Tiffany: A Luxury That Louis Vuitton Can’t Afford
Last week, French luxury goods retailer LVMH Moet Hennessy (OTC: LVMUY), better known as Louis Vuitton, announced it is terminating its offer to acquire American jeweler Tiffany & Co. (NYSE: TIF). The company said it received a letter from the French government asking it to delay closing this transaction due to ongoing trade talks with the United States.
I’m not surprised this deal may not happen. Last year, I slammed this deal when it was first announced. I said then that I thought Louis Vuitton was paying too much for Tiffany.
My reasoning was simple. Tiffany was already overvalued given its recent sales performance. There was no compelling reason for Louis Vuitton to pay a premium to buy the company.
Since then, TIF has traded above the $120 buyout price proposed by Louis Vuitton. However, TIF fell below $110 after the news broke last week that the deal is off.
I think TIF may have a lot farther to fall than that. Before this deal was proposed, TIF was trading near $90. I see no reason why it should not return to that level if this deal really is dead.
Apparently, not everyone involved is so sure this transaction cannot be resurrected. Tiffany announced that it will sue Louis Vuitton to complete the transaction.
It could be years before this legal squabble is settled. Tiffany’s lawyers will argue that the company has no control over trade tariffs imposed by the United States. Louis Vuitton’s attorney will respond that it has no choice but to cede to the wishes of its federal government.
The longer the global trade war drags on, the riskier Tiffany looks.
But the most pressing issue right now is the coronavirus pandemic, which has greatly reduced in-store traffic at most Tiffany locations. During the quarter ended July 31, worldwide net sales decreased 29% compared to the same period last year.
It isn’t just Tiffany that is suffering. Sales of luxury goods of all sorts have plummeted over the past six months. The type of jewelry sold by Tiffany is not bought online nor shipped through the mail.
Further proof of that arrived in my inbox a few days ago. The sender was soliciting my interest in a private placement offering. There is nothing unusual about that given my role as the chief investment strategist for Personal Finance.
What is unusual is the nature of the offering. The deal in question is a collateralized debt obligation (CDO), using “luxury timepieces” as collateral for the loans.
In short, the sponsor of this offering is asking well-heeled investors to act as a virtual pawnshop for commercial watch dealers. If they don’t repay the loan, you can sell their merchandise to recoup your investment.
There’s just one hitch. Given the state of the global economy, demand for watches that cost $20,000 and more is on the wane. If thousands of them were dumped on the market at the same time, prices would fall even farther.
Let’s face it, if they could, these dealers would obtain a conventional business loan from their local bank using their inventory as collateral. The fact that they are not is all you really need to know about this deal.
It also says a lot about the state of the luxury goods market in the United States. Conspicuous consumption is out, at least until the coronavirus pandemic has been fully contained.
To be clear, American consumers are still breaking out their wallets. In fact, spending on retail and food services in July of this year was greater than in July of last year.
Across the board, sales were higher in July for most retail categories with one notable exception. Consumer spending at clothing and accessories stores, which includes high-end retailers, was down 20% in July following a 26% decline in June.
Some of that decrease in demand can be attributed to millions of Americans telecommuting. No need to update the wardrobe when you can work from home in your jammies. But that category also includes Tiffany and stores that sell luxury timepieces.
However, it could prove erroneous to assume that sales of jewelry, luxury timepieces, and formal clothing will revert to their previous levels once the coronavirus pandemic is over. People are learning to get by with less, and they may want to keep it that way.
For that reason, the best investment opportunities may be in businesses that enable the type of retail spending that will continue to grow. It just so happens that I recently discovered a little known company that could appreciate more than 2,000% in the years to come.
I doubt you’ve heard of this company, but I’m sure you’re very familiar with its business partner. The two of them are teaming up to revolutionize the retail banking sector. I’ve written a report that explains how they plan to accomplish that audacious goal.
It may be too late for the likes of Louis Vuitton and Tiffany to undo the mess they have made, but it’s not too late for you to get on the ground floor of the next great investment opportunity.
To access this free report, click here.