Tiffany & Co. (NYSE:TIF) today reported its financial results for the three months (“second quarter”) ended July 31, 2014. Net earnings rose 16% due to a 7% increase in worldwide net sales and a higher gross margin. Management increased its earnings forecast for the current fiscal year by five cents per share.

Michael J. Kowalski, chairman and chief executive officer, said, “These healthy second quarter results reflected solid sales growth in our stores, particularly in the Americas and Asia-Pacific regions. In addition, an improved gross margin was an important contributor to the earnings growth. We were also pleased with solid performance across most product categories, ranging from the success of perennial classics in fine, statement and engagement jewelry to our newest ATLAS collection, and we are excited about the current debut of our new TIFFANY T jewelry collection.”

In the second quarter:

  • Worldwide net sales increased 7% to $993 million. On a constant-exchange-rate basis excluding the effect of translating foreign-currency-denominated sales into U.S. dollars (see “Non-GAAP Measures”), worldwide net sales increased 7% and comparable store sales increased 3% largely due to growth in the Americas and Asia-Pacific regions.
  • Net earnings rose 16% to $124 million, or $0.96 per diluted share, compared with $107 million, or $0.83 per diluted share, in last year’s second quarter, benefiting from the sales growth and a higher gross margin.

In the six months (“first half”) ended July 31, 2014:

  • Worldwide net sales rose 10% to $2.0 billion. On a constant-exchange-rate basis, (see “Non-GAAP Measures”), worldwide net sales rose 11% due to sales growth in all regions and comparable store sales rose 7%.
  • Net earnings increased 31% to $250 million, or $1.92 per diluted share, from $190 million, or $1.48 per diluted share, in the first half of last year. Excluding pre-tax expense of $9 million, or $0.05 per diluted share, that was recorded in last year’s first quarter for staff and occupancy reductions (see “Non-GAAP Measures”), net earnings rose 27%.

Net sales highlights by region were as follows:

  • In the Americas, total sales rose 9% in the second quarter to $484 million and increased 8% in the first half to $922 million. On a constant-exchange-rate basis, total sales rose 10% in the quarter and 9% in the half reflecting geographically-broad-based growth across most of the region, while comparable store sales were up 8% in both periods.
  • In Asia-Pacific, total sales increased 14% in the second quarter to $237 million and rose 15% in the first half to $498 million. On a constant-exchange-rate basis, total sales rose 13% in the second quarter and 16% in the first half with comparable store sales up 7% and 9%, respectively, due to strong growth in Greater China and Australia.
  • In Japan, total sales declined 13% in the second quarter to $119 million (a 10% decline on a constant-exchange-rate basis). As expected, the second quarter’s sales decline reflected a softening of customer demand after exceptionally strong 20% total sales growth in the first quarter (a 29% increase on a constant-exchange-rate basis) when customers had accelerated their purchases in anticipation of an increase in Japan’s consumption tax on April 1st. Management noted that, after a substantial sales decline in April, the Company experienced sequentially smaller rates of monthly sales declines during the second quarter. In the first half, total sales rose 4% to $293 million (a 10% increase on a constant-exchange-rate basis). Comparable store sales on a constant-exchange-rate basis declined 13% in the quarter and increased 9% in the half.
  • In Europe, total sales increased 8% in both the second quarter and first half to $120 million and $221 million, respectively. On a constant-exchange-rate basis, total sales increased 1% in the quarter and 2% in the half; comparable store sales declined 8% and 5%, respectively, reflecting weak performance in the U.K. and most of continental Europe.
  • Other sales rose 28% in the second quarter to $33 million and 34% in the first half to $71 million. The increases were primarily due to retail sales growth reflecting the opening of the first Company-operated TIFFANY & CO. store in Russia, as well as 2% and 10% comparable store sales growth in the United Arab Emirates.
  • During the second quarter, Tiffany opened one store in the Americas in Aventura, Florida; it has opened five stores in the first half. At July 31, 2014, the Company operated 293 stores (122 in the Americas, 72 in Asia-Pacific, 55 in Japan, 38 in Europe, five in the U.A.E. and one in Russia), versus the prior year’s 277 stores (116 in the Americas, 67 in Asia-Pacific, 54 in Japan, 35 in Europe and five in the U.A.E.).

Other financial highlights:

  • Gross margin (gross profit as a percentage of net sales) increased to 59.9% in the second quarter and 59.1% in the first half, from 57.5% and 56.8% in the respective prior-year periods. The increases largely reflected favorable product costs and price increases taken across all product categories and regions, and, to a lesser extent, sales leverage on fixed costs resulting from the increase in worldwide net sales.
  • SG&A (selling, general and administrative) expenses rose 9% in the second quarter primarily due to increases in labor and other store-related costs, as well as higher marketing spending, and SG&A expenses rose 7% in the first half. Excluding $9 million of staff and occupancy reduction expenses recorded in last year’s first quarter, SG&A expenses in the first half rose 8%.
  • The operating margin (earnings from operations as a percentage of net sales) rose to 21.0% in the second quarter due to the higher gross margin, and rose to 20.9% in the first half due to the higher gross margin and sales leverage on operating expenses.
  • The effective tax rate was 35.5% in the second quarter and 35.3% in the first half, versus 34.2% and 34.5% in the respective prior-year periods.
  • Cash and cash equivalents and short-term investments totaled $398 million at July 31, 2014, versus $490 million a year ago. Total short-term and long-term debt, and as a percentage of stockholders’ equity, were $1.03 billion and 35%, respectively, at July 31, 2014, versus $964 million and 35% a year ago.
  • Net inventories were $2.5 billion at July 31, 2014, or 9% higher than a year ago, in support of new product introductions and anticipated sales growth.
  • Capital expenditures were $91 million in the first half, compared with $87 million a year ago.
  • In March 2014, the Company's Board of Directors authorized a new program to repurchase up to $300 million of the Company's common stock over a three-year period which expires in March 2017. The Company spent approximately $9 million in the second quarter to repurchase 102,000 shares of its common stock at an average cost of $90.98 per share, and it spent approximately $16 million in the first half to repurchase 184,000 shares at an average cost of $89.18 per share. At July 31, 2014, $284 million remained authorized for future repurchases.

Outlook for 2014:

For the fiscal year ending January 31, 2015, management is now forecasting net earnings in a range of $4.20-$4.30 per diluted share, versus its most recently-published forecast of $4.15-$4.25 per diluted share. This full year forecast is based on the following assumptions, which are approximate and may or may not prove valid:

1) Worldwide net sales increasing by a high-single-digit percentage.

2) Opening 10 Company-operated stores and closing three existing stores: opening four in the Americas, two in Asia-Pacific, two in Japan, and one each in Europe and Russia, while closing one each in the Americas, Asia-Pacific and the U.A.E.

3) Operating margin increasing due to a higher gross margin and SG&A expense growth less than sales growth.

4) Interest and other expenses, net of $65 million with the increase over 2013 reflecting the interest cost on higher average levels of net-debt.

5) An effective income tax rate of 35%.

6) A 6% increase in net inventories.

7) Capital expenditures of $270 million, versus $221 million last year, with the increase largely reflecting incremental investments in certain information technology systems.

8) Free cash flow (cash flow from operating activities less capital expenditures) of at least $400 million.

Today’s Conference Call:

The Company will conduct a conference call today at 8:30 a.m. (Eastern Time) to review actual results and the outlook. Please click on http://investor.tiffany.com (“Events and Presentations”).

Tiffany & Co. operates jewelry stores and manufactures products through its subsidiary corporations. Its principal subsidiary is Tiffany and Company. The Company operates TIFFANY & CO. retail stores in the Americas, Asia-Pacific, Japan and Europe, as well as in the United Arab Emirates and Russia. It also engages in direct selling through Internet, catalog and business gift operations. For more information, please visit www.tiffany.com or call the shareholder information line at 800-TIF-0110.

Next Scheduled Announcement:

The Company expects to report third quarter results on Tuesday November 25th. To be notified of future announcements, please register at http://investor.tiffany.com (“E-Mail Alerts”).

This document contains certain “forward-looking” statements concerning the Company’s objectives and expectations with respect to sales, products, store openings and closings, operating margin, interest and other expenses, the effective income tax rate, net earnings, inventories, growth opportunities, capital expenditures and free cash flow. Actual results might differ materially from those projected in the forward-looking statements. Information concerning risk factors that could cause actual results to differ materially is set forth in the Company’s Form 10-K, 10-Q and 8-K reports filed with the Securities and Exchange Commission. The Company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances.

TIFFANY & CO. AND SUBSIDIARIES
(Unaudited)

NON-GAAP MEASURES

The Company reports information in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). The Company's management does not, nor does it suggest that investors should, consider non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. The Company presents such non-GAAP financial measures in reporting its financial results to provide investors with an additional tool to evaluate the Company's operating results.

Net Sales

The Company's reported net sales reflect either a translation-related benefit from strengthening foreign currencies or a detriment from a strengthening U.S. dollar. Internally, management monitors and measures its sales performance on a non-GAAP basis that eliminates the positive or negative effects that result from translating sales made outside the U.S. into U.S. dollars (“constant-exchange-rate basis”). Management believes this constant-exchange-rate basis provides a more representative assessment of sales performance and provides better comparability between reporting periods. The following table reconciles the sales percentage increases (decreases) from the GAAP to the non-GAAP basis versus the previous year:

Second Quarter 2014 vs. 2013  

 

First Half 2014 vs. 2013
GAAP

Reported

  Translation

Effect

  Constant-

Exchange-

Rate Basis

    GAAP

Reported

  Translation

Effect

  Constant-

Exchange-

Rate Basis

Net Sales:

          
Worldwide 7 % — % 7 % 10 % (1 )% 11 %
Americas 9 % (1 )% 10 % 8 % (1 )% 9 %
Asia-Pacific 14 % 1 % 13 % 15 % (1 )% 16 %
Japan (13 )% (3 )% (10 )% 4 % (6 )% 10 %
Europe 8 % 7 % 1 % 8 % 6 % 2 %
Other 28 % — % 28 % 34 % — % 34 %

Comparable Store Sales:

Worldwide 3 % — % 3 % 6 % (1 )% 7 %
Americas 8 % — % 8 % 7 % (1 )% 8 %
Asia-Pacific 7 % — % 7 % 8 % (1 )% 9 %
Japan (15 )% (2 )% (13 )% 3 % (6 )% 9 %
Europe (2 )% 6 % (8 )% 1 % 6 % (5 )%
Other 2 % — % 2 % 10 % — % 10 %

Net Earnings

The accompanying press release presents net earnings and highlights expenses tied to certain items in the text. Management believes excluding such items presents the Company's results on a more comparable basis to the corresponding period in the prior year, thereby providing investors with an additional perspective to analyze the results of operations of the Company at July 31, 2014. The following table reconciles certain GAAP amounts to non-GAAP amounts:

  Six Months Ended

July 31, 2013

(in thousands, except per share amounts)   $

(after tax)

  Diluted

EPS

Net earnings, as reported $ 190,358   $ 1.48
Cost reduction initiatives a 5,785     0.05
Net earnings, as adjusted $ 196,143     $ 1.53

a On a pre-tax basis, includes charges of $9,379,000 within SG&A for the first half of 2013 associated with severance related to staffing reductions and subleasing of certain office space for which only a portion of the Company's future rent obligations will be recovered.

TIFFANY & CO. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited, in thousands, except per share amounts)

 
Three Months Ended July 31,   Six Months Ended July 31,
2014     2013   2014     2013
Net sales $ 992,930   $ 925,884 $ 2,005,062   $ 1,821,368
 
Cost of sales 397,767   393,755   820,373   786,015
 
Gross profit 595,163 532,129 1,184,689 1,035,353
 
Selling, general and administrative expenses 386,642   355,243   766,375   717,309
 
Earnings from operations 208,521 176,886 418,314 318,044
 
Interest and other expenses, net 16,151   14,694   32,427   27,406
 
Earnings from operations before income taxes 192,370 162,192 385,887 290,638
 
Provision for income taxes 68,250   55,411   136,158   100,280
 
Net earnings $ 124,120   $ 106,781   $ 249,729   $ 190,358
 
Net earnings per share:
 
Basic $ 0.96   $ 0.84   $ 1.93   $ 1.49
Diluted $ 0.96   $ 0.83   $ 1.92   $ 1.48
 
Weighted-average number of common shares:
 
Basic 129,252 127,826 129,093 127,572
Diluted 129,908 128,771 129,851 128,606

TIFFANY & CO. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)

 
  July 31,   January 31,   July 31,
2014 2014 2013

ASSETS

 
Current assets:
Cash and cash equivalents and short-term investments $ 398,434 $ 367,035 $ 489,782
Accounts receivable, net 190,318 188,814 161,746
Inventories, net 2,531,451 2,326,580 2,328,510
Deferred income taxes 104,909 101,012 77,948
Prepaid expenses and other current assets 225,863   244,947   181,931
 
Total current assets 3,450,975 3,228,388 3,239,917
 
Property, plant and equipment, net 857,317 855,095 814,593
Other assets, net 627,533   668,868   677,208
 
$ 4,935,825   $ 4,752,351   $ 4,731,718
 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 
Current liabilities:
Short-term borrowings $ 275,433 $ 252,365 $ 207,412
Accounts payable and accrued liabilities 300,781 342,090 276,810
Income taxes payable 28,374 31,976 36,731
Merchandise and other customer credits 65,510   70,309   67,921
 
Total current liabilities 670,098 696,740 588,874
 
Long-term debt 750,070 751,154 756,807
Pension/postretirement benefit obligations 279,502 268,112 342,361
Other long-term liabilities 213,869 220,512 221,692
Deferred gains on sale-leasebacks 77,858 81,865 86,688
Stockholders’ equity 2,944,428   2,733,968   2,735,296
 
$ 4,935,825   $ 4,752,351   $ 4,731,718