Good day, everyone and welcome to this Tiffany & Company first quarter earnings conference call. Today’s call is being recorded. Participating in today’s call is Mr. Mark Aaron, Vice President of Investor Relations; and Mr. Jim Fernandez, Executive Vice President and CFO. At this time, I would like to turn the call over to Mr. Mark Aaron. Please go ahead, sir.
Mark L. Aaron
-- earlier today and by now you have hopefully had a chance to read the press release. The results reflected obvious macro challenges but met our expectations. Jim and I will comment on those results and on our outlook.
First, please note Tiffany's Safe Harbor statement, that statements made on this call that are not historical facts are forward-looking statements. Actual results might differ materially from the expectations projected in those forward-looking statements. Additional information concerning risk factors that could cause actual results to differ materially is set forth in Tiffany's 2008 annual report on Form 10-K and in other reports filed with the Securities and Exchange Commission.
The company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. Now let’s proceed.
When we reported our full year 2008 results in March, we spelled out our cautious outlook and assumptions for the new year. The results that we reported this morning are keeping us on track to achieve our full-year plans.
Worldwide sales declined 22% in the first quarter and were down 18% on a constant exchange rate basis. Let’s look at our sales performance by region.
Sales in the Americas declined 31% in the quarter. Within that, total retail sales in the U.S. declined 32% and as we saw in the fourth quarter, more than half of the decline resulted from fewer transactions, with the remainder due to a decline in the average spending per transaction.
Our price stratification analysis indicated generally consistent results across most price strata except for substantially greater decline in the sales above $50,000. Comparable U.S. store sales dropped 34%, which were somewhat below our expectation and compared with a flat comp in last year’s first quarter.
In terms of the monthly trend, U.S. comps declined 34% in February, 39% in March, and 30% in April. Last year, U.S. comps were unchanged in February, up 4% in March, and down 3% in April, so the two-year run-rates do not indicate any meaningful change in trend.
Our business in the U.S. is being affected by challenging economic conditions but we are also facing a headwind from continued heavy and unprecedented levels of discounting by many competitors, including liquidation sales by some who will likely be closing their stores. It’s difficult to say when these competitive headwinds will dissipate but they surely will.
Comp store sales for U.S. brand stores declined 32%, reflecting broad-based geographical softness. This compare with a 4% decline last year and was several percentage points less than we expected. There were no specific regions that particularly stood out for relative weakness or strength in the quarter. However, sales in our New York flagship store declined by a greater-than-expected 42% in the quarter, and we attribute it to weak spending, especially by customers tied to the financial sector, as well as to a decline in foreign shoppers.
You may recall that the New York store sales had increased 16% in last year’s first quarter when we were still benefiting from an abundance of foreign visitors to New York.
Sales in the nine-store New York region declined 40% in the quarter.
The U.S. sales decline in the quarter reflected similar percentage declines in sales to local customers and to foreign visitors. As I just alluded to, the decline in foreign customer spending was more pronounced in the New York flagship store, which had enjoyed heavy European spending at this time last year.
Conversely, our European stores may be benefiting from this diminished travel flow, which would again point to the advantage of Tiffany's geographical diversification around the world.
We continue to be quite pleased with the initial performance of the U.S. stores that we’ve opened in the past year with every one exceeding their sales plans in the quarter. In addition, regarding our new smaller concept store in Glendale, California, we are very pleased by both customer response to the open selling environment and by the operational efficiencies we are realizing. The concept will continue to evolve in terms of store design and product offering, including the likely addition of a representative engagement ring assortment. And as we previously said, it increases the long-term potential number of U.S. stores.
Our e-commerce and catalog businesses in the U.S. also continued to experience cautious consumer spending in the quarter. Their combined sales declined 17%, which slightly exceeded our expectation and was on top of a 1% increase last year. The sales decline continued to mostly reflect a decline in the number of orders while the average order size was down slightly. As we previously reported, we are decreasing catalog mailings this year by reducing the frequency of some mailings and relying more on e-mail marketing communications to drive customers to our website and stores.
Rounding out the Americas are Tiffany's stores in Canada and Latin and South America, which experienced modest comp store sales declines that were nonetheless better than we expected. During the quarter, we opened our second store in Toronto in the Yorkdale section and a store in the Palacio De Hierro department store in Guadalajara.
Now turning to the Asia-Pacific region, total sales in the quarter declined 7% on a constant exchange rate basis. On that basis, comparable store sales declined 13% in Japan and 5% in the rest of the Asia-Pacific region.
In Japan, the 13% comp decline actually came in better than our expectation and was on top of a 7% decline last year. There was no meaningful difference in comp declines between Tokyo and elsewhere.
During the quarter, we closed a boutique in Ikebukuro and expect to reopen later this year in a different department store in that city.
The YEN was stronger than the U.S. dollar, averaging 96 in the quarter versus 104 in last year’s first quarter, which is why a 13% total sales decline in Japan in YEN translated into a smaller 7% decline in dollars.
The 5% comp decline in the Asia-Pacific region outside Japan was on top of a 22% increase last year and was also better than we expected. We saw mixed results in that region during the quarter, ranging from solid growth in Korea and Australia to weaker results in Hong Kong and Taiwan.
During the quarter, we opened our ninth store in Korea.
Tiffany's business in China continues to develop nicely. In the quarter, we opened another store on the mainland, in Hangzhou and now with nine stores there, we are establishing a strong presence on route toward our goal of at least 25 locations in the next five years. We also operate two successful stores in Macau.
Let’s now look at Europe, where total sales increased 18% on a constant exchange rate basis, as we benefited from incremental sales from the seven stores we added last year and from what we believe is our success in capturing more market share.
The Pound and Euro have weakened substantially from a year ago versus the dollar, which caused European sales to decline 8% when translated into dollars.
Comp store sales on a constant exchange rate basis rose by a better-than-expected 3% in the quarter. By country, there was a narrow range of comp increases and declines but every country came in better than we expected in local currencies. A comp increase in London was in line with overall Europe. In addition, this came on top of a robust 12% increase in last year’s first quarter and the monthly European comp store sales trend improved as the quarter progressed.
Lastly, sales in our other channel declined 43% in the first quarter. The decline resulted from our temporarily reducing the quantity of rough diamonds that we are purchasing in light of soft demand, which has consequently contributed to a reduction in our wholesale sales of lower quality diamonds back into the market.
Going in the other direction was an increase in first quarter sales in our IRIDESSE stores. We previously announced that we will be closing those stores when we reach agreements with landlords and sell off their inventory. The inventory liquidation sales at the IRIDESSE stores led to the first quarter sales increase.
So that covers our segment review of sales. Looking at a few merchandising highlights, the best performing product category, relatively speaking, was fashion silver and gold jewelry, which benefits from more accessible price points as well as a number of design introductions, like the new keys collection in a price range from $150 in sterling silver to $15,000 in platinum and diamonds.
Keys can have a wide range of symbolic interpretations for customers and the collection is enjoying a very strong start. Designer jewelry sales, on the other hand, primarily those of Elsa Peretti and Paloma Picasso, declined in line with the overall company.
The engagement jewelry category performed relatively better than the overall company and exceeded our expectation, although it is still posting a year-over-year decline. We are now launching Tiffany's [Bizette] collection, our latest addition in a legacy of world famous engagement ring designs showcasing diamonds in a variety of shapes.
High-end statement jewelry sales over $50,000 continued to post the greatest declines, although in line with our expectations. Watch sales were lower, but we expect that trend to improve when new designs begin to appear in our stores later this year.
And on another note, you may have seen the recent news that Tiffany has hired the highly regarded design team of Richard Lambertson and John Truex to explore the development of a leather accessories business. We are excited about this potential opportunity and will provide additional details at an appropriate future time.
So that covers our sales review. Jim will now take you through the rest of the earnings statement, the balance sheet, and our outlook for the rest of the year.
James N. Fernandez
Thanks, Mark. Moving down the earnings statement, gross margin in the quarter came in somewhat better than we expected. It declined to 55.6% in the quarter from 57.1% last year. The decline was largely due to higher product costs, partly offset by lower wholesale sales of diamonds, which we typically sell back into the market at cost.
Diamond prices have reversed course in the past six months and are now back to levels of one or two years ago. While we are benefiting from lower purchasing costs, the gross margin benefit is probably not felt until next year, based on manufacturing lead times and assumed inventory turnover.
Some mines have recently cut back on their production in order to adapt to reduced global consumer demand and to help stabilize rough diamond pricing.
SG&A expenses in the quarter declined 15% from last year, although about 3% of the decline was due to the translation effect from the stronger U.S. dollar. We continued to expect about a 10% reduction in SG&A expenses this year through initiatives already taken to reduce staffing, as well as reduce marketing spending and realizing lower sales related variable costs, all of which occurred in the first quarter.
Interest and other expenses net were $12.4 million in the quarter versus $1.5 million last year. As we expected, higher interest expense tied to recent long-term debt issuances was the primary reason for the increase, as well as for our expectation that interest and other expenses net will be approximately $50 million for the year.
Our effective tax rate was 42% in the quarter versus 36.7% last year, with the increase reflecting differences in the geographical mix of earnings. We still expect about a 37% rate for the full year.
Adding it all up, net earnings in the quarter were $24 million, or $0.20 per diluted share, compared with last year’s $64 million or $0.50 per diluted share, and this met our expectation.
We planned our business this year to focus on cost containment and cash flow generation in order to maintain respectable profitability and a healthy balance sheet that can withstand the currently challenging environment. Our first quarter results achieved that objective.
Tiffany has a strong balance sheet liquidity. At April 30th, we had $304 million of cash and cash equivalents versus $160 million last year. We had $822 million of total short-term and long-term debt compared with $611 million a year ago.
During the first quarter, we completed our plan to secure additional long-term financing by borrowing $300 million, and this followed our issuing $100 million of long-term debt last December. The proceeds have been or will be used to redeem some maturing debt, as well as to further strengthen our liquidity position. As a result, we are financially well-positioned to support our growth strategies.
Stockholders’ equity of $1.6 billion was lower than a year ago, reflecting a substantial stock repurchase activity before we suspended the program last September.
Accounts receivable of $135 million at April 30th was 30% lower than a year ago due to the sales decline. Receivable turnover remained at the very high 18 times per year.
We told you that we plan to reduce inventory levels by a single digit percentage this year and our progress was evident in the first quarter. We finished 2008 with inventory levels 17% over the prior year because of the substantial sales shortfall in the fourth quarter. However, before the year had ended, we had already taken steps to adjust internal manufacturing levels and to reduce outside vendor purchases. Although net inventories at April 30th were 6% over a year ago, they have declined 3% since January 31st, so assuming that sales continue in line with our expectations, we should stay on track to achieve our inventory reduction objective for the year.
Capital expenditures were $15 million in the first quarter versus $26 million last year, and we continue to forecast full-year CapEx of approximately $100 million, or about a third less than last year, due to fewer store openings and cost containment in other areas.
Combining our forecast for earnings with a forecasted decline in working capital and a smaller CapEx budget, we continue to plan to generate about $400 million of free cash flow, which we define as cash flow from operating activities less capital expenditures.
Last week, Tiffany's Board of Directors declared a regular quarterly dividend and an unchanged rate of $0.17 per share.
In terms of our earnings outlook, we have said that the first quarter’s bottom line was consistent with our expectation. We also indicated in today’s press release that so far in May, the rate of total sales decline is somewhat smaller than it was in the first quarter, as we expected it would be, with a slight improvement in the Americas and greater improvement in other regions, although it’s still too early to draw any conclusions.
So we see no need to revise our full-year expectations that assume a continuation of soft economic conditions, although with sequentially smaller rates of decline each quarter due to easier year-over-year comparisons. That expectation is based on first on an 11% worldwide sales decline for the year, with a greater decline in the first half, as demonstrated by our first quarter results. By region, we expect mid-teens percentage declines in the Americas, factoring in a high-teens U.S. comp decline that we expect will get smaller later in the year, simply due to much easier year-over-year comparisons. We expect a mid-single-digit percentage sales decline in the Asia-Pacific region in dollars, which includes a high-single-digit comp decline on a constant exchange rate basis. And we expect the high-single-digit percentage decline in Europe in dollars but comps equal to last year on a constant exchange rate basis. Lastly, we still expect a 20% decline in other sales.
We continue to look for about a three-point decline in the operating margin when adjusting for the prior year to exclude one-time items, and expect the decline to be divided between a lower gross margin and a higher SG&A expense ratio.
In total, this should lead to net earnings from continuing operations of $1.50 to $1.60 per diluted share.
While results are soft in the short-term, our longer term goals continue to call for achieving at least a 10% return on average assets and at least a 15% return on average stockholders’ equity.
In closing, we’ve made some defensive moves to adjust for the challenging environment but we are also taking advantage of growth opportunities. As such, we are selectively expanding our store base this year by increasing the number of retail locations by 5% to 6%, and our product development and marketing efforts remain very active in creating excitement among a large number of potential customers.
We think we are navigating our business appropriately through this stormy environment and remain focused on Tiffany's considerable longer term growth potential. We believe that when the current competitive pressures eventually wane, Tiffany will be well-positioned to increase its share of a lucrative global market.
Please note on your calendars that we expect to report our second quarter results on Friday morning, August 28th. And that wraps up this conference call but as always, please feel free to contact Mark with any questions, and thanks for listening.
This concludes today’s conference call. You may listen to a recorded replay starting today, May 29, 2009, at 10:30 a.m. Central Standard Time, and running through June 5, 2009 at 10:30 a.m. Central Standard Time, by dialing 719-457-0820, or 888-203-1112, and entering the code 7893479. You may now disconnect your line. Thank you.
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