Ringflation: Rising commodities may hurt Tiffany

Published Mon, May 2 20163:48 PM EDT

Evelyn Cheng @in/evelyn-cheng-53b23624 @chengevelyn

Rising prices for gold, platinum, silver and soon, diamonds, will start to hit the bottom lines for Tiffany & Co. and other jewelers, according to one Wall Street analyst. "We believe the commodity cost benefit to retailers will 'wind down' in about 12 months, and will likely be a modest headwind to margins in 2H17 (less than 20 basis points for both companies)," Wells Fargo senior analyst Ike Boruchow said in a Sunday note on Tiffany and Signet Jewelers. "To be specific, platinum and gold are both up 15-20 percent this year, while silver is up 25 percent," he said in the note. "Further, the major diamond indices are showing slight inflation YTD, which is important, given that these gems likely account for 40-45 percent of merchandise costs for jewelers." Gold topped $1,300 an ounce Monday morning to hit its highest level in more than a year, going back to last January. The precious metal is up more than 20 percent for the year so far, after three years of sharp declines. Similarly, the diamond index, which tracks prices from the International Diamond Exchange, is up more than 1 percent this year after four straight years of declines, according to FactSet. Using a weighted average of diamonds, gold, silver and platinum, and accounting for a lag for hedging, Boruchow calculates commodity costs will provide a 150 basis-point boost to Tiffany's gross margin this year. But that drops to just 17 basis points next year. In the fourth quarter of 2017 specifically, the price gains would become a negative drag of 33 basis points on gross margin for the company. Anthem Blanchard, founder and CEO of Anthem Vault, expects gold prices to hit $1,500 by the end of the year, and silver to top $20 by that time. The catalyst for those gains are the "real negative interest rate environment, combined with a lot of uncertainty out of central banks," he told CNBC. In addition, "higher gold prices probably mean more uncertainty, (resulting in) people saving more and spending less on jewelry," he said. Read More Gold's surge is making it feel a lot like late 2007 Elevated prices for gold and other input costs would result in "eliminating the primary driver of Tiffany's gross margins over the past few years," Boruchow said. He has a "sell" rating on the stock and notes negative impact from reduction of leverage and currency changes. On the other hand, he has a "buy" rating on Signet given M & A synergies and fixed cost leverage.

Akio Kon | Bloomberg | Getty Images

Rising prices for gold, platinum, silver and soon, diamonds, will start to hit the bottom lines for Tiffany & Co. and other jewelers, according to one Wall Street analyst.

"We believe the commodity cost benefit to retailers will 'wind down' in about 12 months, and will likely be a modest headwind to margins in 2H17 (less than 20 basis points for both companies)," Wells Fargo senior analyst Ike Boruchow said in a Sunday note on Tiffany and Signet Jewelers.