Good day, everyone, and welcome to this Tiffany & Co. First Quarter Conference Call. [Operator Instructions] With us today are Mr. Mark Aaron, Vice President of Investor Relations and Mr. James Fernandez, Chief Financial Officer and Executive Vice President. At this time, I would like to turn the call over to Mr. Aaron. Please go ahead, sir.
Thank you. Good morning and thanks to everyone for joining us. On today's call, Jim and I will review Tiffany's first quarter results and comment on the outlook for the rest of the year. Before continuing, please note Tiffany's Safe Harbor language that statements made on this call that are not historical facts or 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 2009 annual report on Form 10-K and on 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 we can proceed. We're pleased to say that the improved sales and earnings performance we observed in the latter part of 2009 has continued into 2010, and in the first quarter, surpassed our expectations. And we were also pleased that the growth was generally broad-based geographically and by price point, although we attribute much of this strong improvement to comparisons to the troughs of a year ago.
Before reviewing sales by region, you should note in today's news release that we are now expanding our disclosure by geographical segment to align external reporting with changes in our organizational structure and greater decision-making and accountability at the regional level. One revision is to report Japan separately from Asia-Pacific. Also, results for certain emerging markets, such as Russia and the Middle East, where we sell to distributors for their resale in those markets, have moved out of Asia-Pacific and Europe and into the Other segment. We’ve posted prior year sales on our website under the headings Financial Information and Reportable Segments. Prior-year operating earnings by segment will be reported in our 10-Q reports as we move through the year.
Having noted that, Tiffany's worldwide sales rose 22% in the first quarter after declining 22% in last year's first quarter. Let's now look at sales by segment.
Sales in the Americas increased 22% in the first quarter, which was better than we expected and compared with a 31% decline last year. The 22% increase was generated by increased transactions in all major product categories and an increase in the average transaction size. Traffic and conversion rose too. In terms of price stratification, we continued to see growth in sales and transactions across the range of price strata, from silver jewelry to diamond jewelry, with the largest percentage increases in jewelry above $50,000. Of course, high-end statement jewelry was the most depressed category a year ago.
We are now reporting comparable store sales for the entire Americas as opposed to just the U.S., although the U.S. is the largest driver of the segment, representing 91% of sales in this segment in 2009. On a constant exchange rate basis, America's sales increased 20% and comps rose 15% versus a comp decline of 32% last year.
In terms of the monthly trend, Americas comps rose 18% in February, 21% in March and 7% in April. This contrasted with respective monthly comp declines of 32%, 36% and 29% in the Americas last year. Sales in the New York flagship store rose 26% in the quarter versus a 42% decline last year, while comparable Americas brand store sales rose 13% versus a 30% decline last year.
The comp store sales growth was pretty broad-based in the U.S. although we did note softness in our Southwest region, as well as in Hawaii. Stores in Canada, Mexico and Brazil posted strong increases in the quarter. In terms of customer mix, more than half of the comp growth was generated by increased spending by domestic customers, with a smaller contribution from foreign tourists. We believe sales in April were adversely affected by the Icelandic volcano, which reduced foreign tourist travel to New York and some other markets too. We expect that much of that travel will eventually be rescheduled, so the spending may just be temporarily deferred.
Direct marketing sales in the Americas also performed well in the first quarter, with combined Internet and catalog sales posting a 23% increase that was better than we expected and which compared with a 17% sales decline last year. The 23% increase was largely due to more orders shipped. But we also saw an increased average order size. Now let's look at Japan, where total sales declined 2% due to a small decline in both units and in the average price per unit sold. The yen averaged 91 to $1 in the first quarter versus 96 last year. Our full year plan is based on a rate of 95. On a constant exchange rate basis, excluding the effect of the stronger yen, total sales in Japan declined 7% in the quarter and comps declined 10%, which was below our expectations and was on top of a 13% comp decline in last year's first quarter. Comps declined in all three months with no discernible pattern. There was no meaningful difference in comp declines within or outside Tokyo and the retail environment remains challenging. Our objective in Japan is to maximize profitability there.
The picture is much brighter in the Asia-Pacific region, where sales growth was generally strong in most markets. Total sales increased 50% in the first quarter due to a substantial increase in unit volume, as well as an increase in the average price per unit sold. On a constant exchange rate basis, increases of 37% in total sales and 21% in comparable store sales exceeded our expectations. Comps had declined 5% in last year's first quarter but since then have improved steadily and we posted double digit growth in every month of this first quarter. During the quarter, we expanded Tiffany's presence in China with the opening of an additional store in Shanghai, a substantial 6,400 square-foot store in the Hong Kong Plaza. And just earlier this month, we also opened a 3,100 square-foot store in the IFC mall in the Pudong section of Shanghai. We now operate 12 stores in mainland China and are on track to have approximately 30 stores there within about five years.
We were also pleased with performance in Europe in the quarter, where total sales rose 25%, largely due to increased unit volume. In constant currencies, total sales rose 19% and comps increased 14%. This was better than we expected and was on top of a 3% comp increase last year. Double digit comp store sales growth was the norm across continental Europe, while sales in the U.K. rose modestly. European comps rose in all three months, although a deceleration in April might have been due, at least in part, to travel disruption from the volcano, as well as customers focused on and distracted by various European economic and political issues. We should add that the weaker euro, which averaged $1.36 in the first quarter, did not have much of a negative effect on the translation of our European results into U.S. dollars compared with the rate of $1.37 that we had planned. But it did benefit translation of results when compared with the rate of $1.30 last year. However, we are now forecasting the euro at $1.25 for the rest of the year and are similarly forecasting the pound to be somewhat weaker than our original plan of $1.55.
Lastly, sales in our Other segment more than doubled in the quarter. This segment consists of wholesale sales of diamonds acquired through our rough diamond sourcing program and those sales were up substantially. In addition, as I said before, we now also include our wholesale sales of Tiffany & Co. merchandise to third-party distributors in emerging markets, and those sales also increased. We intend to place greater emphasis on growing our business in those markets in the coming years.
Looking at results from a merchandising perspective, the sales growth in the quarter came from a wide range of product categories. At the highest end, we saw considerable growth in Statement Jewelry over $50,000. The Engagement Jewelry category was also quite strong, benefiting from our extraordinary assortment of designs and strong inventory position, and perhaps also reflecting some pent up demand. The Fine Jewelry category also posted a solid increase, reflecting growth of Celebration Ring sales tied to a renewed marketing emphasis, as well as the strength of other core collections such as Victoria, Metro and Hearts. Fashion Jewelry, such as the Keys and Charms Collections, were strong and right now we are lapping the hugely successful launch of Keys last spring. We were also pleased with solid sales growth of the designs of Elsa Peretti and Paloma Picasso. And lastly, watch sales were up nicely in the quarter.
Let's now turn to the rest of the earnings statement. It's a pleasure to report that gross margin rose 1.9 points in the first quarter to 57.8% after experiencing declines throughout last year. This increase largely resulted from sales leverage on fixed costs and manufacturing efficiencies and was higher than we expected.
In addition, we periodically review and adjust retail prices as we did in the first quarter to address market conditions and product cost increases, which despite volatility, have trended higher over the past couple of years. We continue to expect that gross margin will increase at least a full point for the year.
SG&A expenses rose 13% in the quarter. This virtually matched our expectation and compared with a 16% decline in last year's first quarter. The 13% increase reflected higher staffing, occupancy and marketing costs as we expected, along with an increase in variable costs tied to the sales growth.
In addition, we announced on April 29 that we will be relocating Tiffany's headquarters staff to a new Manhattan location early next year. Costs associated with the move were not significant in the first quarter. We suggest you read the news release of April 29 for a description of all expected short-term costs and expected long-term savings.
As a result of good leverage on fixed costs in the quarter, the ratio of SG&A expenses to net sales was 41.1% in the quarter versus 44.4% last year. And we continue to expect that SG&A expenses will increase about 10% for the full year.
Putting it all together, Tiffany's operating margin rose to 16.6% in the quarter versus 11.5% last year. Interest and other expenses net were virtually unchanged from last year at $12 million. The effective income tax rate was 31% in the first quarter versus our plan of 35% and a rate of 42% last year. The variance to our plan resulted from a benefit related to a change in tax status as certain subsidiaries associated with a previously disclosed acquisition in 2009 of additional equity interest in our diamond polishing operation. This was partly offset by a charge related to the new health care reform legislation, whereby the tax benefit related to the Medicare Part D retiree drug subsidy received by the company was eliminated. Combined, these two non-recurring items benefited EPS by approximately $0.02 per share in the quarter. The 42% rate last year reflected a shift in the geographical mix of earnings. For the full year, we continue to expect an effective tax rate of approximately 35%. So in total, net earnings from continuing operations rose 135% to $64 million in the first quarter and per share earnings rose to $0.50 from $0.22 last year. I'll now turn the call over to Jim.
Thanks, Mark. We were very pleased and encouraged with the sales and earnings performance in the first quarter. We do think however, that the economic and consumer spending environment still contains enough uncertainties to warrant continuing degrees of caution and expense discipline in our outlook.
That said, we are excited about Tiffany's considerable growth potential, and we have the financial and organizational wherewithal to expand our strong position within the jewelry industry.
Let's look at the balance sheet. At April 30, accounts receivable were 3% higher than last year due to sales growth and receivables were turning at 19x per year. Inventories at April 30 were 5% below a year ago. However, inventories have increased 3% since the start of the year as we replenished stores following the very strong demand in the fourth quarter and store availability has improved. Our plan continues to call for a high single digit percentage increase in inventories for the year.
Capital expenditures were $26 million in the first quarter compared with $15 million last year. After spending only $75 million on CapEx in all of 2009 as we held back on non-essential projects, we are on track to spend approximately $200 million in 2010, representing a more normal spending rate of 6% to 7% of sales. From a liquidity perspective, we had $674 million of cash and cash equivalents at the end of the quarter versus $304 million a year ago.
Our total short-term and long-term debt amounted to $760 million at April 30 versus $822 million last year. Total debt to stockholders' equity declined to 39% at April 30 from 51% last year. In terms of spending a portion of that cash, we have $253 million of long-term debt coming due within the next 12 months, much of which is in Japan. At this time, we anticipate refinancing 10 billion yen or approximately $110 million and paying down the balance.
In addition, we resumed share repurchases near the end of January. In the first quarter, we spent $14.3 million to buy 319,500 shares at an average cost of $44.62 per share. There's about $388 million remaining under the currently authorized plan, which expires next January. And Tiffany's board of directors has approved two dividend increases this year, including an 18% increase in the quarterly rate earlier in the year, which was followed last week by an additional 25% increase in the quarterly rate. But in light of obvious economic uncertainties, I want to emphasize that we intend to maintain a strong balance sheet with a comfortable level of financial flexibility. We have a robust schedule of store openings this year. Our worldwide plans now call for opening 16 stores. One previously planned store in Europe has had a construction delay until early 2011, but we are on schedule in Europe this year to open a store in London's Canary Wharf and a second store in Spain in Barcelona.
In the Americas, we've signed leases for new stores in Baltimore, Jacksonville, The Woodlands in Houston and in Santa Monica. And in Asia-Pacific, our plans include new stores in China, Korea, Singapore and Taiwan. Beyond store expansion, we are looking forward to our upcoming launch of e-commerce in Austria, Belgium, France, Germany, Ireland, Italy, The Netherlands and Spain.
In addition to store expansion, we have an active lineup of product introductions this year. We recently launched in Japan our extraordinary new collection of jewelry with yellow diamonds. It's been very well received and will be rolled out to our other stores later in the year. There are additions to our Keys and Charms Collection. We are now introducing Tiffany Garden, which combines diamonds and colorful gemstones based on designs in the Tiffany & Co. archives. There's Paloma Picasso's new Marrakesh Collection, which is already proving quite popular. We will also be expanding our very successful Return to Tiffany Collection. There are new watches being introduced, and we are excited about the upcoming launch of a collection of leather handbags and accessories designed by Richard Lambertson and John Truex. And as we've previously reported, we are stepping up the pace of marketing communications this year through print and online media that will support new products as well as enhance overall customer awareness of Tiffany's offerings.
We are now almost one month into the second quarter and consolidated worldwide sales growth is in line with our objective. For the full year, we think our sales growth projections and assumptions are reasonable. They are largely based on easy comparisons to the soft results last year and are not based on overly optimistic economic assumptions. But they do assume no deterioration in the macro environment or in consumer confidence.
Specifically, those full year projections continue to include an 11% increase in worldwide sales and by region, a low double digit percentage sales increase in the Americas, a low single digit percentage decline in Japan, a mid-20s percentage sales increase in Asia-Pacific, which is a bit better than the 20% growth that we previously expected, a high single digit percentage increase in Europe, which is somewhat lower than the mid-teens growth that we previously expected due to translation; and other sales would be equal to last year. And we have not made any meaningful changes to our assumptions for margins, expense discipline, interest expense or the effective tax rate for the rest of the year.
But because of better than expected first quarter earnings, we are increasing our outlook for the year from the previous $2.45 to $2.50 per diluted share to the new range of $2.55 to $2.60 per diluted share. Please note that consistent with the previous outlook, this does not include expenses related to our headquarters staff relocation or the first quarter's net tax benefit, which total approximately $0.09 per share.
Our success for many years and most recently has resulted from a disciplined approach to managing Tiffany's business. As we mentioned on our year end call in March, and shown now with the new sales reporting structure we have disclosed today, our organization has evolved toward greater local decision-making and accountability in each region. We expect to achieve improvements in the areas of in-store product assortment, inventory management and in our allocation of marketing spending, which should ultimately lead to a greater growth in sales and market share.
This will be an important driver in our overall pursuit of substantial growth around the world. That concludes our remarks. Please feel free to call Mark with any questions, and we expect to report Tiffany's second quarter results on August 27. Thank you for joining us.
And ladies and gentlemen, this does conclude today's conference. Today's call will be available for replay beginning today at 6:30 a.m. Central Time and will be available through June 3 at 10:30 a.m. Central Time. To access the replay, please call 888-203-1112 or 719-457-0820 and please reference pass code 6884650. Thank you very much for your participation.
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