Tiffany & Co. today reported a 12% first quarter increase in net sales, led by 11% growth in U.S. comparable store sales. Net earnings rose 9% in the quarter, despite weak sales in Japan and a lower gross margin that reflected shifts in sales mix and higher product costs.
In the three months (first quarter) ended April 30, 2005, net sales rose 12% to $509,901,000, compared with $456,960,000 a year ago. On a constant-exchange-rate basis that excludes the translation effect from a weaker U.S. dollar, net sales rose 11% and worldwide comparable store sales rose 4% (see attached “Non-GAAP Measures”).
Net earnings in the first quarter increased 9% to $40,058,000, or 27 cents per diluted share, from $36,811,000, or 25 cents per diluted share.
Michael J. Kowalski, chairman and chief executive officer, said, “We are very pleased with the robust growth in our U.S. sales, which compared with a very strong quarter last year, as well as growth in many international markets. We believe this clearly signifies the enduring appeal of our classic products and demand for our latest introductions, as well as the favorable response to our new CELEBRATION rings campaign. Sales in Japan remained below our expectations, but we will continue to focus our managerial, marketing and merchandising resources on that market.”
Sales in Tiffany's channels of distribution were as follows:
U.S. Retail sales increased 14% to $243,411,000 in the first quarter. Growth was primarily generated by an increase in the amount spent per transaction, as well as by a higher number of transactions. Comparable store sales rose 11%, due to growth of 11% in the New York flagship store and a geographically broad-based 11% increase in branch stores. The success of new stores opened in the past year also contributed to overall sales growth.
International Retail sales of $190,316,000 in the first quarter were 3% higher than the prior year. On a constant-exchange-rate basis, International Retail sales rose 1% but comparable store sales declined 6%; on that basis, comparable store sales declined 10% in Japan (total retail sales declined 5%), increased 5% in the Asia-Pacific region outside Japan and declined 3% in Europe.
Direct Marketing sales in the first quarter rose 12% to $41,377,000. Combined Internet and catalog sales rose 14% and business gift sales increased 9% due to increases both in the number of orders and in the amount spent per order.
Other sales rose 61% to $34,797,000. The increase was partly due to 18% sales growth in LITTLE SWITZERLAND stores. In addition, approximately two-thirds of the increase was attributable to the sale of rough diamonds determined, in the normal course of business, to be unsuitable for Tiffany's production (such sales commenced in the third quarter of 2004 and will continue on a regular basis as a component of the Company's direct diamond sourcing initiatives). Other sales also benefited modestly from growth of TEMPLE ST. CLAIR jewelry sales and from two IRIDESSE stores, which opened last fall and focus exclusively on the pearl jewelry category.
Other Financial Highlights:
Gross margin was 53.9% in the first quarter, versus 56.7% in the prior year. The decline was largely due to changes in geographic and product sales mix, as well as higher product costs. In addition, the Company recorded a LIFO inventory charge of $1,218,000 in this quarter, compared with a charge of $3,574,000 in 2004's first quarter. In the final week of the quarter, the Company increased certain U.S. retail prices to offset higher product costs.
Selling, general and administrative (“SG&A”) expenses increased 6% in the first quarter. SG&A expenses as a percentage of net sales were 40.9% in the first quarter, versus 42.9% in the prior year. Sales growth was sufficient to leverage fixed SG&A expenses.
The effective tax rate was 35.5% in the first quarter, versus 38.0% in the prior year. The decrease was due to an additional tax-benefit of $1,500,000, or $0.01 per diluted share, which was related to the repatriation provisions of the American Jobs Creation Act of 2004.
Net inventories at April 30, 2005 were 11% higher than at April 30, 2004. Combined raw material and work-in-process inventories rose 5% due to expanded rough diamond sourcing and increased costs of raw materials. Finished goods inventories rose 14% to support broadened product offerings and new stores.
During the first quarter, the Company spent $33,978,000 to repurchase and retire 1,036,792 shares of its Common Stock, at an average cost of $32.77 per share.
The Company is in a strong financial position. At April 30, 2005, cash and cash equivalents were $213,708,000 (versus $190,793,000 a year ago), total debt was $439,666,000 (versus $528,698,000 a year ago) and stockholders' equity was $1,710,532,000 (versus $1,496,950,000 a year ago). Total debt as a percentage of stockholder's equity was 26% at April 30, 2005, compared with 35% a year ago.
Mr. Kowalski continued, “We are justifiably enthusiastic about Tiffany's growth potential in the U.S. and in many international markets. We are more cautious about Japan, but continue to address weakness in that market with product development initiatives and focused marketing.”
He added, “We have a very strong line-up of new product introductions this year and exciting plans for new store openings, all supported by compelling marketing and public relations programs. Our full-year objective calls for an 8-10% net sales increase, including annual comparable store sales growth in a mid-to-high single-digit range in the U.S. and in a low-single-digit range in yen in Japan; the opening of four Company-operated TIFFANY & CO. stores in the U.S. and at least four internationally; and the opening of additional LITTLE SWITZERLAND and IRIDESSE stores. Also for the full year, we now expect a modest year-over-year decline in gross margin as well as a low-to-mid single-digit increase in SG&A expenses; and other expenses, net of approximately $20 million. We also expect an effective tax rate of approximately 38% for the remaining quarters of the year. And we continue to expect mid-single-digit percentage growth in net inventories for the full year.”
Mr. Kowalski concluded, “Therefore, we are maintaining our expectation for net earnings to be comfortably in a range of $1.45-$1.55 per diluted share for 2005; however, earnings could be at the lower end of that range if full year comparable store sales in Japan were to decline by a single-digit percentage.”