TIF
#Thank you.
Hello, everyone.
By now I hope you have seen the news release we issued earlier today announcing our third-quarter results.
On today's call, <UNK> and I will review the quarterly results and how they are tied to our growth strategy, and then we will address the outlook for the rest of the year.
Please note before continuing 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 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.
In general, these third-quarter results were mixed.
Sales and margins continued to be negatively affected by the strong US dollar and net earnings came in several cents lower than we expected.
However, worldwide net sales increased 4% on a constant exchange rate basis, despite greater-than-expected softness in the Americas, reflecting strong growth in Japan and modest growth in Europe and the Asia-Pacific regions.
Worldwide net sales declined 2% when reported in dollars on a GAAP basis.
In addition to the strong dollar's affect on translation of foreign sales into US dollars, we continued to experience a negative effect on foreign tourist spending in the US that was only partly offset by higher foreign tourist spending in other regions.
In addition, we took a price increase in the quarter which moved us closer to restoring our global pricing structure to normal levels given the dollar's continued strength.
Gross margin rose in the quarter and SG&A expense growth was modest.
Adding it all up, EPS of $0.70 was down 8% from non-GAAP EPS of $0.76 last year, which had excluded a charge for debt extinguishment.
In other highlights, we introduced new designs in several existing jewelry collections in a range of materials and price points.
We also made good progress with our long-term strategy to optimize our store base with openings, renovations, relocations, and closings.
And in light of recent stock price weakness, purchases under our stock repurchase plan were increased, allowing us to use our strong cash position to return value to shareholders.
So let's now look at regional sales performance.
In the Americas, on a constant exchange rate basis, total sales declined 5% and comparable store sales were down 6% on top of an 11% comp increase in last year's third quarter.
In the quarter we once again saw a substantial decline in sales to foreign tourists in varying degrees by nationality, with pronounced weakness in the New York area as well as in other tourist-related markets on the East and West Coasts of the US and in Hawaii.
Sales to domestic customers were roughly flat to last year, which we can partly attribute to difficult year-over-year comparisons, but also perhaps to continued softness in broader consumer spending trends.
It is also worth mentioning that we are in the process of some major US store renovations, having just completed a magnificent upgrade of our important store on Michigan Avenue in Chicago and now focused on major renovations of our stores on Union Square in San Francisco and on Rodeo Drive in Beverly Hills.
In contrast to the disappointing sales results in the US, we continued to generate solid comp store sales growth in Canada and Latin America in the quarter.
We entered the new market of Chile when we opened a store in Santiago in September and just earlier this month we relocated our Mexico City store within the El Palacio de Hierro Polanco, which is the largest luxury department store in Latin America.
In dollars, total sales in the Americas declined 7%.
Despite strong sales of statement jewelry, there were varying degrees of softness across most other jewelry categories, in stark contrast to last year's strong third quarter.
Let's now turn to results in the Asia-Pacific region, where on a constant exchange rate basis sales increased 6% in total and comp store sales rose 2%, in contrast to a 3% comp decline in last year's third quarter.
Overall, results in this third quarter reflected healthy sales growth in China and Australia, mixed results in other countries, and continued pronounced weakness in Macau and Hong Kong.
During the quarter, we expanded our store base in Asia-Pacific by opening our fourth store in Macau in the Studio City hotel and resort.
Earlier this month we opened two stores: one in China in Beijing SKP, which is formerly known as the Shin Kong Place, which is a major shopping center in China; and the other in Korea in the newly built Pangyo Hyundai department store.
With China in the news so much regarding their economy, stock market, and currency, we're pleased and encouraged that our total sales in China increased by a healthy amount in the third quarter despite volatility and sensitivity to headline macro events.
It is also important to note that we've continued to benefit from spending by Chinese tourists as they travel to other regions.
So to reiterate what we have consistently said, Tiffany remains focused on the long-term growth opportunity to serve Chinese consumers, both locally and globally, and we have not in any way altered our strategies.
When measured in US dollars, total Asia-Pacific sales declined 2% in the quarter, primarily reflecting the negative effect of currency translation.
Japan in the third quarter once again posted strong sales growth in yen.
Total sales rose 34% in yen, driven by strong unit growth and increases in average price across all jewelry categories.
A 24% comp increase in yen was on top of the 6% comp declines in last year's third quarter.
The vast majority of purchases in Japan are made by local customers and overall growth in the quarter was partly driven by higher local customer spending.
Also contributing to the sales growth were higher sales to foreign tourists, particularly Chinese visitors, as I alluded to a moment ago, which may be related to the attractiveness arising from the weaker yen as well as the Chinese shifting some of their travel this year away from Hong Kong and Macau, at least for the moment.
And I should add that a portion of Japan's non-comp sales growth in the quarter was due to the timing of some wholesale sales.
The yen remains substantially weaker than the dollar, but that 34% total sales growth in the quarter in local currency was still a solid 17% when translated into US dollars.
The store count in Japan was unchanged at 56 company-operated locations, but we are enhancing our store base by relocating two department store-based locations this year.
Europe also continued to perform well in the quarter on a constant exchange rate basis due to a combination of higher sales to foreign tourists and to local customers that was geographically broad-based across Continental Europe and in the UK.
On a constant exchange rate basis, total sales increased 9% and comparable store sales rose 6% on top of a 2% comp increase in last year's third quarter.
Engagement jewelry was the strongest category in Europe in the quarter, but most other categories were up as well in local currencies.
And during the quarter as part of our focus on optimizing the existing store base, we relocated and transitioned our one store within Harrod's in London to become two separate boutiques, one within their fine jewelry hall and the other within their luxury jewelry hall.
Earlier this year we had also relocated our store within Selfridges to gain a stronger and expanded presence.
And just earlier this month we were pleased to open our 40th store in Europe, representing our third store in Spain and second in Madrid in the El Corte Ingles department store.
As we've said throughout this year both the euro and pound's weakness against the dollar have stimulated foreign tourist spending in Europe, while perhaps also encouraging some Europeans to shop locally rather than abroad.
However, when translated into US dollars, total third-quarter sales in Europe decreased 2% due to small variations among jewelry categories in unit volume and average price.
Lastly, other sales rose 8% in the quarter on a constant exchange rate basis with comp store sales down 3%.
This smallest of our segments includes comparable store sales in our one store in Russia, which has been a strong performer since opening last year, and our five stores in the United Arab Emirates.
It also includes wholesale diamond sales, which rose in the quarter, as well as some third-party licensing revenue.
One element of our long-term strategy is to proactively engage customers in our stores through more consultative selling.
As I have mentioned, paralleling that is our strategy to optimize our store base through a combination of store openings, renovations, relocations, and closings.
We are on track to increase our company-operated worldwide store base by a net of 12 stores this year, representing a 4% net increase in both our company-operated store base and in worldwide square footage.
The longer-term expectation is to increase worldwide square footage closer to 2% a year.
And of course, we complement our store presence with regular enhancements to our websites in order to reinforce brand and product awareness.
We were also pleased to see an increase in worldwide e-commerce sales on a constant exchange rate basis in the quarter.
All of these initiatives in stores and online support our global strategy to further enhance customers' relationships and experiences with Tiffany.
In terms of a few merchandising highlights as measured in dollars, category trends were pretty similar to recent quarters.
While there was some continued softness in the fine jewelry part of our statement, fine, and solitaire category, we again experienced considerable growth in high-end statement jewelry through our VIP customer events.
The engagement jewelry category performed well in Japan and Europe, but continued to post soft results on a worldwide basis.
The fashion jewelry category continued to have strong growth in gold jewelry, reflecting the success of the Tiffany T collection, although it's worth noting that the year-over-year comparison was negatively affected by strong launch sales in last year's third quarter.
While our strategy for product innovation includes the periodic introduction of entirely new design collections such as Tiffany T, we are equally focused on expanding, refreshing, and reinterpreting existing collections in the interim years.
For example, in order to improve our performance in silver jewelry sales at price points below $500, we recently introduced new designs in our popular Return to Tiffany collection, with more to come next year.
We have seen good initial results, but think we will be better able to evaluate our success in the silver jewelry category after the holiday season.
In other initiatives, Tiffany's Infinity jewelry collection, which incorporates a design, symbolic of continuous connection, energy, and vitality, has been expanded in both silver and gold.
At higher price points we've expanded the beautiful Victoria collection with new designs in platinum and diamonds and the elegant Tiffany Bow collection with designs in gold and diamonds.
All of these collections are being supported with broad print and digital advertising and we have been pleased with initial customer reactions.
Lastly, we continue to be pleased with initial sales of our new CT60 and East West collections of watches that were launched earlier this year, and we have just added some stunning new jewelry watches to the assortment.
As we previously said, we are supporting the watch category with extensive marketing to strengthen awareness of not only the product, but also our brand credibility and heritage.
So that covers the sales highlights showing a wide range of performance and progress by region and product category.
I am now pleased to turn the call over to <UNK>.
Thank you, <UNK>, for that overview.
Before I review the rest of the results, I would like to summarize some of the highlights regarding the third quarter.
Once again, the strong US dollar continued to negatively affect the translation of our results transacting outside the US with a 6% negative effect on worldwide sales and it adversely affected tourist spending in the US.
The operating margin, while benefiting from a high gross margin, continued to experience a lack of SG&A expense leverage.
Earnings per share were down 8% from last year's adjusted EPS and were below our expectation that called for no earnings growth in the quarter.
We lowered our full-year expectation for net earnings, although we significantly increased our free cash flow projection based on effective inventory management.
Lastly, in light of recent stock price weakness, purchases made under our stock repurchase program were increased, using our strong cash position to return value to shareholders.
Now let's look at the rest of the earnings statement.
Gross margin of 60.2% in the third quarter was 70 basis points higher than last year, partly reflecting the favorable effect of product input costs, but also some negative effect from shifts in product mix, especially contrasting the relatively low gross margins of high price point statement jewelry sales, which were strong, with the relatively high gross margins of silver jewelry sales, which were weak.
An increase in the wholesale sales of diamonds also had some negative effect on gross margin.
In addition, we took some price increases of varying degrees in all regions during the third quarter, partly necessitated by the strong US dollar, moving us closer, but not completely, to restoring our worldwide pricing structure to normal levels.
For the full year we continue to expect a modest increase in gross margins.
And as we mentioned three months ago on our last call, gross margin should also benefit further from this year's declining precious metal and diamond costs, but that benefit will take some time to be reflected in gross margin based on the rate of inventory turnover.
Selling, general, and administrative expenses rose only 1% in the quarter, benefiting from the translation effect of the strong dollar and lower variable labor costs that largely offset investments in stores and higher pension costs.
SG&A expense growth was reduced by 5% due to the translation effect of the strong dollar.
In addition, as previously communicated, we had expected that year-over-year growth in marketing would moderate due to heavy spending in last year's second half and that's what happened.
Interest and other expenses net in the quarter came in about equal to last year.
Interest expense itself continued to be lower than the prior year due to our refinancing of long-term debt to lower rates in October of 2014.
However, we also recorded some foreign currency transaction losses in the third quarter.
We continue to project interest in other expenses net at approximately $50 million in 2015.
The third quarter's effective tax rate of 35.5% was in line with last year's third quarter, and we continue to forecast a full-year effective tax rate in 2015 similar to last year's rate of 34.4%.
In terms of our balance sheet, we finished the quarter with cash and short-term investments of $725 million while short-term and long-term debt of just over $1 billion represented 38% of stockholders' equity.
An important part of our financial strategy is to maintain adequate liquidity to invest in growing our business regardless of short-term economic cyclicality.
At the same time, we also regularly consider appropriate opportunities to return cash to shareholders through dividend growth and share repurchases.
During the second quarter we had increased our quarterly dividend by 5%, which represented the 14th dividend increase in the past 13 years.
During the quarter, in light of share price weakness, purchases under our stock repurchase program accelerated as we spent approximately $60 million to repurchase our shares at an average cost of $80 per share.
We have spent $116 million for share repurchases in this year-to-date and at October 31 we had approximately $157 million available for repurchases under our current authorization that runs through March of 2017.
Another one of our financial goals is to keep inventory growth below the rate of sales growth by achieving better productivity in our stores, as well as in our overall supply chain, while also maintaining deep assortments and high availability in our stores.
I am pleased that at October 31 net inventories were 8% below last year.
When excluding the translation effect of the strong US dollar, inventories still declined by 4% compared with the 4% year-to-date increase in worldwide sales on a constant exchange rate basis.
Rounding out our cash flow, capital expenditures were $159 million in the year-to-date versus $153 million a year ago.
We continue to forecast about $260 million for the full year with the focus on stores and new IT systems being implemented over several years, including for global customer relationship management and inventory management.
In terms of our financial forecast, we believe these third-quarter results, combined with volatile external conditions and negative effects from a strong US dollar, justify a downward adjustment to our earnings expectation.
Our company is well positioned for the holiday season with a strong product offering and a holiday advertising campaign that touches on many categories.
However, the macro environment in the near term remains uncertain in the Americas and elsewhere.
Therefore, we now believe it is prudent to forecast full-year EPS 5% to 10% lower than the $4.20 per share last year, excluding charges for debt extinguishment last year and loan impairment in the second quarter of this year.
However, from a cash flow perspective, we are pleased with our progress in managing inventories more efficiently and we are significantly increasing our free cash flow objective by $100 million to now forecast in excess of $500 million for the full year.
In summary, despite a number of challenges that have affected our financial results this year, we are progressing in a number of areas that are all intended to strengthen Tiffany's positioning among the world's most important luxury brands while also enhancing profitability and productivity.
I will now turn the call back to <UNK>.
Thanks, <UNK>.
We hope our review of third-quarter results has been helpful and, of course, please call me with any questions.
A replay of the 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 564803.
Please note on your calendars that we expect to report sales results for the November-December holiday period on January 19 before the market opens.
And, as typical, without a conference call.
Thanks for listening.
