Performance Analysis of Segments

US Retail Operations

The sales rose 4% in the fourth quarter, which was in line with the results for the November/December holiday season. An increase in the average transaction size was partly offset by a decline in the number of transactions.

U.S. price stratification for the quarter was similar to the holiday season, mostly reflecting greater sales strength in the higher price ranges of various categories. In essence, silver jewelry sales were soft below $500, but stronger above that price. Similarly, fine jewelry sales from $10,000 to $50,000 were relatively stronger than in the $1,000 to $10,000 range, and while sales over $50,000, which represent almost 10% of U.S. retail annual sales, for the fourth quarter were modestly lower than the prior year.

Comparable store sales declined 1% in the quarter. Similar to many other retailers, the firm believes that its fourth quarter performance was affected by customers exhibiting some caution tied to various macroeconomic factors. The monthly same store sales trend in the quarter was erratic, ranging from a 7% increase in November, which was on top of an 11% prior year increase, to a 5% decline in December on top of an 8% increase, to a flat comp in January on top of a 15% increase in the prior year.

Sales in New York flagship store were strong all year despite tough year-over-year comparisons, increasing 10% in the fourth quarter on top of a 17% prior year increase and 21% for the year on top of a 9% increase. Sales in the nine-store New York region, which includes the flagship store and the new Wall Street store, rose 9% in the quarter and 16% for the year. Comparable branch store sales declined 4% in the quarter, with some softness in most markets, but sales increased 4% for the year. Branch same store sales had increased 8% in last year’s fourth quarter and 4% for the year.

Despite the fourth quarter softness, there were some strong performing stores, including Cincinnati, Edina, Houston, and Palo Alto. Sales in Hawaii, where the firm has four stores, rose fractionally and sales declines in California with 12 stores and Florida with eight stores were roughly in line with the overall brand store comp decline.

For fiscal 2007, the firm’s five largest U.S. branch stores ranked by sales volume were at South Coast Plaza in Costa Mesa, San Francisco, Chicago, Beverly Hills, and Bellagio in Las Vegas. Tiffany continued to benefit from higher sales to foreign tourists in 2007, especially Europeans visiting New York store, as well as its branch stores in Orlando, Las Vegas, and San Francisco, along with customers from Japan visiting stores in Hawaii. In fact, fourth quarter same store sales in the flagship store entirely reflected higher foreign tourist spending, while for the full year the New York flagship store increase reflected a combination of higher sales to foreign tourists and local customers. Overall, sales to foreign tourists represented 14% of U.S. retail sales in 2007 versus 11% in 2006.

For the full year, U.S. retail sales rose 11% and same store sales rose 7%. As a percent of sales, the New York store increased to 20% of U.S. retail sales in 2007 versus 19% in 2006, and the New York flagship store sales approached $300 million in 2007, with sales productivity topping a record $7,000 per gross square foot.

It was another year of successful store openings. The firm added seven stores in Austin, Texas; the Forum Shops in Las Vegas; Natick, Massachusetts outside Boston; Santa Barbara, California; Providence, Rhode Island; Red Bank, New Jersey; and the Wall Street store. In Hawaii, Tiffany closed its Whaler’s Village store in Maui. In total, the firm added a net of six U.S. stores in 2007, which increased its US store base by 9% and square footage by 10%.

International Operations

The international retail sales increased 21% in the fourth quarter due to very strong growth in the Asia-Pacific region outside Japan and solid growth in its stores in Europe, Canada, and Latin America. On a constant exchange rate basis, which excludes the effect of translating foreign currency denominated sales into US dollars, international retail sales rose 14% and same store sales rose 6%.

For the year, international sales rose by a strong 19%, with comps of 7% on a constant exchange rate basis. It’s clear that the firm’s international business is steadily becoming more geographically diversified. For the full year, international retail sales represented 41% of Tiffany''s worldwide net sales, with Japan accounting for 17% versus 19% in the prior year, the Asia-Pacific region outside Japan increasing to 11%, Europe growing to 8%, and the rest of international sales at 5%.

Total retail sales in Japan declined 2% in the fourth quarter, as the decline in jewelry units sold primarily in silver jewelry was partly offset by an increased average price. While silver jewelry sales were soft, the firm is pleased with an increase in sales of engagement jewelry and in Elsa Peretti’s jewelry design and similar patterns were true for the full year.

The YEN averaged 110 to the dollar in the fourth quarter versus 118 in the prior year’s quarter. Hence, although Japan retail sales declined 2% in YEN in the quarter, they rose 4% when translated into dollars. For the year, there was minimal translation effect with the YEN virtually unchanged at 117 to the dollar.

The same store sales in Japan declined 6% on top of a 4% decline in last year’s fourth quarter. The trend included declines of 4% in November, 6% in December, and 9% in January, versus respective declines of 4%, 5%, and 5% in last year’s fourth quarter. Geographically, the 6% decline in the quarter was comprised of a 5% decline in Tokyo and a 7% decline outside Tokyo and a similar pattern existed for the full year as well. It’s worth noting that for the full year, same store sales in Japan declined 5% but total retail sales were equal to the prior year, with the difference representing the importance of new stores and store relocations.

During the year, the firm opened four new department store boutiques in the Seibu Department Store in Tokyo’s Shibuya; in the Takashimaya Department Store in Tokyo’s Shinjuku; in the Fukuya Department Store in Hiroshima; and in the Matsuzakaya Department Store in Nagoya, while closing three underperforming locations for a net increase of one location in Japan in 2007.

More recently, the recent opening of a two-level Tiffany Boutique in the Matsuzakaya Department Store in Tokyo now gives the firm three street-facing locations on the Ginza and the firm has nearly completed its plan to convert key department store boutiques from standard format to full concession operations with its own Tiffany trained employees, which enables it to enhance the shopping experience.

In the Asia-Pacific region outside Japan, same store sales surged 28% in the fourth quarter and 26% in the year, with double-digit percentage growth in every country. These gains were on top of strong 22% comp growth in both last year’s fourth quarter and the full year. Sales in Hong Kong itself represent almost one-third of that region. During the year, the firm added six stores in the region, in Seoul, in Singapore’s Changi Airport, in Macau, Kuala Lumpur, Hong Kong, and in Tianzhen in China. The firm finished the year with 34 company-operated Tiffany stores in that region.

The company also experienced another year of strong growth in Europe in 2007. Same store sales rose 8% in the fourth quarter on top of a 19% increase and rose 13% for the year on top of a 20% increase. Europe was also a picture of broad-based geographical strength, both in London, which represents a little more than half of European sales, and on the continent. The firm added three European stores in 2007 in Hamburg, London, and Bologna and finished the year with 17 company-operated Tiffany stores in Europe.