Tiffany Management Discusses Q2 2010 Results - Earnings Call Transcript

Tiffany Management Discusses Q2 2010 Results - Earnings Call Transcript
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Tiffany & Co. (TIF)

Q2 2010 Earnings Call Transcript

August 27, 2010 8:30 am ET

Executives

Mark Aaron – VP, IR

Jim Fernandez – EVP and CFO

Presentation

Operator

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Good morning, everyone, and welcome to this Tiffany & Co. second quarter conference call. (Operator instructions) With us today we have Mr. Jim Fernandez, Executive Vice President and Chief Financial Officer, and Mr. Mark Aaron, Vice President of Investor Relations. Mr. Aaron, please go ahead.

Mark Aaron

Thanks and hi everyone. Earlier today, we reported Tiffany’s second quarter results, and on this call Jim and I will review that performance and also comment on the outlook for the full year.

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 2009 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 we can proceed. We're very with Tiffany’s second-quarter earnings growth. As a stronger than expected gross margin more than offset sales growth that fell modestly short of our internal expectations. Worldwide sales grew 9% in the quarter reflecting softer than expected growth in the Americas. However, sales results for total Asia-Pacific were generally solid and sales growth strengthened in Europe in the second quarter as we expected.

And probably not surprisingly there was continued softness in Japanese sales. We had a very strong increase in gross margins, and SG&A expense growth was well contained. So all in all it was a good quarter with net earnings from continuing operations up 19%, and more relevant up 45% when excluding some non-recurring items recorded in the current and prior year periods. And we modestly increased our full-year earnings outlook.

Let us first look at sales by segment. In the Americas region sales increased 8% in the second quarter, which was lighter than we expected especially due to softness earlier in the quarter. The 8% increase entirely resulted from an increase in the average transaction size. Our price stratification analysis indicated healthy growth in sales and transaction at most price points, including the highest end, but lower sales and transaction at price points below $500.

Some of that softness below $500 might reflect the tough comparison to the launch in last year’s second quarter of Tiffany Keys, and the softness might also say something about consumer behavior related to current economic conditions. In any case, Tiffany benefits from offering products in a broad range of price points.

Comparable store sales in the Americas rose 5% in the quarter on a constant currency basis on top of 25% decline in last year’s second quarter. Looking at the trend during the quarter, Americas comps increased 5% in May versus a 27% declined last year, rose 2% in June versus a 25% decline, and increased 9% in July versus a 23% decline last year. Comparable Americas brand store sales increased 4% versus a 24% decline last year. Sales in the New York flagship store increased 8% in the quarter versus a 30% decline last year.

In addition, the 8 New York area brand stores posted a 12% comp increase in the quarter. There were no significant differences in performance among most regions, except for continued and pronounced softness in the south-west US region that includes Southern California, Arizona and Las Vegas. On the other hand, our sales in Hawaii and Guam were very strong and our stores in Canada, Mexico and Brazil posted solid increases in the quarter.

Looking at the customer mix, foreign tourist spending accounted for more than half of the sales growth in the quarter, with the largest increases from Asian customers and minimum sales growth to European visitors. Interestingly, the entire increase in our New York flagship store sales came from higher sales to tourist, and Mayor Bloomberg recently projected that tourist visits to New York will reach record levels this year. While foreign tourism accounts for roughly 15% of US store sales, it runs at roughly twice that rate in the New York flagship store.

Direct marketing, Internet and catalog sales in the Americas declined by 2% in the quarter, which was below our expectation and was due to a decline in orders shipped. In last year’s second quarter while retail store sales were still running down more than 20%, direct marketing sales had declined only 8% as it benefited from the launch of the Keys collection. We are pleased to be seeing a resumption of direct marketing sales growth this month.

Now let us take a look at our growing business in Europe. Total sales increased 14% in the second quarter. However, year-over-year the euro and pound on average were 10% and 7% weaker than the dollar in the quarter, and were close to our internal forecast. Therefore, on the more meaningful constant exchange rate basis, total European sales rose 25% and comparable store sales increased 21%. This was on top of a 5% comp increase last year.

After experiencing a slowdown in European sales near the end of the first quarter, comparable store sales growth improved steadily throughout the second quarter, and actually rose by double-digit percentages in all three months. We were pleased that sales growth was pretty evenly divided between the UK and continental Europe. The vast majority of our European business is transacted with local customers, but we are also seeing an increase in sales to foreign visitors, especially from China. In mid-June, we launched e-commerce in 8 countries in continental Europe, and are quite pleased with the initial numbers of both visits and orders.

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