This summary is based on the third quarter fiscal 2008 earnings call conducted by Tiffany & Co. (TIF) on November 26, 2008.
Management:
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Chief Financial Officer, Executive Vice President: James N. Fernandez
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Vice President, Investor Relations: Mark L. Aaron
Key Investors Issues
- Sales declined 7% to $618 million from $627 million in the prior year.
- Net earnings were $44 million or 35 cents a diluted share, down 57% from $103 million or 74 cents a share in 2007.
- The firm spent $90 million to repurchase 2.3 million shares.
Third Quarter Highlights
Sales declined 7% to $618 million from $627 million in the prior year due to a 14% decline in comparable U.S. store sales which was below expectation that called for only a modest decline and compared with a healthy 8% increase last year.
- The comp store sales trend ranged from a 6% decline in August, as expected, versus an 11% increase last year to much greater than expected declines of 15% in September versus a 2% prior increase and a comp decline of 20% in October.
- U.S. comps have softened further in November. Geographically, sales in the New York flagship store declined 5% and its low point was in October when sales in that store declined 17%.
- Total sales in the entire nine store New York region declined 6% in the quarter which includes the Wall Street store.
While the New York flagship store generated more than 20% of U.S. store sales in the quarter the eight other New York area stores add up to slightly less than half of the flagship store’s volume.
- Outside of the New York flagship store, comparable U.S. branch store sales declined 16% with the low point in October when total branch store comps declined 21%.
- The sales decline in the Americas resulted from substantial decreases in the number of transactions in every region of the U.S. except for the New York flagship store where it declined just slightly.
- While the average size per transaction rose slightly across the U.S. price stratification analysis showed weakness in sales and transactions across the board at most price levels with no meaningful differences.
- There is still plenty of sales activity occurring at high price points and the Blue Book event in New York in October confirmed ongoing interest among customers.
In terms of the customer base in the quarter the comp store sales declined entirely reflective lower sales to lower market customers.
- Sales to foreign tourists, especially from Europe, rose slightly with that increase occurring in the New York flagship store.
- The firm also recently completed the conversion of the location in the Mohegan Sun resort in Connecticut into a regular store.
- Also in the Americas region combined e-commerce and catalog sales in the U.S. declined 7% with a decline in orders partly offset by an increase in the average order size.
- The website and catalogs continue to represent important sales and marketing vehicles as they complement retail stores and the overall multi-channel distribution model.
Retail sales in Canada, Mexico and Brazil were up by double digit percentages in the quarter and e-commerce sales in Canada were strong too.
- Asia Pacific region sales rose 3% due to an increase in the average price per unit sold as unit growth in the region was hampered by a decline in Japan.
- Comps in Japan began the quarter with a modest increase but then turned down in September and October.
- Tiffany’s has added four new boutiques in 2008 in the Daimaru Department store in Fukuoka, in the Hankyu store in Umeda, in the Matsuzakaya store in Tokyo and the Intetsu Store in Hamamatsu.
- In the Asia Pacific region outside Japan total sales in constant currency rose 12% and comp store sales rose 4% which was on top of a huge 29% increase last year.
The firm has expanded its presence in China with three additional stores in Shenyang, Chengdu and Qingdao.
- In Europe, total sales rose 16% due to an increase in the number of units sold and on that basis, comp store sales increased 8% which was on top of a 14% increase last year.
- London represents a bit more than half of European sales and despite the various economic and market pressures it posted double digit sales growth that continued throughout the quarter.
- In the U.K. the firm is also seeing strength in e-commerce and catalog sales and retail store sales also rose in every country on the continent.
- This has been an unusually active year for Tiffany’s store expansion in Europe with seven new stores opened including two in London, one each in Brussels, Madrid, Dublin, Düsseldorf and Berlin.
Sales in Tiffany''s other channels declined 1% on top of 137% increase last year which had been due to increased wholesale sales of diamonds in connection with the rough diamond sourcing.
- From a merchandising perspective, while overall statement jewelry sales declined in the quarter they rose slightly outside the U.S.
- Similarly, sales of the various fine jewelry collections declined modestly worldwide with a greater drop in the U.S. but increased nicely elsewhere especially in the Asia Pacific region.
- A single digit increase in worldwide engagement jewelry sales included a small decline in the U.S. in diamond solitaire sales but strong growth in wedding bands.
- At more modest price points, fashion jewelry sales were up due to the continued success of the silver and gold charm jewelry collection with particular strength in Europe.
Gross margin rose almost 2 points to 66.3% due to favorable changes in product sales mix, the benefit from the company’s precious metal hedging program and a reduction in anticipated management incentive compensation.
- Selling, general and administrative expenses decreased 7% as a reduction in anticipated management incentive compensation more than offset incremental costs related to new stores.
- Other expenses net were $14 million versus $2 million last year with the increase attributable to the total write off of an interest rate swap held with Lehman Brothers and from foreign exchange transaction losses.
- Net earnings from continuing operations were $44 million or 35 cents per diluted share, down 57% from $103 million or 74 cents per diluted share in the prior year due to a write-off to an exposure to Lehmans.
The balance sheet included cash and cash equivalents of $160 million, total short and long-term debt of $821 million and stockholder’s equity of $1.6 billion.
- Accounts receivable were 3% lower than a year ago due to sales performance but receivable turnover remained at a very high 18 times per year.
- Net inventories were 12% above last year, with the increase directly related to the sudden softening of sales in September and October but also partly due to higher raw materials related to higher manufacturing and diamond sourcing as well as for new stores.
- The firm spent $90 million to repurchase 2.3 million shares at $39.61 per share, however, due to the market turmoil and near-term uncertainties it has temporarily suspended the buying to conserve cash.
Total debt to equity is typically near its seasonal high at 50% versus 23% a year ago, largely reflecting a smaller equity base tied to substantial share repurchases over the past year as well as higher short-term borrowings.
- The firm is also evaluating opportunities to issue new debt, up to $300 million in order to repay $100 million of senior notes coming due within the next 12 months as well as to fund potential share repurchases.
- It still has $339 million outstanding on its $450 million revolving credit facility.
