With Tiffany, LVMH grows in jewelry and Tiffany gets a chance to shine

The $16.2 billion deal by Louis Vuitton’s parent company LVMH to buy Tiffany & Co. — the biggest ever in the luxury sector — is expected to benefit both parties.

For LVMH, the deal will give the world’s largest luxury goods company a bigger name in fine jewelry and make it a bigger player in the U.S. For Tiffany, which has been criticized for lacking innovation, the deal could enable it to freshen its products and will help it grow overseas.

The deal also comes as demand for diamonds globally is going through a resurgence.

“What’s happening now is this [Tiffany] management team is saying, ‘We have made some progress, but the business is not as strong as we had hoped,'” Oppenheimer senior analyst Brian Nagel said in an interview. “Some of that has come from pressure in the U.S. …. They’re not knocking the ball out of the park with new product.”

“A lot of what they’ve [launched] as new products are just reinterpretations of products they have had for decades,” he added. “They kind of have been running the risk of being your mom’s or grandmother’s jewelry brand.”

Tiffany has come under pressure as French luxury brand Cartier has been investing more in targeting younger shoppers. Cartier parent company Richemont’s jewelry business, which is headquartered in Switzerland, has an operating margin of about twice that of Tiffany.

Based on how he has handled a slew of other luxury brand acquisitions, including of Italian jewelry house Bulgari, LVMH CEO Bernard Arnault is expected to help Tiffany grow outside of the Americas, a market that represents about 41% of the jewelry company’s sales today. Analysts say LVMH could also move Tiffany upmarket, offering items at even steeper prices.

With Bulgari, for example, LVMH helped make the brand a bigger name in watches and helped refresh its flagship stores.

Tiffany, meantime, is in the midst of renovating its iconic flagship store on Manhattan’s Fifth Avenue, which accounts for as much as 10% of annual sales. The remodeling is expected to be complete by the fourth quarter of 2021. And Tiffany has said it will spend 1% to 2% of its worldwide net sales, each year, to finish it.

LVMH could play a major role in the remodeling, Nagel said. He also expects LVMH will add merchandise from some of its other brands, like Louis Vuitton and TAG Heuer, to Tiffany stores over time, making them another distribution point.

“We have an immense respect and admiration for Tiffany and intend to develop this jewel with the same dedication and commitment that we have applied to each and every one of our Maisons,” Arnault said in a statement.

The deal is expected to close in the middle of 2020 if approved by Tiffany shareholders.

Tiffany shares were up nearly 8% Monday morning, trading above $133. LVMH’s offer values Tiffany at $135 a share. Tiffany has a market cap of roughly $16 billion, and its stock has risen more than 55% this year.

Jewelry bouncing back

LVMH is making a bet on a brand that has had its share of rough patches.

Tiffany logged 10 quarters of either flat or negative same-store sales growth between the fourth quarter of 2014 and the third quarter of 2017.

Two years ago, under pressure from an activist investor, Tiffany ousted its CEO Frederic Cumenal, citing its disappointing financial results for the decision.

Under CEO Alessandro Bogliolo, Tiffany laid out six initiatives to turn things around, including stronger marketing and better in-store presentations.

“This transaction, which occurs at a time of internal transformation for our legendary brand, will provide further support, resources and momentum for those priorities as we evolve towards becoming The Next Generation Luxury Jeweler,” Bogliolo said in a statement.

Tiffany also has struggled as the global diamond industry hit a period of volatility, with demand for fine jewelry falling off. But jewelry sales have started to bounce back, thanks to a strong U.S. economy, stronger demand from Chinese millennials and more people buying diamonds for themselves in China, according to consultancy Bain & Co.

Jewelry was one of the strongest performing areas of the luxury industry in 2018, Bain said. The firm has forecast that same-store sales in the $20 billion global market are set to grow 7% this year.

This would bode well for Tiffany and LVMH.

“From Tiffany’s perspective, we see the access to capital, global and high luxury expertise as likely to boost Tiffany’s transition considerably,” Atlantic Equities analyst Daniela Nedialkova said in a note to clients.

“From LVMH’s perspective, Tiffany brings a strong and established jewelry brand, which is more modern and accessible than the brands in LVMH’s current portfolio … and of course carries the promise of upside on the brand’s successful turnaround.”

— CNBC’s Michael Bloom contributed to this reporting.