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. 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.

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Tiffany and Elsa Peretti Sign 20-Year Agreement

Elsa Peretti

Tiffany & Co. and Elsa Peretti have reached an agreement to continue their highly successful relationship for another 20 years, according to a U.S. Securities and Exchange Commission filing released Wednesday.

Under the agreement, the international luxury retail jeweler will continue to be the exclusive sales outlet for jewelry created by the world renowned jewelry designer. Since 1974, Tiffany has been the sole licensee for the intellectual property rights (Peretti Intellectual Property) necessary to make and sell Peretti-designed products under her trademarks.

The new agreement was finalized on December 27, 2012, according to the 8K SEC filing. Under the amended terms, “Peretti grants Tiffany an exclusive license, in all of the countries in which Peretti-designed jewelry and products are currently sold, to make, have made, advertise and sell these items, which are made in conformance to Peretti’s designs and bear her trademarks.”

Peretti’s jewelry—which specializes in relatively simple figures, such as open hearts, teardrops and rounded shapes that are striking in its execution—is among Tiffany’s most popular brands, accounting for 10 percent of the retailer’s net sales in 2009, 2010 and 2011.

As part of the agreement, on December 31, 2012, Tiffany paid a one-time fee of more than $47.2 million to Peretti. 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) and 5 percent of net sales of Peretti jewelry. If Peretti jewelry continues to amount to 10 percent of total net sales for Tiffany, this could amount to another $18 million per year for Peretti. The one-time payment does not reduce future royalties.

In May, 2012, it appeared that the long-time relationship between the two parties was coming to an end. In an SEC filing, Tiffany said the two sides were unable to agree on a price for Tiffany to purchase the intellectual property rights of Peretti. Peretti’s advisors told Tiffany that she’d “consider exercising her right to terminate the License Agreement,” according to the May 23 document. Under the terms of the agreement at the time, either party could terminate the agreement with written notice.

The new agreement is terminable by Peretti “only in the event of a material breach by Tiffany or upon a change of control of Tiffany,” according to the SEC filing. Tiffany can terminate the agreement “only in the event of a material breach by Ms. Peretti or following an attempt by Ms. Peretti to revoke the exclusive license.”

If the agreement is terminated, Tiffany would have an exclusive right for one year to sell any Peretti-designed products on hand or on order. For at least an additional six months afterward, Tiffany would have the exclusive right to sell any Peretti-designed products on hand, subject to Peretti’s right to purchase the remaining products.

In addition, Peretti retains ownership of the Peretti Intellectual Property and exercises approval and consultation rights with respect to important aspects of the promotion, display, manufacture and merchandising of licensed products. The agreement further requires Tiffany to display the licensed products in stores, to devote a portion of its advertising budget to the promotion of Peretti products, to increase the inventory of non-jewelry licensed products (that inventory averaged approximately $4 million during the past 60 months) and to protect the use and registration of the Peretti Intellectual Property.

During the term of the agreement, Peretti may not sell, lease or otherwise dispose of the Peretti Intellectual Property unless it has the approval of Tiffany. The agreement also provides that any heir, estate, trustee or permitted successor or assignee of Peretti will be bound by its terms.

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Tiffany in Stalled Buyout Talks With Elsa Peretti

Elsa Peretti by Francesco Scavullo,
originally published in
Francesco Scavullo on
Beauty in 1976.

Jewelry designer, Elsa Peretti, who has created pieces for Tiffany & Co. for nearly four decades, is attempting to end her relationship with the luxury retail jeweler, according to a U.S. Securities and Exchange Commission filing Wednesday.

Peretti’s jewelry—which specializes in relatively simple figures, such as open hearts, teardrops and rounded shapes that are striking in its execution—is among Tiffany’s most popular brands, accounting for 10 percent of the retailer’s net sales in 2009, 2010 and 2011. Peretti, 72, receives a royalty for Tiffany’s use of her property rights, the retailer said in the 8k filing. Since 1974, Tiffany has been the sole licensee for the intellectual property rights (Peretti Intellectual Property) necessary to make and sell Peretti-designed products under her trademarks.

The two sides cannot agree on a price for Tiffany to purchase the intellectual property rights of Peretti, according to the 8k report filed by Tiffany in advance of its first quarter earnings report Thursday. If an agreement can’t be reached, Peretti’s advisors told Tiffany that she’d “consider exercising her right to terminate the License Agreement.” Either party can terminate the agreement with written notice.

Elsa Peretti open heart pendant in 18k rose gold.

“If Tiffany ceases to have an exclusive license to use the Peretti Intellectual Property, … operating results may be adversely affected,” Tiffany said in the report.

In the filing, Tiffany said that it “made a firm offer to Ms. Peretti in an amount that is based upon the value of the Peretti Intellectual Property to Tiffany.”

If Peretti exercises her right to terminate the license agreement, Tiffany said it would retain all rights for six months, including the right to make Peretti-designed products, following the date of notice of termination. After the six-month period, Tiffany would have a year to sell any Peretti-designed products it has on hand or on order. Afterward, Tiffany would still be permitted to sell Peretti-designed products it has on hand, subject to Peretti’s right to purchase these remaining products.

Under the current license agreement, Peretti retains ownership of Peretti Intellectual Property and exercises approval rights in regards to promotion, display, manufacture and merchandising of Peretti-designed products. In addition, Tiffany is contractually required to devote a portion of its advertising budget to the promotion of the Peretti-designed products.

Tiffany said in its report that the separation provisions in the contract would soften the blow, at least short-term. For example, marketing and merchandising requirements to promote and sell Peretti designs could be moved to other existing products. And, Tiffany said it would be “relieved” of advertisement and royalty obligations.

But Tiffany still warns of the possibility of difficult days ahead if an agreement between the two sides can’t be reached.

“Tiffany has enjoyed significant success and profitability from its longstanding relationship with Ms. Peretti, and there can be no assurance as to whether or the extent to which such mitigation efforts would offset the results realized under the License Agreement.”