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Tiffany & Co. (TIF)

Q2 2012 Earnings Call

August 27, 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 the Tiffany & Co. Second Quarter Conference Call. Today's conference is being recorded. Participating on today's call is Mr. Patrick McGuiness, Senior Vice President and Chief Financial Officer, and Mr. Mark Aaron, Vice President of Investor Relations. At this time, it is my pleasure to turn the conference over to Mark Aaron. Please go ahead.

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Mark L. Aaron

Thank you. Good day, everyone, and thanks for joining us. On today's call, Pat and I will review second quarter results and comment on the full year financial outlook. Before continuing, 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 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.

Now let's review the results. When we reported first quarter results on May 24, we indicated that worldwide sales in the first few weeks of the second quarter were increasing by a low-single-digit percentage and that we expected net earnings in the second quarter to decline from the prior year when excluding last year's nonrecurring costs. The overall results we report today were in line with those internal expectations. Net worldwide sales rose 2%, led by strong growth in Japan, while sales in the Americas, Asia Pacific and Europe were virtually equal to the prior year. And while net earnings on a GAAP basis rose 2%, adjusted net earnings declined 17% from the prior year, which was about what we expected when excluding nonrecurring costs in last year's second quarter related to the relocation of our New York headquarters staff. The year-over-year comparisons we faced in the quarter could not have been much more difficult, so it's worth reminding you that in last year's second quarter, worldwide sales had increased 30%, net earnings had increased 33% and net earnings excluding nonrecurring costs had surged 58%.

Let's now look at second quarter sales by region. In the Americas, total sales declined 1% in the quarter. An increase in the average price per unit sold was offset by a decline in unit volume. On a constant-exchange-rate basis, total sales were equal to the prior year, and comp store sales were down 5% on top of a 23% comp increase last year. Of that 5% comp decline in the quarter, brand store comps were down 4% on top of a 19% increase last year, with most regions performing in a relatively narrow band except for solid growth in Florida, Texas and our Pacific market of Hawaii and Guam. Sales in the New York flagship store declined 9% on top of a staggering 41% increase last year. Data published by MasterCard Spendingpulse continues to indicate weak customer spending for the entire U.S. jewelry industry and most pronounced among the high-tier jewelers.

From a customer mix perspective, the sales decline in the U.S. in the quarter was entirely due to lower spending by local customers. While overall sales to foreign tourists were roughly unchanged from the prior year, higher sales to Japanese and Chinese visitors were offset by a decline in spending by European tourists in the U.S., which obviously affected the New York flagship store as well. Also in the Americas region, total sales rose in Canada, although comps declined, while we had strong growth in local currency comps in Latin America.

Beyond stores, combined e-commerce and catalog sales in the Americas rose 3% in the quarter due to an increase in the average sales per order. That was on top of a 16% increase last year. I'm pleased to add that based on successful results measured both quantitatively and creatively from a test mailing of a new catalog format we did earlier this year, our catalogs will soon have a fresh new look starting with the upcoming holiday season.

During the quarter, we added one store in the Americas when we opened our ninth store in Mexico in the Altavista neighborhood of Mexico City. In the second half of the year, we will be adding 3 stores in the U.S., 1 in Brazil and 5 in Canada, which now includes converting from wholesale distribution 4 Tiffany boutiques in Holt Renfrew department stores into company-operated locations.

Turning to the Asia Pacific region, total sales rose 1% in the second quarter, resulting from increased unit volume with an offsetting decline in the average price per unit sold. On a constant-exchange-rate basis, total sales increased 3%, and comp store sales in local currencies declined 5%, which compared with an extraordinary 41% comp increase in last year's second quarter. Australia posted the strongest growth in the quarter in contrast to softness in Hong Kong tied to restrained Chinese consumer spending and softness in Korea.

We remain enthusiastic about Tiffany's longer-term potential in China, and we continued to expand our store base in the second quarter by opening our 18th and 19th stores there, one in Nanjing and the other in Shanghai's Grand Gateway mall, which represents our fifth store in that city. We have 5 additional stores on track to open in the Asia Pacific region in the second half of the year.

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