Tiffany & Co. (NYSE: TIF) reported financial results for the fourth quarter and full year ended January 31, 2014. Worldwide net sales rose 5% in the quarter and 6% in the year. A net loss in the fourth quarter was due to a recorded charge that related to a ruling in an arbitration proceeding (see below and “Non-GAAP Measures”); however, excluding that and specific charges recorded in the first quarter, net earnings increased 6% in the fourth quarter and 15% in the full year, reflecting the sales growth and improved operating margins. In addition, management provided its initial forecast for the fiscal year ending January 31, 2015.
Michael J. Kowalski, chairman and chief executive officer, said, “We are proud of our performance this past year. Sales and operating earnings (excluding the arbitration-related charge) rose to record levels. Sales growth was led by fine and statement jewelry, new or expanded jewelry collections including the ATLAS, ZIEGFELD, and HARMONY collections, and continuing strength in our iconic jewelry designs. Tiffany's marketing communications more effectively engaged global consumers wherever they shopped, our distribution network was expanded by 14 additional stores, and everywhere the store experience was enhanced by improved visual merchandising. And we made important additions to our management team to strengthen our ability to capitalize on the global growth opportunities before us.”
In the three months (“fourth quarter”) ended January 31, 2014:
- Worldwide net sales increased 5% to $1.3 billion. 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 increased 9%, and comparable store sales rose 6% as a result of increased sales in all regions.
- In the quarter, the Company recorded a net pretax charge of $473 million ($293 million after tax, or $2.27 per diluted share) related to an adverse arbitration ruling (see the Company’s news release issued on December 22, 2013: “Award Issued in Arbitration Between The Swatch Group Ltd. and Tiffany & Co.”) which resulted in a net loss of $104 million, or $0.81 per diluted share. Excluding the charge (see “Non-GAAP Measures”), net earnings rose to $190 million, or $1.47 per diluted share, from $180 million, or $1.40 per diluted share, a year ago.
In the 12 months (“full year”) ended January 31, 2014:
- Worldwide net sales increased 6% to $4.0 billion. On a constant-exchange-rate basis, worldwide net sales rose 10% and comparable store sales rose 6% due to growth in all regions.
- Net earnings were $181 million, or $1.41 per diluted share. Excluding the aforementioned charge in the fourth quarter, as well as expenses of $9 million, or $0.04 per diluted share, that had been recorded in this year’s first quarter for specific staff and occupancy reductions (see “Non-GAAP Measures”), net earnings increased 15% to $481 million, or $3.73 per diluted share, from $416 million, or $3.25 per diluted share, in the prior year.
- In the Americas region, total sales rose 6% to $659 million in the fourth quarter and 5% to $1.9 billion in the full year. On a constant-exchange-rate basis, total sales rose 7% in the quarter and 5% in the full year; comparable store sales increased 7% in the quarter due to growth in most markets, and rose 3% in the full year led by growth in New York flagship store sales as well as modest growth in branch store sales.
- Total sales in the Asia-Pacific region increased 8% to $275 million in the fourth quarter and 17% to $945 million in the full year. On a constant-exchange-rate basis, total sales rose 11% in the quarter and 18% in the full year; comparable store sales increased 4% in the quarter due to growth in Greater China and most other markets, and increased 11% in the year due to broad-based sales growth across the region.
- Tiffany’s business in Japan performed well throughout the year. A negative translation effect from a substantially weaker yen versus the U.S. dollar resulted in total sales declining 12% to $169 million in the fourth quarter and 9% to $579 million in the full year. However, on a constant-exchange-rate basis, total sales increased 8% in the fourth quarter and 11% in the full year, with 8% and 10% growth in comparable store sales.
- In Europe, total sales increased 10% to $161 million in the fourth quarter and rose 9% to $470 million in the full year. On a constant-exchange-rate basis, total sales rose 7% in both the quarter and full year; comparable store sales rose 2% in the quarter and 4% in the year due to growth in most countries.
- Other sales increased 47% to $35 million in the fourth quarter and 53% to $111 million in the full year. On a constant-exchange-rate basis, total Other sales also increased 47% and 53% in those respective periods, partly due to increases of 23% and 14% in 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, as well as wholesale sales of diamonds not meeting the Company's requirements.
- Tiffany added 14 stores (net) in 2013. At January 31, 2014, the Company operated 289 stores (121 in the Americas, 72 in Asia-Pacific, 54 in Japan, 37 in Europe and five in the U.A.E.), versus 275 stores (115 in the Americas, 66 in Asia-Pacific, 55 in Japan, 34 in Europe and five in the U.A.E.) a year ago.
- Gross margin (gross profit as a percentage of net sales) increased 1.4 points to 60.5% in the fourth quarter and rose 1.1 points to 58.1% in the full year. Gross margin in both periods largely benefited from reduced product cost pressures, as well as price increases taken earlier in the year. In addition, a sales mix shift in the full year toward higher-priced, lower gross margin products offset some of those benefits.
- SG&A (selling, general and administrative) expenses rose 7% in the fourth quarter and 6% in the full year, with the increases in both periods largely reflecting incremental fixed and variable labor costs and higher store-related expenses. The translation effect from a stronger U.S. dollar reduced SG&A expense growth by 3% in both the quarter and full year.
- Interest and other expenses, net were $8 million in the fourth quarter and $49 million in the full year, versus $14 million and $54 million in the respective periods last year. Interest and other expenses, net in the quarter and full year included $7 million associated with a foreign currency transaction gain related to the payment of the arbitration award (see “Non-GAAP Measures”).
- The Company had an income tax benefit in the fourth quarter due to the effect of the arbitration award. The effective income tax rate was 28.8% in the full year. Excluding the above-mentioned charges, the effective income tax rates were 36.1% in the fourth quarter and 34.8% in the full year, versus 35.0% and 35.3% in the prior year.
- Cash and cash equivalents and short-term investments were $367 million at January 31, 2014, compared with $506 million a year ago reflecting the Company’s $473 million cash payment tied to the aforementioned adverse arbitration ruling. Short-term and long-term debt totaled $1.0 billion at January 31, 2014 versus $959 million a year ago. As a percentage of stockholders' equity, total debt was 37% at both January 31, 2014 and January 31, 2013.
- Net inventories increased 4% in the full year to $2.3 billion at January 31, 2014. Finished goods inventories and combined raw material and work-in-process inventories increased at similar rates. On a constant-exchange-rate basis, net inventories rose 6% over last year.
- Capital expenditures were $221 million in 2013, versus $220 million in the prior year.
- The Company incurred a “free cash outflow” (net cash provided by operating activities less capital expenditures) in the full year (see “Non-GAAP Measures”), which was entirely due to the $473 million arbitration award payment.
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