Tiffany and Co concluded an agreement with its Japanese Distributor, Mitsukoshi Limited. Tiffany & Co Japan assumed management responsibilities of the operation of 29 boutiques and was now responsible for millions of dollars of inventory that was previously sold wholesale to Mitsukoshi Limited. Tiffany & Co Japan now faces the risk of foreign currency fluctuations previously borne by Mitsukoshi Limited. Tiffany & Co Japan must now make the decision between basic hedging alternatives: Entering into forward agreements to sell yen for dollars or purchasing a yen put option.
As Tiffany & Co’s receivable cash flows are now denominated in ¥ due at future ...view middle of the document...
’s sales figures are seasonal in nature following the FY1992 trend it can be established that 21% of total sales occur in the 3rd quarter giving $ 21,000,000 as total sales in Q3.
The slowing Japanese economy following a boom period of the 1980’s and early 1990’s has resulted in Japanese consumers becoming more cautious about spending, which has slowed demand for Tiffany & Co.‘s luxury items. Appreciation of the Yen/Dollar in the period from 1983-1993 shown in Appendix 1 has now lead to evidence of overvaluation from a purchasing power parity (PPP) perspective of the yen shown in Exhibit 7 of case. The Japanese Jewellery market has a value of $20 billion of which Tiffany & Co. currently has a 1% market share leaving potential growth in market share despite slowed demand.
As part of the arrangement Mitsukoshi would still receive 27% of net retail sales in compensation for providing boutique facilities, sales staff, collection of receivables, and security for store inventory. This will give Tiffany access to Mitsukoshi’s established sales networks although Tiffany & Co. would take over marketing responsibilities in Japan from Mitsukoshi. Mitsukoshi sold Tiffany & Co. merchandise at substantial premium that Tiffany management believe from which a retail price reduction of 20%-25% will likely result in a substantial increase in unit volume of jewellery sales. Due the significant number of Tiffany Boutiques operating in Japan, future openings there were expected to occur at a minimal rate in the near-term. In Tokyo, Tiffany boutiques could be established only in Mitsukoshi’s stores and Tiffany- brand jewellery was exclusive to these boutiques, however Tiffany-Japan reserved the right to open a single flagship store.
Tiffany and Co. is a profitable firm despite posting a loss of ($31,513,000) in the first half of FY 1993 which can be attributed to the repurchasing of inventory from Mitsukoshi. The repurchase of inventory has also has had an impact on gross margin which decreased from 49.4% in 1991 to 48.7% in FY 1992 much of which can be attributed to decline Japanese wholesale purchases from 23% of Tiffany’s total sales in FY 1991 to 15% in FY 1992. Capital expenditure has decreased from 41.4m in FY 1991 to 22.8m in FY 1992 with an expected further drop to 18.0m in FY 1993 this reduction highlights expected limited expansion operations in Japan. Tiffany & Co has increased its current assets in the first half of FY1993 from $330,676,000 in FY 1992 to 330,676. Cash and short term assets have decreased from 6,672,000 in FY 1992 to $6,665,000 in the first half of FY 1993. Inventories have increased in the first half of FY 1993 due to repurchase of Japanese inventory. Significant increases to accounts payable is the primary reason for the increase to total current liabilities. Due to the loss posted in the first half of FY 1993 no income taxes are...