The purpose of this article is to discuss the foreign exchange exposure risks facing Tiffany.

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 became profitable again, management offered Tiffany stock to the public in 1987, and in 1989, Mitsukoshi was the individual institutional investor. largest in Tiffany stock. . In 1993, Tiffany entered into an agreement with its Japanese distributor, Mitsukoshi, to assume management responsibilities for 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 even though demand for Tiffany products in Japan fell from 23% to 15% in 1992. However, Tiffany will still be required to pay tariffs of 27% of retail sales net in compensation to Mitsukoshi after this. restructuring.

This change in operations exposed Tiffany directly to exchange rate fluctuations previously supported by Mitsukoshi. Previously, Mitsukoshi made sure that Tiffany never had to worry about exchange rate fluctuations and guaranteed a certain amount of cash flow to Tiffany on 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 made the cash settlement.

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 considers the exchange rate fluctuations that 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 foreign exchange risk. Tiffany bears the risk of any exchange rate fluctuations that occur when it assumes responsibility for establishing the retail price in yen, maintaining inventory in Japan for sale, managing and financing local advertising and publicity programs, and controlling the local Japanese management. This may or may not decrease Tiffany’s sales and revenues 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 Income/(loss) from operations= $2,381

1994 Income/(loss) from operations = $3,888

Table 1 clearly indicates that revenues from Tiffany’s foreign operations decreased even though net sales increased in 1993. The additional economic exposure to which Tiffany is now exposed may further reduce its revenues, which will affect its net sales. long-term.

• Exposure of transactions

The restructuring of Tiffany’s Japanese operations requires Tiffany to repurchase 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 Product Return for Japan Realignment = ($115,000)

1992 Product Return for Japan Realignment = 0

1993 net profit/loss = ($31,513)

1992 Net profit/loss = $6,992

However, Tiffany only managed to repurchase $52.5 million of inventory in July 1993, and Mitsukoshi agreed to accept a deferred payment of $25 million of this repurchased inventory, to be paid in yen quarterly at 6% annual interest on the next 4,000 yen. 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 repurchase its inventory. On top of that, this transaction exposure may also result in significant losses for Tiffany. The reduction in net income in Table 2 assumes that Tiffany actually repurchased all of its inventory prior to July 31, 1993. However, this assumption was not accurate and Tiffany can now only repurchase all of its inventory prior to 1998, which I believe which will lead to a further decrease in net income as they are then required to pay in yen from 1993 to 1998.

third Conclusion and recommendation

I think Tiffany is making the right decision by restructuring its Japanese operations. Tiffany stands to experience big gains by gaining more control in Japan if she plans her strategy wisely. It is important to Tiffany to hedge against volatile yen/dollar exchange rates and they can always purchase options and futures contracts to reduce this risk. I believe that the gains Tiffany stands to gain from gaining control in Japan outweigh the foreign exchange risk, as this risk can be offset by hedging.