchasing from Tiffany’s on wholesale basis to have a greater control over their sales in Japan. With the new agreement, Mitsukoshi was no longer an independent retailer of Tiffany’s products but still received fees of 27% of net retail sales as an exchange of providing the facilities, staff and store inventory. Tiffany in on the other hand had to face the risk of currency exchange, which was previously bore by Mitsukoshi and historical data showed that the currency risks can be very volatile. This has influenced the management to hedge the risk by entering into either forward contract or put option. If the US dollar depreciates, the management should be worried, but if things go the other way around, the management should consider the hedging management in the short term. The forward contract can be effective to give certainty to the management by selling Yen for dollars at a pre-determined price in the future. From the tables given, 1 month forward contract stood at JPY106.355 per dollar and 3 months contracts at JPY106.33, which basically involves with no transaction costs. Meanwhile, put option gives Tiffany the right but not obligation to sell Yen for dollars at a pre-determined price for a specified time period is if the Yen depreciates further against the dollar. If Tiffany pays for the strike price of JPY93.5 with 3 months maturity, the premium will reduce earnings by almost 1.7%.