The purpose of this article is to discuss the exchange rate exposure risks Tiffany faces.
Tiffany & Co was an internationally renowned luxury goods retailer, designer, manufacturer and distributor. Tiffany was acquired by Avon Products in 1979, but was later bought back by its own management in 1984. After the company returned to profitability, management offered Tiffany stock to the public in 1987 and in 1989, Mitsukoshi was the individual institutional investor. largest in Tiffany shares. . In 1993, Tiffany entered into an agreement with its Japanese distributor, Mitsukoshi, to assume management responsibilities at its wholly owned subsidiary, Tiffany & Co. Japan Inc.
I. Exchange rate fluctuations in 1993
Tiffany restructured its Japanese operations by selling directly to the Japanese market instead of selling to Mitsukoshi and Mitsukoshi selling to Japan. Tiffany wanted more control over its operations in Japan despite the fact that demand for Tiffany products in Japan declined from 23% to 15% in 1992. However, Tiffany will still be required to pay fees of 27% of retail sales net in compensation to Mitsukoshi after this. restructuring.
This change in operations exposed Tiffany directly to the exchange rate fluctuations that Mitsukoshi previously endured. Previously, Mitsukoshi ensured that Tiffany never had to worry about exchange rate fluctuations and guaranteed a certain amount of cash flows to Tiffany in its wholesale transactions. Mitsukoshi assumed the risk of any exchange rate fluctuations that occurred between the time he purchased the inventory from Tiffany and the time he finally settled in cash.
Tiffany should be concerned about exchange rate fluctuations because the exchange rate between the yen and the dollar is very volatile. Tiffany faced additional risk in restructuring its Japanese operations, as Mitsukoshi no longer controls Tiffany’s sales in Japan.
I think it is very important that Tiffany consider the exchange rate fluctuations it will be exposed to before deciding to take full control of its subsidiary store in Japan.
II. Extent of Tiffany’s exposure to currency risk
• Economic exposure
Tiffany is now exposed to currency risk. Tiffany has to bear the risk of any exchange rate fluctuations that occur when it takes responsibility for setting the retail price in yen, holding inventory in Japan for sale, managing and financing local advertising and advertising programs and control local Japanese management. This may or may not decrease Tiffany’s sales and income from its foreign operations. Table 1 below shows the performance of Tiffany’s foreign operations from 1992 to 1993.
Table 1: Tiffany Co Foreign Operations ($000)
1993 Net Sales= $71,838
1994 Net Sales= $52,851
1993 Profit/(loss) from operations= $2,381
1994 Profit/(loss) from operations = $3,888
Table 1 clearly indicates that income from Tiffany’s foreign operations declined even though net sales increased in 1993. The additional economic exposure Tiffany is now exposed to may further reduce its income, which will affect its net sales. long-term.
• Exposure of transactions
The restructuring of Tiffany’s Japanese operations requires Tiffany to buy back its inventory, which will significantly decrease its net income. As can be seen in Table 2 below, Tiffany is said to have repurchased its inventory for $115 million in 1993.
Table 2: Tiffany Co Second Quarter Income Statement ($000)
1993 Return of product for Japan realignment = ($115,000)
1992 Return of product for Japan realignment = 0
1993 net profit/loss = ($31,513)
1992 Net profit/loss = $6,992
However, Tiffany only succeeded in repurchasing $52.5 million of inventory in July 1993, and Mitsukoshi agreed to accept a deferred payment of $25 million on this repurchased inventory, to be repaid in yen quarterly at 6% interest per year over the next 4, 5 years. The remaining inventory of $62.5 million will be repurchased during the period ending February 28, 1998, and payment for this deposit will be made in yen.
The exchange rate fluctuation will definitely affect Tiffany’s ability to buy back its inventory. On top of that, this transaction exposure may also lead to significant losses for Tiffany. The reduction in net income in Table 2 assumes that Tiffany actually repurchased all of its inventory before July 31, 1993. However, this assumption was not accurate and Tiffany can now only repurchase all of its inventory before 1998, which I believe which will lead to a further decrease in net income, since they are then required to pay in yen from 1993 to 1998.
third Conclusion and recommendation
I believe that Tiffany is making the right decision in restructuring its Japanese operations. Tiffany could experience big gains from gaining more control in Japan if she plans her strategy wisely. It is important to Tiffany to hedge against the volatile exchange rates between the yen and the dollar and they can always buy options and futures contracts to reduce this risk. I believe that the gains that Tiffany can gain from gaining control in Japan outweigh the currency risk, as this risk can be offset by hedging.