Tiffany & Co. (TIF)
Q1 2012 Earnings Call
May 24, 2012 8:30 am ET
Mark L. Aaron - Vice President of Investor Relations
Patrick F. McGuiness - Chief Financial officer and Senior Vice President
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Good day, everyone, and welcome to this Tiffany & Co. First Quarter Conference Call. Today's call is being recorded. Participating in today's call are Mr. Mark Aaron, Vice President of Investor Relations; and Mr. Pat McGuiness, Senior Vice President and CFO. At this time, I would like to turn the conference over to Mr. Mark Aaron. Please go ahead.
Mark L. Aaron
Good day, everyone. Pat McGuiness and I appreciate your tuning in for this review of Tiffany's first quarter results and an update of our full year outlook. Before we continue, please note Tiffany's Safe Harbor provision 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 2011 annual report on Form 10-K and in other 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. Now let's proceed.
The first quarter results we reported this morning were mixed. Total sales growth of 8% was a few percent below our expectation due to softness in April, but you should note that it was on top of a 20% increase on last year's first quarter. The shortfall to our expectation was entirely in the Americas while quarterly sales in Asia Pacific, Japan and Europe came in pretty much where we expected.
Gross margin declined in the quarter, which we had anticipated, and SG&A expenses were in line with our expectation. Put it together and net earnings rose slightly over last year on a GAAP basis but declined slightly when adjusted to exclude nonrecurring costs last year. You should also note that net earnings in last year's first quarter had increased by a strong 26%.
We had clearly communicated 2 months ago that we expected only minimal EPS growth when adjusted in the first quarter, and that we anticipated that most of the expected annual increase in 2012 would occur in the fourth quarter. Pat will address our new annual outlook in his remarks.
Let's begin the sales review by looking at the Americas, where total sales rose 3% in the quarter. The increase was due to a higher average price per unit sold. On a constant exchange rate basis, sales also rose 3%, and comps were equal to last year due to a 1% increase in brand store comps, with no meaningful geographical differences by region except for strength in our Pacific market and a 4% decline in New York flagship store sales.
In last year's first quarter, Americas comps had increased 17% due to a 15% increase in brand store comp and a 23% increase in New York flagship store sales. In any case, both the brand stores and New York comps trailed our expectations.
We believe that our performance in the U.S., while disappointing to us, is also reflective of data published by MasterCard spending polls for the high-end segment of the U.S. jewelry industry.
On our last call, we identified a number of factors that we believed affected sales in the Americas, ranging from restrained spending by customers employed in the financial sector to substantial competitive discounting, which we believe has continued, to particular softness in entry-level silver jewelry price points tied to resistance to price increases. We think those factors are all still relevant.
In addition, the first quarter finished on a softer note that we attribute to a difficult year-over-year comparison to strong growth in April 2011, which may have been related to at least some degree to the timing of Mother's Day, which occurred on May 8 last year and May 13 this year.
In terms of customer mix, it was higher foreign tourist spending that drove the modest Americas sales increase in the quarter versus suspending by domestic customers. In fact, our stores in Hawaii and Guam saw the largest increase. Conversely, we noted that foreign tourist spending in the New York flagship store was equal to the prior year, as increased sales to Asian visitors were offset by lower sales to Europeans and other tourists.
In the Americas region beyond the U.S., sales were up in Canada and we had strong sales growth in Mexico, where we have 8 stores, and Brazil, with our 3 stores. We added 3 stores in the Americas in the first quarter, including one in the newly opened City Creek Center in Salt Lake City, one in Montréal in the Ritz-Carlton Hotel and one in Mexico in the Palacio De Hierro's Interlomas department store. Six more stores in the Americas are planned for later this year.
Lastly, combined e-commerce and catalog sales in the Americas rose 1% in the quarter due to an increase in the average sales per order. The increase was slightly below our expectation but came on top of a 14% increase last year.
Let's now turn to the Asia Pacific region, which posted a solid 17% sales increase in the first quarter that was virtually in line with our expectation and was mostly due to increased unit volume, as well as some increase in the average price per unit sold. On a constant exchange rate basis, total sales rose 16% with double-digit sales increases in most countries. Local currency comp store sales rose 10%, despite going up against a substantial 26% increase last year.