TIF
#Thank you, Kayla.
Good day to everyone and greetings from sunny New York City.
Tiffany reported its first-quarter results earlier today and I hope you've had a chance to review the news release.
On today's call I will elaborate on the results as well is on management's outlook for the full year.
Before saying more, please note that statements made on this call that are not historical facts are forward-looking statements.
Actual results might differ materially from the expectations projected in those forward-looking statements.
Additional information concerning risk factors that could cause actual results to differ materially is set forth in Tiffany'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.
Okay, so now let's review the results.
Overall these first-quarter results generally represented a continuation of the softness in sales trends that we experienced in the latter part of 2015 and were largely what we expected.
Our earnings forecast that we first provided in March assumed that we would begin the year with lower sales in most regions which combined with a higher gross margin and SG&A expense deleverage led us to anticipate a 15% to 20% decline in EPS in the first quarter and it essentially did.
The actual 15% EPS decline, which included a tax benefit and a 21% decline excluding the benefit, were generally in line with our expectations.
Most relevant, however, is that despite the persistence of well-known macroeconomic challenges, we are continuing to pursue a number of important strategic initiatives designed to strengthen Tiffany's position as one of the world's most important luxury brands.
So let's look at the quarter's results.
Starting with the top line, worldwide net sales declined 7% both as reported and on a constant exchange rate basis due to softness in most regions.
There was no overall translation effect on sales as the recently strengthening yen offset any negative translation effect of the stronger US dollar against other currencies.
Looking at sales performance by region, in the Americas, total sales declined at 9% and comparable-store sales declined 10%.
On a constant exchange rate basis, total sales declined 8% in the first quarter and comp store sales declined 9%.
We attribute the overall lower sales to softness in domestic customer spending in many US markets as well as lower spending by foreign tourists of many nationalities in New York and other high tourism markets.
The total sales decline was due to unit-related softness across most jewelry categories.
Beyond the US, results were mixed in our stores in Latin America and Canada.
We didn't add any stores to the Americas store base in the first quarter, nor do we anticipate any growth in store locations in the Americas throughout the remainder of fiscal 2016.
However, as part of our ongoing store optimization strategy, we are in the midst of significant renovations of our stores in San Francisco, Beverly Hills and Vancouver similar in scale to what we completed in Chicago last year.
Moving to the Asia-Pacific regions, total sales declined 8% and comp store sales declined 15% in the quarter.
On a constant exchange rate basis, however, sales declined 5% in total and comp store sales were down 12% with softness across much of the region.
We achieved total sales growth in China fueled by strong results in some significantly open stores which we believe may have affected comp store sales in the near-term for a few existing stores.
We also saw solid sales growth in Korea.
However, that growth in China and Korea was more than offset by a continued significant decline in Hong Kong as well as more moderate declines in some other markets.
We continue to assume that results in Hong Kong will be pressured throughout the year.
As reported in US dollars, the total Asia-Pacific sales decline in the quarter was due to roughly equal declines in jewelry units and in changes in average price and product mix.
Our Asia-Pacific store count was unchanged during the quarter, although we do expect to let stores later in the year in China, Australia, Korea and New Zealand while also closing some older ones in a few countries.
I'm pleased to say that we had a good quarter in Japan.
Total sales in Japan rose 8% and comparable-store sales rose 12% in the quarter.
On a constant exchange rate basis, which excludes the recent dramatic strengthening of the yen, comp store sales rose 5% which we attribute to increased spending by local customers.
But that growth was mostly offset by lower wholesale sales resulting in a total sales increase of 1%.
And looking at comp store sales growth on a constant exchange rate basis, it's also important to note that comp store sales had declined 24% in last year's first quarter after surging 30% in the first quarter of 2014 when consumers accelerated their purchasing prior to an increase in Japan's consumption tax.
So we're really looking at a modestly positive three-year average annual run rate as we would expect for Japan.
Total sales in Japan increased largely from higher jewelry unit volume.
During the quarter, we closed a department store location in Yonago and plan to relocate a few stores in Japan over the course of this year.
Tiffany's business in Europe remained under pressure in the first quarter, particularly on the continent, which continued the trend we experience late last year following the tragedy in Paris and also affected by the more recent tragedy in Brussels.
Total sales in Europe declined 9% and comp store sales declined 15% in the quarter.
On a constant exchange rate basis, total European sales declined 7% in the quarter and comp store sales declined 14%, although you should remember that that was on top of a very strong 18% comp increase in last year's first quarter.
In addition to the difficult year-over-year comparison we attributed the lower sales primarily to softness in foreign tourist spending across the continent.
It's worth noting that our sales in the UK were relatively better than results on the continent and our business in Russia continued to perform very well.
The total sales decline in Europe in the quarter was entirely due to lower jewelry unit volume.
During the first quarter we were pleased to add two stores in Italy: one on the fashionable Via Condotti, marking our third store in Rome, and a new store in beautiful Venice.
There's additional store activity planned for later in the year in Europe.
Lastly, other sales were 30% lower in the first quarter, primarily reflecting softness in our retail sales in the UAE as well as in wholesale sales to other markets in the Middle East.
In an effort to improve our performance around the world we continue to be focused on further enhancing the consumer experience through in-store training and systems to even more effectively engage with our customers, optimizing our store base with renovations and relocations and of course introducing new designs across all product categories and price points.
The objective is to increase the frequency of customer visits to our stores and the conversion rate.
Complementing Tiffany's Company-operated stores is our web presence around the world with e-commerce sales accounting for 6% of worldwide sales in 2015.
I think it's worth noting that worldwide e-commerce sales rose slightly in the first quarter.
We continue to believe that our dual focus on stores and online reinforces global brand and product awareness while enhancing customers' overall experiences with Tiffany.
And on a related note, we were pleased last month to launch Tiffany's relationship with NET-A-PORTER which we view is another step toward building greater awareness among a worldwide group of fashion conscious luxury shoppers.
Touching on a few product category highlights in the quarter, while the 7% decline in worldwide sales was reflected in varying degrees of softness across all product categories, it is worth noting that both the engagement jewelry and wedding band category and the fashion jewelry category performed relatively better than the statement, fine and solitaire jewelry category.
Fashion jewelry sales continue to reflect the success of our Tiffany T and Atlas collections.
And while we've seen lower overall unit volumes in fashion silver jewelry in certain regions, we're pleased with the initial reaction to new silver jewelry pieces that have been added to the Return to Tiffany and Infinity collections to address softness at price points under $500.
Our goals in fashion jewelry are to sustain growth in gold jewelry and stabilize sales in silver jewelry.
We plan to continue to pursue those objectives with new designs and advertising.
We've spoken about some softness in the engagement jewelry and wedding bands category in some regions over the past year and we're now focusing our marketing communications on more directly conveying the competitive strength of our engagement assortment.
The ads not only celebrate the 130th anniversary of Tiffany introducing its extraordinarily beautiful six-pronged diamond ring setting in 1886 but they also emphasize the exceptional quality and rarity of our diamonds.
We believe that's a compelling message to couples who plan to marry.
In the statement, fine and solitary jewelry category there are a few key takeaways.
At the highest end of our product offerings we were pleased with the results at our annual Blue Book event that we held in New York in April.
While the year-over-year sales comparison was quite difficult due to record-setting results at last year's event, customers nonetheless showed their enthusiasm for the unique collection of statement jewelry that was focused on the theme the Art of Transformation.
Rounding out that category, we saw continued success with our important and recently expanded Victoria Collection but this was offset by soft and mixed performance in other collections.
Lastly, we continue to be pleased with our progress in building a larger and more significant watch business as we increase awareness of new designs and Tiffany's heritage in that category.
So that covers the sales review, let's now take a look at the rest of the earnings results.
Gross margin rose 2.1 point to 61.2% in the first quarter due to a continuation of favorable product input cost, price increases taken over the past year and sales mix, partly offset by the effect of currency translation and the lack of sales leverage on fixed costs coming from the sales decline.
Our forecast continues to assume an increase in gross margin for the full year.
In fact, more than we had initially expected.
However, we continue to also expect the full-year increase to be more modest than we experienced in the first quarter as we anniversary some of the positive effect of favorable product input costs from last year as well as some of our pricing action.
Selling, general and administrative expenses rose 3% in the quarter.
The bulk of the modest increase was for labor, occupancy and depreciation cost, much of which was store related.
We continue to expect deleveraging of SG&A expenses for the full year.
The effective tax rate declined to 29% in the quarter from 34.7% last year and the reduction reflected an unanticipated benefit related to the conclusion of a tax examination.
For the full year, our forecast continues to be based on an assumed rate slightly lower than in 2015.
As a result, EPS for the quarter of $0.69 was 15% lower than a year ago and, as I mentioned earlier, would have declined 21% excluding the tax benefit.
Either way, results were generally in line with our expectation that called for 15% to 20% decline in the first quarter.
We believe our balance sheet places us in a strong position to support our growth initiatives while also providing flexibility and opportunities to return cash to shareholders and generate an attractive total shareholder return over the long term.
Cash and short-term investments totaled $790 million at April 30 compared with $715 million a year ago.
Short-term and long-term debt totaled $1.1 billion and as a percentage of stockholders' equity was unchanged versus a year ago at 37%.
Net inventories at April 30 were 2% lower than a year ago and the effect of foreign currency translation was negligible.
Accounts receivable of $221 million was 15% higher than a year ago, partly reflecting the timing of collections at quarter end as well as in-house credit related to both statement jewelry and wholesale sales.
The receivable turnover rate remained high at 20 times per year.
Capital expenditures were $46 million in the first quarter versus $37 million in last year's first quarter.
Beyond reinvesting some of our free cash flow in our business, our objective is to provide opportunities to return cash to shareholders through dividends and share repurchases.
As a reminder, at the end of last year our Board terminated a previously existing $300 million repurchase program that had only about $59 million of authorization remaining and replaced it with a new authorization permitting the repurchase of up to $500 million of common stock.
Under our stock repurchase plan, in light of our share price, we maintained a healthy pace of repurchases in the first quarter, spending $78 million to repurchase shares at an average cost of $66 per share.
At April 30, approximately $416 million remained available for repurchases under the new program that expires in January 2019.
So in terms of our outlook for the year we believe it is prudent at this early point of the year to moderate our annual forecast and call for a mid-single-digit decline in diluted EPS in 2016 versus last year's diluted EPS excluding charges.
We do acknowledge some of the specific risk to the guidance for the remainder of the year, primarily related to the difficulty in assessing the potential for a slower than expected improvement in US activity, continued substantial softness in Europe and weakness in foreign tourist spending among the Chinese and other nationalities.
Beyond this full-year forecast, we are modifying our near-term expectations and now forecast diluted EPS in the second quarter to decline by a percentage similar to what we just experienced in the first quarter.
For the full year, this assumes net worldwide sales declining by a low single-digit percentage.
It also factors in a bit more upside to gross margin than we initially expected.
I should add that our forecast also continues to assume a moderate strengthening US dollar over the balance of the year and about a 2% net increase in worldwide gross square footage.
Our full-year assumptions for inventories, CapEx and free cash flow are unchanged from the previous guidance.
So that covers the outlook for this year.
We're all well aware of the near-term external headwinds.
However, we believe that the initiatives we're currently pursuing, combined with an assumption that these headwinds will begin to abate at some point, will eventually set the stage for Tiffany to achieve its longer-term objectives that call for high single-digit net earnings growth driven by mid-single-digit worldwide net sales growth on a constant exchange rate basis and continued generation of strong free cash flow.
We were pleased with the large attendance and interest at our recent Investor Day in New York and with the substantial webcast audience as well.
As we emphasized in the management presentations, which are available on our investor website, we are focused on generating an attractive total shareholder return in the long term.
As I noted before, this focus revolves around our objective to strengthen Tiffany's position as one of the world's most important luxury brands.
Strategically this is premised on initiatives to effectively communicate with and serve our customers, to optimize our store base, to delight customers with new product design, and to improve our cost structure and enhance our supply chain.
We believe we have a strong balance sheet and the right management team to execute on those strategies.
And on a related note, we've begun the search to fill our recently vacated CFO position.
So I hope you found today's conference call to be informative but feel free to call me with any questions.
A replay of this call is available on our website or by dialing 888-203-1112 in the US or 719-457-0820 outside the US and entering passcode 3632445.
Please note on your calendars that we expect to report second-quarter results on August 25.
Thanks for listening and have a great day.
