Tiffany & Co. today reported increases in sales and earnings in its fourth quarter and full year ended January 31, 2003. Results were in line with the Company's expectations.
In the three months (fourth quarter) ended January 31, 2003, net sales rose 9% to $619,013,000, compared with $565,759,000 a year ago. On a constant-exchange-rate basis that excludes the effect of translating local-currency-denominated sales into U.S. dollars, net sales rose 8% and comparable worldwide store sales declined 1%. Net earnings increased 8% to $89,287,000, or 60 cents per diluted share, compared with $82,745,000, or 55 cents per diluted share, a year ago. Net earnings in the prior year included an impairment charge of three cents per diluted share related to Tiffany's investment in a third-party Internet retailer.
For the year ended January 31, 2003, net sales of $1,706,602,000 were 6% higher than $1,606,535,000 in the prior year. On a constant-exchange-rate basis, net sales rose 6% and comparable worldwide sales declined 1%. Net earnings rose 9% to $189,894,000, or $1.28 per diluted share, versus $173,587,000, or $1.15 per diluted share, in the prior year. Net earnings in the year ended January 31, 2003 include the effect of a non-recurring tax benefit of five cents per share, reflecting the recognition of the cumulative U.S. tax benefits as provided by the Extraterritorial Income Exclusion Act provision of the Internal Revenue code. The Company determined in the third quarter that this tax benefit was applicable to its operations and, therefore, recognized a tax benefit in that quarter. Excluding the non-recurring tax benefit, net earnings were $1.23 per diluted share.
Michael J. Kowalski, chairman and chief executive officer, said, “Tiffany enjoyed a year of modest sales and earnings growth in 2002 but, of greater importance, made continued strong progress towards strategic objectives intended to create long-term value for shareholders.”
In the fourth quarter and full year, gross margins (gross profit as a percentage of net sales) were 59.7% and 59.3%, compared with 60.9% and 58.7% in the prior year. Expense ratios (selling, general and administrative expenses (SG&A) as a percentage of net sales) of 35.2% and 40.6% were higher than 34.6% and 39.4% in the prior periods due to insufficient sales volume to offset SG&A increases and increases in marketing expenses.
The Company concluded 2002 in a strong financial position. Net-debt leverage of 14% at January 31, 2003 compared with 9% a year ago. Accounts receivable of $113,061,000 was 15% above the prior year. Net inventories of $732,088,000 were 20% above the prior year-end, partly due to the opening of new stores, the introduction of new products, expanded manufacturing operations and the translation effect of a weaker U.S. dollar, as well as the inclusion of Little Switzerland's inventories.
The Company purchased and retired 400,000 shares of its Common Stock in the open market during the fourth quarter at an average cost of $28.33 per share. The Company purchased and retired 1,350,000 shares of its Common Stock in the open market during the full year at an average cost of $27.80 per share. The Company currently has $21 million available for future purchases under its authorized plan.
Mr. Kowalski continued, “We are encouraged by Tiffany's ability to weather a variety of difficult external conditions which, we believe, clearly exhibits the appeal of Tiffany's extraordinary product offerings and the strength of our management team. In 2002, we achieved our objectives for new store openings, new product introductions, infrastructure development and disciplined expense management, all of which make Tiffany well positioned to benefit when economic conditions improve.”
He added, “While it is difficult to precisely predict the timing of improved consumer sentiment, Tiffany enjoys a wealth of organic and incremental growth opportunities that we are actively pursuing. We fully intend to maintain our normal pace of store expansion and product development in 2003 but, from a financial perspective, we are taking a relatively cautious approach to planning the beginning of the year. We are barely one month into the new fiscal year but are experiencing a good start, including healthy Valentine's Day sales results. Our expectations for 2003 include: (1) a low-teens percentage increase in net sales (including mid-single-digit comparable store sales increases in the U.S. and Japan) and 5% growth in retail store square footage; (2) a decline of less than a full point in gross margin, as incremental infrastructure costs partly related to a new distribution center and the annualized expenses of Little Switzerland more than offset benefits from growth in internal manufacturing; (3) a mid-teens percentage increase in SG&A, reflecting ongoing store expansion and accelerating business development spending as well as higher advertising spending, depreciation and insurance costs; (4) a mid-single-digit increase in operating earnings; (5) a reduction in “other expenses, net” to approximately $10 million, partly reflecting expected earnings from the Company's equity investment in Aber Diamond Corporation; (6) a high-single-digit increase in earnings before income taxes; (7) an effective tax rate of approximately 38%; and, as a result of the above, (8) a mid-to-high single-digit increase in net earnings, or a range of $1.33 – $1.38 per diluted share. Seasonally, we would expect net earnings growth in all except the third quarter. On a year-over-year comparative basis, during the third quarter, pre-tax earnings growth will be limited by increased costs due to the startup and ongoing operation of our second distribution center, and net earnings are expected to decline entirely due to a non-recurring tax benefit in the third quarter of 2002. Overall, these expectations are similar to what we expressed when we reported Tiffany's holiday sales results in January. Finally, we expect to achieve healthy cash flow to support this growth and that, as a result of the completion of some major projects, capital expenditures will decelerate to approximately 8% of net sales. Difficult business conditions and geo-political uncertainties could certainly impact the near-term confidence and spending of consumers and affect retail sales. However, we will continue to maintain our focus on longer-term opportunities to create lasting shareholder value.”