Tiffany & Co. reported that its net sales increased 11% in the second quarter. Comparable store sales rose 6% in the U.S. and 1% in local currency in Japan. Earnings from operations increased 27% due to the sales growth and its leverage effect on selling, general and administrative expenses.
Net earnings in the three months (second quarter) ended July 31, 2005 increased 53% to $50,551,000, or $0.35 per diluted share, from $33,090,000, or $0.22 per diluted share. Net earnings in the six months (first half) ended July 31, 2005 rose 30% to $90,609,000, or $0.62 per diluted share, versus $69,901,000, or $0.47 per diluted share. As a result of the American Jobs Creation Act of 2004, the effective tax rates in both periods were lower than the prior year, which boosted earnings by $0.05 per diluted share in the second quarter and $0.06 per diluted share in the first half.
Net sales in the second quarter increased 11% to $526,701,000, compared with $476,597,000. On a constant-exchange-rate basis that excludes currency effects from translating foreign-denominated sales into U.S. dollars, net sales increased 10% and worldwide comparable store sales increased 4% (see attached “Non-GAAP Measures”).
In the first half, net sales rose 11% to $1,036,602,000, compared with $933,557,000 in the prior year. On a constant-exchange-rate basis, net sales rose 10% and worldwide comparable store sales rose 4%.
Sales in Tiffany's channels of distribution were as follows:
— U.S. Retail sales increased 8% to $267,710,000 in the second
quarter and 11% to $523,562,000 in the first half. Comparable
store sales rose 6% in the second quarter due to growth of 6%
in comparable branch store sales and 3% in New York flagship
store sales. Comparable store sales increased 8% in the first
half due to growth of 8% in branch store sales and 7% in the
New York flagship store. The Company opened a store in Carmel,
California in the second quarter and now operates 56 TIFFANY &
CO. stores in the U.S.
Effective in the second quarter, the Company placed
responsibility for U.S. business gift sales within the U.S.
Retail channel and, consequently, now reports U.S. business
gift sales in that channel. In the past, such sales were
reported in the Direct Marketing channel, which will continue
to report business gift sales transacted by e-commerce. The
prior-year amounts have been reclassified to conform to the
current-year presentation. An attached schedule highlights the
— Direct Marketing sales increased 5% to $30,354,000 in the
second quarter and 9% to $59,290,000 in the first half,
primarily due to increases in the amounts spent per e-commerce
and catalog order.
— International Retail sales increased 12% to $202,104,000 in
the second quarter and 7% to $392,420,000 in the first half.
On a constant-exchange-rate basis, international retail sales
rose 9% in the quarter and 5% in the half, including
comparable store sales growth of 3% in the quarter and a
decline of 2% in the half. On that basis, comparable store
sales increased 1% in the quarter and declined 5% in the half
in Japan (total retail sales rose 5% in the quarter and
fractionally in the half); rose 6% in both periods in the
Asia-Pacific region outside Japan; and increased 5% and 2% in
Europe. The Company added retail locations in Brisbane,
Australia and in Paris, France (its third location) in the
second quarter and operates 94 TIFFANY & CO. international
stores and boutiques.
— Other sales increased 43% to $26,533,000 in the second quarter
and 52% to $61,330,000 in the first half. These increases were
largely due to sales of rough diamonds (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). Also contributing to growth were sales increases
of 6% and 13% in the Company's LITTLE SWITZERLAND stores, and
sales in the first two IRIDESSE stores which opened last fall
and focus exclusively on the pearl jewelry category.
Other Financial Highlights:
— Gross margin (gross profit as a percentage of net sales) of
55.5% in the second quarter was equal to the prior year. Gross
margin of 54.7% in the first half was lower than 56.1% in the
prior year, largely due to changes in geographic/product sales
mix and higher product costs, as well as wholesale sales of
rough diamonds which earn a minimal or no gross margin. The
Company recorded LIFO inventory charges of $2,952,000 in the
second quarter and $4,169,000 in the first half, compared with
charges of $5,453,000 and $9,027,000 in the prior year.
— Selling, general and administrative (“SG&A”) expenses in both
the second quarter and first half were 6% higher than the
prior-year periods. The ratio of SG&A expenses to net sales
improved to 41.4% in the second quarter and 41.1% in the first
half, versus 43.3% and 43.1% in the prior year, due to the
leverage effect of strong sales growth on fixed SG&A expenses.
— The operating margin (earnings from operations as a percentage
of net sales) increased to 14.1% in the second quarter, versus
12.2% in the prior year, and rose to 13.6% in the first half,
versus 13.0% a year ago.
— Effective tax rates of 28.0% in the second quarter and 31.5%
in the first half were lower than 38.0% in the prior-year
periods. The decreases were due to additional tax benefits of
$6,600,000, or $0.05 per diluted share, in the second quarter
and $8,100,000, or $0.06 per diluted share, in the first half,
which were related to the repatriation provisions of the
American Jobs Creation Act of 2004.
— Net inventories at July 31, 2005 were 3% higher than a year
ago. Finished goods inventories rose 9% in support of
broadened product offerings and new stores. Combined raw
material and work-in-process inventories declined 10%,
reflecting a substantial buildup last year during the initial
development of rough diamond sourcing activities.
— The Company continues to repurchase its shares. In the second
quarter, the Company repurchased and retired 1,538,520 shares
of its Common Stock at a total cost of $49,970,000, or an
average cost of $32.48 per share. In the first half, it
repurchased and retired 2,575,312 shares of its Common Stock
at a total cost of $83,948,000, or an average cost of $32.60
per share. Approximately $325 million remains available for
future repurchases under the currently authorized plan.
— The Company's financial position remains strong. At July 31,
2005, cash and cash equivalents were $128,611,000 (versus
$153,623,000 a year ago), total debt was $404,263,000 (versus
$586,337,000 a year ago) and stockholders' equity was
$1,693,975,000 (versus $1,507,608,000 a year ago). Total debt
as a percentage of stockholders' equity was 24% at July 31,
2005, versus 39% a year ago.
Michael J. Kowalski, chairman and chief executive officer, said, “These quarterly results are encouraging and we believe well-position Tiffany for a successful second half. Our full-year objectives call for an 8-10% increase in net sales, including U.S. comparable store sales growth in a mid-to-high single-digit range and Japan comparable store sales in local currency approximately equal to the prior year. For the full year, we continue to expect a modest year-over-year decline in gross margin, a low-to-mid single-digit percentage increase in SG&A expenses, approximately $20 million of other expenses, net and an effective tax rate of approximately 36%. Based on these reported actual results, we believe it is reasonable for us to increase our expectation for full year 2005 net earnings to a range of $1.55 – $1.65 per diluted share, from the previous range of $1.45 – $1.55. In addition, the Company is on track to achieve its objective for a mid-single-digit percentage increase in inventories for the full year, which should contribute to an improving return on assets.”