Tiffany & Co. (NYSE: TIF – News) today reported its results for the third quarter ended October 31, 2004. Net earnings declined 26% in the quarter and were below management's expectations calling for earnings approximately equal to the prior year. Retail sales growth in the U.S. (including a 4% increase in comparable store sales) and in many international stores was partially offset by weaker-than-expected sales in Japan and the Company's Direct Marketing channel. In addition, higher precious metal and diamond costs were meaningful factors leading to a decline in consolidated gross margin.
In the three-month period (third quarter) ended October 31, 2004, net sales increased 7% to $461,152,000, versus $430,123,000 in the prior year, and comparable stores sales rose 3%. On a constant-exchange-rate basis (see attached “Non-GAAP Measures”) that excludes the effect of translating local-currency-denominated sales into U.S. dollars, net sales and comparable store sales increased 5% and 1%. Net earnings of $20,809,000, or 14 cents per diluted share, were 26% lower than $28,031,000, or 19 cents per diluted share, a year ago.
In the nine-month period (year-to-date) ended October 31, 2004, net sales rose 10% to $1,394,709,000, compared with $1,268,457,000 in the prior year, and comparable store sales rose 8%. On a constant-exchange-rate basis, net sales and comparable store sales increased 7% and 5%. Net earnings were $97,733,000, or 66 cents per diluted share, compared with $105,041,000, or 71 cents per diluted share.
Sales results in the Company's four channels of distribution, and as compared to prior-year periods, were as follows:
U.S. Retail sales of $216,500,000 in the third quarter were 7% higher than a year ago and comparable store sales rose 4% (due to growth of 1% in New York flagship store sales and 5% in comparable branch store sales). In the year-to-date, U.S. Retail sales of $666,932,000 were 13% above the prior year and comparable store sales increased 11% (due to increases of 14% in New York flagship store sales and 10% in comparable branch store sales). In both periods, the comparable store sales increases were driven by higher average amounts spent per transaction, while the number of transactions declined. This year, the Company has opened four new TIFFANY & CO. stores: in Palm Beach Gardens, Florida, Edina, Minnesota, Kansas City, Missouri and, last week, in Westport, Connecticut. The Company now operates 55 TIFFANY & CO. stores in the U.S.
International Retail sales rose 10% to $190,851,000 in the third quarter and comparable stores sales increased 3% (an increase of 6% and a decline of 2% on a constant-exchange-rate basis). In the year-to-date, International Retail sales increased 10% to $556,530,000 and comparable store sales rose 4% (up 3% and down 2% on a constant-exchange-rate basis). Sales results by major region on a constant-exchange-rate basis were as follows: in Japan, third quarter retail sales declined 2% in total and 5% on a comparable store basis primarily due to continued declines, although at a lesser rate than earlier in the year, in silver jewelry, while year-to-date retail sales declined 7% in total and 9% on a comparable store basis; in other Asia-Pacific markets, comparable store sales increased 6% in the quarter and 15% in the year-to-date; and in Europe, comparable store sales increased 1% in the quarter and 3% in the year-to-date. This year, the Company has added six new international stores and boutiques, including three in Japan (in Tokyo, Takasaki and, last week, in Osaka), one store in Taipei, a store in Shanghai and a fourth store in London, and currently operates 96 TIFFANY & CO. stores and boutiques internationally.
Direct Marketing sales declined 6% to $36,861,000 in the third quarter and 5% to $114,034,000 in the year-to-date. Combined e-commerce and catalog sales declined 1% in the quarter and increased 5% in the year-to-date, due to an increase in the average order size but a decline in the number of orders for entry-level priced jewelry. Business sales declined 17% in the third quarter and 23% in the year-to-date, resulting from management's decision to discontinue service-award program sales at the end of 2003.
Specialty Retail sales rose 17% in the third quarter to $16,940,000 and rose 13% in the year-to-date to $57,213,000. As expected, the third quarter's sales increase in this channel was primarily due to the startup of sales of rough diamonds purchased as part of larger assortments from certain mines but determined, in the normal course of business, to be unsuitable for Tiffany's production. During the quarter, sales growth in LITTLE SWITZERLAND stores was affected by severely adverse weather in the Caribbean. In addition, in October the first IRIDESSE store opened in Tysons Galleria in McLean, Virginia, and a second store will open this month in The Mall at Short Hills in New Jersey. IRIDESSE focuses exclusively on the pearl jewelry category.
Other Financial Highlights
Gross margins (gross profit as a percentage of net sales) of 53.4% in the third quarter and 55.3% in the year-to-date were below prior-year levels of 55.3% and 56.9%. A significant portion of the declines (58% and 44%) was due to LIFO inventory charges of $8,682,000 in the quarter and $17,708,000 in the year-to-date (versus prior-year charges of $3,500,000 and $7,600,000) primarily resulting from increases in precious metal and diamond costs. To a lesser extent, gross margin was adversely affected by a confluence of factors including changes in sales mix and costs incurred to expand product distribution and sourcing/manufacturing capacity.
Selling, general and administrative (“SG&A”) expenses increased 10% in both the third quarter and year-to-date, with a substantial portion of the increases tied to higher marketing, depreciation and amortization expenses. SG&A expenses as a percentage of net sales rose to 45.0% in the quarter and 43.0% in the year-to-date, compared with 43.8% and 43.0% in the prior year.
The American Jobs Creation Act of 2004 (“AJCA”) was signed into law in October 2004. At this time, the Company is analyzing the AJCA to determine its impact on the Company's financial statements. The Company's third quarter results and 2004 outlook do not include any effects of the AJCA.
Net inventories at October 31, 2004 were 26% higher than a year ago. A 59% increase in raw material and work-in-process inventories was a direct result of expanded rough diamond sourcing and increased costs of raw materials. Finished goods inventories increased 17% to support new stores and new product offerings. In addition, inventories increased 2% due to the translation effect of a weaker U.S. dollar.
The Company was active in its share repurchase program during the third quarter, repurchasing and retiring 700,000 shares of its Common Stock at an average cost of $30.19 per share. In the year-to-date, the Company has repurchased and retired 1,435,000 shares of its Common Stock at an average cost of $32.46 per share. Approximately $70 million remains available for future repurchases under the currently authorized plan.
The Company's financial position at October 31, 2004 included cash and cash equivalents of $129,776,000 (versus $152,724,000 a year ago), short-term and long-term debt totaling $660,583,000 (versus $565,452,000 a year ago) and stockholders' equity of $1,509,895,000 (versus $1,346,648,000 a year ago).
Commenting on the results, Michael J. Kowalski, chairman and chief executive officer, said, “These disappointing results do not affect our long-term strategic direction. While the U.S. sales increase was geographically broad-based, we had to cope with softer demand in the early part of the quarter and faced a tough comparison with 2003's third quarter, when we achieved a 16% comparable store sales increase. In Japan, we are continuing to reposition our product assortment and support new product introductions with additional marketing and the opening of two freestanding stores. We are seeing some traction from these initiatives, but results were still below our expectations and it would be premature to draw conclusions.”
Mr. Kowalski added, “We are excited about initial customer reactions to the entire range of new products we've introduced this year and are equally encouraged with successful early results from our new stores. Therefore, we continue to expect a healthy sales increase in the holiday season in the U.S. Nonetheless, we are slightly moderating our previous guidance to mid-single-digit comparable U.S. store sales growth to correspond with the pace of the third quarter. In Japan, we believe that our initiatives, combined with easier year-over-year comparisons, can enable us to improve to flat fourth quarter local-currency comparable store sales. We expect continued favorable results in other international markets and some improvement in direct marketing sales. In total, our target calls for high-single-digit worldwide sales growth in the fourth quarter. We now expect gross margin in the fourth quarter to be somewhat lower than the prior year due to a continuation of many of the third quarter factors, but expect only a mid-single-digit increase in SG&A expenses. As a result, we believe the Company can achieve 5%-10% net earnings growth in the fourth quarter, which would result in full year earnings in a range of $1.43 – $1.48, versus our previous expectation of $1.55 – $1.60.”