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Tiffany & Co. (NYSE:TIF) today reported a 50% increase in net earnings in its third quarter ended October 31, 2013, largely resulting from 7% growth in worldwide net sales and a higher operating margin. The strong earnings growth in the quarter led management to increase its full year forecast.
Michael J. Kowalski, chairman and chief executive officer, said, “We are very pleased with our overall results. Worldwide sales growth in the quarter demonstrated the growing power of the TIFFANY & CO. brand and the benefits of our expanding global presence. Operating earnings rose faster than sales, reflecting favorable product cost trends and ongoing well-controlled expenses. We’re experiencing excellent customer response to our expanded fashion jewelry designs, highlighted by the ATLAS collection, as well as continued growth in our fine and statement jewelry, with particular strength in our yellow diamond collection.”
In the three months (“third quarter”) ended October 31, 2013:
Worldwide net sales increased 7% to $911 million. On a constant-exchange-rate basis that excludes the effect of translating foreign-currency-denominated sales into U.S. dollars (see “Non-GAAP Measures”), worldwide net sales rose 11%, and comparable store sales rose 7% due to growth in all regions.
Net earnings rose 50% to $95 million, or $0.73 per diluted share, compared with $63 million, or $0.49 per diluted share, a year ago.
In the nine months (“year-to-date”) ended October 31, 2013:
Worldwide net sales rose 7% to $2.7 billion. On a constant-exchange-rate basis, worldwide net sales increased 11% and comparable store sales rose 7% due to increases in all regions.
Net earnings increased 20% to $285 million, or $2.21 per diluted share, versus $237 million, or $1.85 per diluted share, a year ago. Expenses of $9 million, or $0.05 per diluted share, had been recorded in this year’s first quarter for staff and occupancy reductions; excluding those costs, net earnings in the year-to-date increased 23% to $291 million, or $2.26 per diluted share (see “Non-GAAP Measures”).
Net sales highlights were as follows:
Total sales in the Americas region increased 4% to $417 million in the third quarter and 4% to $1.3 billion in the year-to-date. On a constant-exchange-rate basis, total sales increased 5% in the quarter and 4% in the year-to-date, and comparable store sales rose 1% in both the quarter and year-to-date due to growth in Tiffany’s New York flagship store sales.
In the Asia-Pacific region, total sales increased 27% to $238 million in the third quarter and 20% to $670 million in the year-to-date. On a constant-exchange-rate basis, total sales increased 29% and 21% in the respective periods, and comparable store sales rose 22% and 15% due to strong sales growth throughout the region.
Tiffany’s business in Japan continued to perform well in the third quarter. A negative translation effect from a substantially weaker yen versus the U.S. dollar caused total sales to decline 13% to $128 million in the third quarter and 8% to $409 million in the year-to-date. However, on a constant-exchange-rate basis, total sales rose 9% in the quarter and 12% in the year-to-date, primarily due to comparable store sales growth of 5% and 11%.
In Europe, total sales increased 7% to $104 million in the third quarter and 8% to $309 million in the year-to-date. On a constant-exchange-rate basis, total sales increased 4% in the quarter and 7% in the year-to-date, with comparable store sales growth of 2% and 5%, led by sales growth in the United Kingdom.
Other sales increased 14% to $24 million in the third quarter and 56% to $76 million in the year-to-date. On a constant-exchange-rate basis, total sales also rose 14% in the quarter and 56% in the year-to-date; comparable store sales of five TIFFANY & CO. stores in the United Arab Emirates, which were converted from independently-operated to Company-operated in July 2012, increased 1% in the third quarter.
Tiffany opened six stores in the quarter: in Paramus, New Jersey, Cleveland, Ohio, West Edmonton, Canada and Curitiba, Brazil; in Stuttgart, Germany; and in Jinan, China. At October 31, 2013, Tiffany operated 283 stores (120 in the Americas, 68 in Asia-Pacific, 54 in Japan, 36 in Europe and five in the U.A.E.), versus 272 stores (113 in the Americas, 64 in Asia-Pacific, 56 in Japan, 34 in Europe and five in the U.A.E.) a year ago.
Other financial highlights:
Gross margin (gross profit as a percentage of net sales) in the third quarter increased 2.6 points to 57.0%, from 54.4% a year ago, and in the year-to-date rose 0.9 point to 56.9% compared with 56.0% in the prior-year period. This contrasts with gross margin declines of 3.5 points and 2.4 points in the third quarter and year-to-date of 2012. In this third quarter and year-to-date, gross margin has benefited largely from reduced product cost pressures, as well as price increases taken earlier in the year. A shifting sales mix toward higher-priced, lower gross margin products has continued to offset a portion of these benefits.
SG&A (selling, general and administrative) expenses increased 5% in the third quarter largely due to incremental labor and store-related costs, and rose 6% in the year-to-date. The translation effect from a stronger U.S. dollar reduced SG&A expense growth by 3% in both periods. In addition, $9 million of expenses had been recorded in the first quarter tied to specific cost reduction initiatives related to staffing reductions, as well as subleasing of office space (see “Non-GAAP Measures”).
Interest and other expenses, net were $14 million in the third quarter and $41 million in the year-to-date, compared with $15 million and $40 million in the respective prior-year periods.
The effective income tax rate of 32.3% in the third quarter benefited from a one-time favorable impact of tax regulations as well as differences in the geographical mix of earnings. In the prior year’s third quarter, the rate of 38.4% was affected by the Company’s true-up of the prior year’s tax provision upon filing its tax returns. The effective income tax rate was 33.8% in the year-to-date versus 35.6% in the prior year.
Cash and cash equivalents were $521 million at October 31, 2013, compared with $345 million a year ago. Total short-term and long-term debt as a percentage of stockholders' equity was 36% at October 31, 2013, versus 40% a year ago.
Net inventories were $2.4 billion at October 31, 2013, or 6% higher than a year ago. There was similar growth in finished goods inventories and combined raw material and work-in-process inventories, which support new stores, expanded product assortments, rough diamond sourcing and internal manufacturing requirements. On a constant-exchange-rate basis, net inventories were 9% above last year.
Outlook for 2013:
For the fiscal year ending January 31, 2014, management is forecasting net earnings in a range of $3.65-$3.75 per diluted share, compared with $3.50-$3.60 per diluted share in its previous outlook and $3.25 per diluted share in 2012. This forecast excludes $0.05 per diluted share of expenses tied to specific cost-reduction initiatives that were recorded in the first quarter. This forecast is based on the following assumptions, which are approximate and may or may not prove valid: