Tiffany’s Sales and Earnings up in Third Quarter

By: Bollywood Movie Review

Tiffany & Co. (NYSE: TIF) reported an 18% increase in its net sales for the three months (third quarter) ended October 31, 2007, reflecting strong sales in the U.S. and many international markets. Comparable store sales rose 8% in the U.S. and 10% (on a constant-exchange-rate basis) internationally. Net earnings increased dramatically due to strong operating performance and a gain on the sale-leaseback of Tiffany’s flagship store in Tokyo.

Net sales in the third quarter increased 18% to $627,323,000. On a constant-exchange-rate basis which excludes the effect of translating foreign-currency-denominated sales into U.S. dollars (see attached “Non-GAAP Measures” schedule), net sales rose 16% due to a 9% increase in worldwide comparable store sales and sales from new stores.

In the nine-month period (year-to-date), net sales rose 18% to $1,885,614,000. On a constant-exchange-rate basis, net sales increased 17% and worldwide comparable store sales rose 10%.

During the quarter, the sale-leaseback of the multi-tenant building housing the Company’s Tokyo flagship store was completed for proceeds of $328,000,000. The Company recorded as other operating income a pre-tax gain of $105,051,000, or $0.48 per diluted share after tax, and a deferred pre-tax gain of $75,244,000 will be amortized in SG&A expenses over a 15-year period. The Company contributed $10,000,000, or $0.04 per diluted share after tax, of the proceeds to The Tiffany & Co. Foundation. The sale-leaseback of the single-tenant building housing the Company’s flagship store in London was also completed in the third quarter for proceeds of $149,000,000; on that transaction, the entire pre-tax gain of $63,961,000 was deferred and will be amortized in SG&A expenses over a 15-year period.

Net earnings from continuing operations rose 208% in the third quarter to $100,445,000, or $0.72 per diluted share, from $32,625,000, or $0.23 per diluted share, in the prior year. Net earnings increased 239% to $98,890,000, or $0.71 per diluted share, compared with $29,142,000, or $0.21 per diluted share, in the prior year.

Year-to-date, net earnings from continuing operations rose 76% to $213,069,000, or $1.52 per diluted share, compared with $120,822,000, or $0.85 per diluted share, in the prior year. Net earnings rose 64% to $185,522,000, or $1.33 per diluted share, which included an after-tax charge of $22,602,000, or $0.16 per diluted share, related to the sale of Little Switzerland. Net earnings in the prior year were $113,428,000, or $0.80 per diluted share.

Michael J. Kowalski, chairman and chief executive officer, said, “Tiffany’s focused growth strategies in distribution, merchandising and marketing continue to prove very effective. We are pleased with our overall businesses in the U.S. and internationally, as well as with product performance ranging from robust diamond jewelry sales to a healthy increase in silver jewelry sales.”

Sales by channel of distribution were as follows:
U.S. Retail sales rose 12% to $302,673,000 in the third quarter and 16% to $946,692,000 in the year-to-date due to increases in transactions and in spending per transaction. Comparable store sales rose 8% in the quarter and 13% in the year-to-date. Sales in the New York flagship store surged 25% and 28% (benefiting from higher sales to local customers and foreign tourists), while comparable branch store sales increased 4% and 9%. During the quarter, the Company opened three new U.S. stores, including a store in Las Vegas (the second in that market), Natick, MA and Wall Street, New York City. The Company operated 68 TIFFANY & CO. stores in the U.S. at the end of the quarter, versus 63 stores a year ago.
International Retail sales increased 22% to $270,845,000 in the third quarter and 18% to $777,875,000 in the year-to-date. On a constant-exchange-rate basis, sales rose 18% in the quarter and 16% in the year-to-date due to strong growth in most markets and an increase in Japan. Detailed sales results by geographical region are noted on the attached “Non-GAAP Measures” schedule. During the quarter, Tiffany opened six retail locations, including Nagoya Japan, Macau, Malaysia, Hong Kong, London and Mexico City. The Company operated 113 TIFFANY & CO. international stores and boutiques at the end of the period, versus 101 locations a year ago.
Direct Marketing sales rose 4% to $31,373,000 in the third quarter due to an increase in the average amount spent per order, and increased 9% to $104,772,000 in the year-to-date, due to increases in the number of orders and the average amount spent per order.
Other sales increased 137% to $22,432,000 in the third quarter and 114% to $56,275,000 in the year-to-date. Sales growth in both periods was largely due to wholesale sales of diamonds (which increased $12.5 million and $27.8 million). In addition, sales increased in the Company’s IRIDESSE stores. Results for the Little Switzerland business have been recorded in discontinued operations.

Other financial highlights were as follows:
Gross margin (gross profit as a percentage of net sales) was 53.7% in the third quarter (versus 54.0% in the prior year) and 54.7% in the year-to-date (versus 55.5%), with the declines largely due to increased wholesale sales of diamonds. The Company recorded LIFO inventory charges of $6,263,000 in the quarter and $18,702,000 in the year-to-date, versus charges of $10,444,000 and $19,911,000 in the prior year.
Selling, general and administrative (“SG&A”) expenses in the third quarter and year-to-date included the Company’s contribution of $10,000,000, or $0.04 per diluted share after tax, to The Tiffany & Co. Foundation. Excluding that contribution, SG&A expenses would have increased 16% in the third quarter and 14% in the year-to-date, reflecting higher labor and occupancy costs (largely tied to new and existing stores) and marketing expenses.
Other expenses, net in last year’s third quarter and year-to-date included income and gains totaling $6,774,000, or $0.03 per diluted share after tax, associated with the sale of equity investments and marketable securities.
The Company’s effective tax rate on earnings from continuing operations was 33.7% in the third quarter, versus 33.3% a year ago, and 36.2% in the year-to-date, compared with 36.9% in the prior year.
The Company reported net losses of $1,555,000 in the third quarter and $27,547,000 in the year-to-date related to Little Switzerland. Year-to-date results included an after-tax charge of $22,602,000 related to the sale of Little Switzerland.
Net inventories at October 31, 2007 were 8% higher than a year ago due to new store openings, expanded product assortments, higher precious metal costs and expanded diamond manufacturing and sourcing operations.
The Company repurchased and retired 1,892,290 shares of its Common Stock in the third quarter at a total cost of $97,037,000, or an average cost of $51.28 per share. In November, the Company has spent $208,217,000 to repurchase 4,440,691 shares of its Common Stock at an average cost of $46.89 per share.

Year-to-date through November 29th, the Company has repurchased 7,515,200 shares of its Common Stock at a total cost of $364,452,000, or an average cost of $48.50 per share. The Company now has $331 million available for repurchases through December 2009 under the currently authorized program.
The Company’s cash and short-term investments increased to $391,120,000 at October 31, 2007, versus $56,933,000 in the prior year, and total short-term and long-term debt declined to $463,190,000 at October 31, 2007 from $660,569,000 a year ago. This reflected proceeds from the sale of the Tokyo and London properties and Little Switzerland. As a result, total debt as a percentage of stockholders’ equity declined to 24% at October 31, 2007 from 39% a year ago.

Commenting on the full-year outlook, Mr. Kowalski said, “We are now one month into the all-important November-December holiday season and are pleased with overall sales growth that is meeting our expectations. This has been another active year for store openings and new product introductions, and we believe that Tiffany is competitively well-positioned in our industry. The vast majority of holiday season business is still ahead of us, so it is premature to extrapolate recent results or draw any conclusions about consumer spending. We will report those results on January 11th. Therefore, our current financial performance expectations for fiscal 2007 call for (i) net sales growth of approximately 15%, (ii) an improved operating margin from continuing operations due to sales leverage on SG&A expenses and (iii) net earnings from continuing operations per diluted share in a range of $2.69 - $2.74 which includes the $0.48 per diluted share after-tax gain from the sale of the Tokyo store and the $0.04 per diluted share after-tax contribution to The Tiffany & Co. Foundation (excluding those two items, it equates to $2.25 - $2.30 per diluted share and compares with a previous expectation of $2.22 - $2.27 per diluted share). Net earnings, which include the charge related to the sale of Little Switzerland and its losses from operations, are expected to be in a range of $2.49 - $2.54 per diluted share