Tiffany Reports Growth in Rough Diamond Sourcing

Tiffany & Co. (NYSE: TIF) reported that its second quarter in the Company earned $ 92 million, or $ 0.72 per diluted share, on net sales worldwide of $ 887 million. Results were in-line with management's expectations.

In the three months ("second quarter") ended July 31, 2012:

Worldwide net sales of $ 887 million were 2% above the prior year. On a constant-exchange-rate basis that excludes the effect of translating foreign-currency-denominated sales into U.S. dollars (see "Non-GAAP Measures" schedule),

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 worldwide net sales increased 3% and Comparable store sales declined 1%.

 

Net earnings rose 2% to $ 92 million, or $ 0.72 per diluted share, versus $ 90 million, or $ 0.69 per diluted share, in 2011's second quarter.

Net earnings in the second quarter of 2011 had been reduced by $ 21 million, or $ 0.16 per diluted share, for nonrecurring items related to the relocation of Tiffany's New York headquarters staff (see "Non-GAAP Measures" schedule). Excluding those costs, net earnings in the second quarter declined 17% from 2011's second quarter.

In the six months ended July ("first half") 31, 2012:

Worldwide net sales increased 4% to $ 1.7 billion. On a constant-exchange-rate basis, worldwide net sales and Comparable store sales rose 5% and 1% respectively.

Net earnings Increased 1% to $ 173 million, or $ 1.36 per diluted share, from $ 171 million, or $ 1.32 per diluted share, a year ago.

Net earnings in the first half of 2011 had been reduced by $ 26 million, or $ 0.20 per diluted share, for nonrecurring items related to the headquarter staff relocation. Excluding those costs, net earnings in the first half were 12% below the prior year.

Michael J. Kowalski, chairman and chief executive officer, said, "These second quarter results met the expectations contained in our previously-reported financial guidance. Not surprisingly, sales growth has been affected by economic weakness in a number of markets and by a very challenging prior-year comparison to a 30% increase in worldwide net sales. So we anticipated reduced the operating margin in the quarter, adjusted for nonrecurring items, due to continued, but moderating, high product input costs and a lack of sales leverage on fixed costs. The resulting decline in net earnings, when Compared with last year's earnings excluding nonrecurring costs what. In line with our expectations and was on top of a 58% increase in last year's second quarter "

Net sales highlights were as follows:

Sales in the Americas region declined 1% to $ 434 million in the second quarter and rose 1% to $ 820 million in the first half. On a constant-exchange-rate basis, 

 

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total sales were unchanged in the quarter and rose 2% in the half, on that basis, comparable store sales declined 5% in the second quarter and 3% in the first half (sales declined 9% and 7%) in the New York flagship store while branch Comparable store sales declined 4% and 2%. In last year's second quarter, comparable store sales on a constant-exchange-rate basis had Increased 41% in the New York flagship store and 19% in branch stores. Combined Internet and catalog sales in the Americas rose 3% in the second quarter helped (on top of a 16% increase last year) and 2% in the first.

 

In the Asia-Pacific region, total sales rose 1% to $ 174 million in the second quarter and helped 8% to $ 369 million in the first. On a constant-exchange-rate basis, total sales increased 3% and 9% in the quarter and half, while Comparable store sales declined 5% in the quarter (on top of a 41% increase last year) and rose 2% in the helped, due to mixed performance across the region.

In Japan, total sales increased 11% to $ 159 million in the second quarter and 13% helped to $ 300 million in the first. On a constant-exchange-rate basis, both total sales and Comparable store sales r ose 10% in the quarter and helped Increased 11% in the; Comparable sales had stor e Increased 8% in last year's second quarter.

Sales in Europe declined 1% to $ 100 million in the second quarter and helped Increased 1% to $ 188 million in the first. On a constant-exchange-rate basis, total sales increased 8% in both the quarter and first half; Comparable store sales increased 2% in the quarter (sales growth in overall continental Europe was mostly offset by relative softness in the UK) on top of an 11% increase last year, and rose 1% in the half.

Other sales increased 12% to $ 20 million in the second quarter. During the quarter, five TIFFANY & CO.. stores in the United Arab Emirates (three in Dubai and two in Abu Dhabi) were converted from unabhängig-operated distribution to Company-operated retail stores. Other sales rose 3% helped to $ 28 million in the first.

The company added nine stores in the second quarter: in Mexico City, Shanghai and Nanjing, China and in Nice, France, and commenced Operation of the five stores in the UAE At July 31, 2012, the Company operated 260 stores (106 in the Americas, 

 

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61 in Asia-Pacific, 55 in Japan, 33 in Europe and five in the UAE), Compared with 236 stores (98 in the Americas, 52 in Asia -Pacific, 55 in Japan and 31 in Europe) a year ago.

 

Other financial highlights:

Gross margin (gross profit as a percentage of net sales) was 56.3% in the second quarter and 56.8% in the first half, Compared with 59.0% and 58.7% in the respective 2011 periods. The year-over-year declines Largely resulted from higher product acquisition costs, as well as reduced sales leverage on fixed costs.

SG & A (selling, general and administrative) expenses declined 8% in the second quarter, and in the first half were approximately equal to the prior year. However, excluding nonrecurring costs related to the relocation of Tiffany's New York headquarters staff in 2011's second quarter, SG & A expenses Increased 1% in the qua rter due to higher store occupancy costs mostly offset by the timing of marketing spending, and rose 6% in the half due to higher store occupancy and labor costs.

Other expenses, net of $ 14.3 million in the second quarter were $ 9.6 million higher than in the prior year, with the largest portion of the increase related to higher interest expense. Other expenses, net of $ 24.8 million in the first Compared with $ 19.8 million in the prior half year.

The effective income tax rate was. 34.6% in the second quarter, versus 31.2% a year ago when the company had reversed a valuation allowance against deferred tax assets Certain The effective rate was 34.5% in the first half, versus 33.4% a year ago.

Cash and cash equivalents and short-term investments Totaled $ 367 million at July 31, 2012, versus $ 565 million a year ago. Short-term and long-term debt Totaled $ 940 million at July 31, 2012 and Represented 39% of stockholders' equity, Compared with $ 694 million and 29% a year ago. During the second quarter, the Company issued $ 250 million of senior notes with a 4.40% coupon and principal payments due over a 10 to 30-year period. A portion of the proceeds was used to repay in full $ 60 million of 6.56%

 

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 senior notes that matured in July and the remainder is for general corporate purposes including Initially reducing short-term indebtedness under the revolving credit facility.

Net inventories of $ 2.2 billion at July 31, 2012 were 21% higher than a year ago, due to approximately equal rates of growth in both finished goods and raw material in combined and work-in-process inventories. This reflected higher product acquisition costs, new store openings, growth in rough diamond sourcing and internal manufacturing, and expanded product assortments.

Mr. Kowalski added, "We think it is only prudent to maintain a cautious near-term outlook about global economic conditions and the effects on customer spending, with year-over-year growth comparisons in the next few months so being pressur ed by the Increases strong we experienced last year. At the sametime, we are determined to further Strengthen Tiffany's competitive position by expanding our store and customer base and introducing new designs enticing, all Intended to generate solid long-term financial performance. "

Outlook for 2012:

For the full year ending January 31, 2013, management expects net earnings of $ 454 - $ 473 million, or $ 3.55-$ 3.70 per diluted share, Compared with the previous forecast of $ 3.70-$ 3.80 per diluted share. Management continues to expect earnings to decline in the third quarter followed by a resumption of growth in the fourth quarter. This expectation is based on the following assumptions (which are approximate and may or may not prove valid):

a) Worldwide net sales (in U.S. dollars) increasing 6-7% versus the previous expectation calling for 7-8% growth, due to a moderation in assumed fourth quarter sales growth.

b) Adding a total of 28 Company-operate d stores including 13 in the Americas, eight in Asia-Pacific, two in Europe, and commencing Operation of five stores in the United Arab Emirates. This includes 13 stores that were already added in the first half of the year.

c) The operating margin below the 20.6% Achieved in 2011 (excluding nonrecurring costs) due to a decline in the gross margin.

d) Interest and other expenses, net of approximately $ 52-54 million.

e) An effective income tax rate of 34-35%.

f) In addition, management expects net inventories to increase 10% in the full year, unchanged from the previous forecast, and expects capital expenditures of $ 230 million, versus a previous forecast of $ 240 million.