Tiffany to Pay Elsa Peretti Up to $436 Million Over 20 Years, Maybe More

Variations of the Elsa Peretti “Sevillana” pendant on the Tiffany website.

Since 1974, Tiffany & Co. and Elsa Peretti enjoyed what is arguably the most successful affiliation ever between a retail jeweler and a jewelry designer. The value of that relationship was put to the test in 2012 when Tiffany announced in May that the partnership was in danger of ending.

Peretti jewelry and other branded products accounted for 10 percent of Tiffany’s total net sales for the past three years, the jeweler recently said. In 2011, Tiffany’s net sales totaled $3.6 billion in 2011, which would mean that sales of Peretti pieces totaled $360 million for the same period. If Tiffany were to lose this business it would have created a huge sales hole that would be difficult to fill—particularly during a time when consumers have become much more cautious of their discretionary spending. In addition, for Peretti, 72, it would be difficult for her to find another partner with the reputation and international reach of Tiffany.

So last week they struck a 20-year deal. It included a strengthening of the termination clauses in the agreement, which were rather loose for both parties. But the main portion of the agreement dealt with finances and from the looks of it Tiffany very much wanted Peretti to stay, according to a document filed with the U.S. Securities and Exchange Commission.

The main component of the financial agreement is that Tiffany will pay Peretti 5 percent of total net sales of Peretti jewelry and other branded objects. In 2011, that would have amounted to $18 million. If sales remained flat during the 20-year life of the agreement, this would amount to $360 million, similar to the total of Peretti sales in 2011. However, with modest increases of less than 5 percent, this could easily add another $20 million over the life of the contract.

As part of the agreement, on December 31, 2012, Tiffany paid a one-time fee of more than $47.2 million to Peretti (no less than $40 million after taxes). In addition, Peretti, 72, will receive a basic annual royalty fee of $450,000 for use of Peretti Intellectual Property ($9 million dollars over 20 years). The one-time payment does not reduce future royalties.

So a conservative estimate of the grand total over the life of the contract, including the modest forecast of annual growth per year of Peretti sales, is $436.2 million.

There are other parts of the contract, according to the SEC document, that will add to Tiffany’s financial commitment and may earn additional money for Peretti. This includes the following:

* An increase in non-jewelry, Peretti-licensed products that Tiffany will sell. In the prior 60 months, that amounted to $4 million in net sales.

* A 100 percent increase (in cost) in the amount of “on-hand and on-order” Peretti-licensed objects in Tiffany’s inventory.

* Peretti will receive an additional 2 percent of net sales of Peretti branded objects for fees in respect of certain quality control services that the designer has committed to in the agreement.

* At least every five years, Tiffany agreed to publish a special catalog or folio of Peretti products that is representative of the full collection of Peretti products being offered for sale by Tiffany.

* Tiffany will expand the content of its website to include a special section containing content regarding Peretti and Peretti products, including narrative and visual information regarding the craftsmanship and the creation of Peretti products.

* Promotional expenses paid by Tiffany equal to at least 2.6 percent of net Peretti sales.

* Under the agreement, Peretti isn’t obligated to make promotional appearances on behalf of Tiffany. However, if she did make an appearance, the luxury jeweler will pay round-trip, first-class air transportation (including to and from Europe) and first-class hotel accommodations for Peretti and another person.

* Tiffany will establish retail prices for Peretti products in accordance with its usual practices. However, under the agreement, Tiffany may reduce retail prices by 20 percent in order to achieve an overall average gross margin for Peretti objects of no greater than 50 percent.

* Peretti products will not be subject to advertised promotional pricing or inventory liquidation events.

Please join me on the Jewelry News Network Facebook Page, on Twitter @JewelryNewsNet and on the Forbes Web site.

Variations of the Elsa Peretti “Sevillana” pendant on the Tiffany website.

Since 1974, Tiffany & Co. and Elsa Peretti enjoyed what is arguably the most successful affiliation ever between a retail jeweler and a jewelry designer. The value of that relationship was put to the test in 2012 when Tiffany announced in May that the partnership was in danger of ending.

Peretti jewelry and other branded products accounted for 10 percent of Tiffany’s total net sales for the past three years, the jeweler recently said. In 2011, Tiffany’s net sales totaled $3.6 billion in 2011, which would mean that sales of Peretti pieces totaled $360 million for the same period. If Tiffany were to lose this business it would have created a huge sales hole that would be difficult to fill—particularly during a time when consumers have become much more cautious of their discretionary spending. In addition, for Peretti, 72, it would be difficult for her to find another partner with the reputation and international reach of Tiffany.

So last week they struck a 20-year deal. It included a strengthening of the termination clauses in the agreement, which were rather loose for both parties. But the main portion of the agreement dealt with finances and from the looks of it Tiffany very much wanted Peretti to stay, according to a document filed with the U.S. Securities and Exchange Commission.

The main component of the financial agreement is that Tiffany will pay Peretti 5 percent of total net sales of Peretti jewelry and other branded objects. In 2011, that would have amounted to $18 million. If sales remained flat during the 20-year life of the agreement, this would amount to $360 million, similar to the total of Peretti sales in 2011. However, with modest increases of less than 5 percent, this could easily add another $20 million over the life of the contract.

As part of the agreement, on December 31, 2012, Tiffany paid a one-time fee of more than $47.2 million to Peretti (no less than $40 million after taxes). In addition, Peretti, 72, will receive a basic annual royalty fee of $450,000 for use of Peretti Intellectual Property ($9 million dollars over 20 years). The one-time payment does not reduce future royalties.

So a conservative estimate of the grand total over the life of the contract, including the modest forecast of annual growth per year of Peretti sales, is $436.2 million.

There are other parts of the contract, according to the SEC document, that will add to Tiffany’s financial commitment and may earn additional money for Peretti. This includes the following:

* An increase in non-jewelry, Peretti-licensed products that Tiffany will sell. In the prior 60 months, that amounted to $4 million in net sales.

* A 100 percent increase (in cost) in the amount of “on-hand and on-order” Peretti-licensed objects in Tiffany’s inventory.

* Peretti will receive an additional 2 percent of net sales of Peretti branded objects for fees in respect of certain quality control services that the designer has committed to in the agreement.

* At least every five years, Tiffany agreed to publish a special catalog or folio of Peretti products that is representative of the full collection of Peretti products being offered for sale by Tiffany.

* Tiffany will expand the content of its website to include a special section containing content regarding Peretti and Peretti products, including narrative and visual information regarding the craftsmanship and the creation of Peretti products.

* Promotional expenses paid by Tiffany equal to at least 2.6 percent of net Peretti sales.

* Under the agreement, Peretti isn’t obligated to make promotional appearances on behalf of Tiffany. However, if she did make an appearance, the luxury jeweler will pay round-trip, first-class air transportation (including to and from Europe) and first-class hotel accommodations for Peretti and another person.

* Tiffany will establish retail prices for Peretti products in accordance with its usual practices. However, under the agreement, Tiffany may reduce retail prices by 20 percent in order to achieve an overall average gross margin for Peretti objects of no greater than 50 percent.

* Peretti products will not be subject to advertised promotional pricing or inventory liquidation events.

Please join me on the Jewelry News Network Facebook Page, on Twitter @JewelryNewsNet and on the Forbes Web site.