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Tiffany & Co. (NYSE:TIF)

Q1 2014 Earnings Conference Call

May 21, 2014 08:30 AM ET

Executives

Ralph Nicoletti - EVP and CFO

Mark Aaron - Investor Relations

Analysts

Operator

Good day, everyone, and welcome to the Tiffany & Company First Quarter Conference Call. Today's call is being recorded. Participating on today’s call is Mr. Ralph Nicoletti, Executive Vice President and Chief Financial Officer and Mr. Mark Aaron, Vice President of Investor Relations.

And at this time, I’d like to turn the call over to Mr. Mark Aaron. Please go ahead, sir.

Mark Aaron

Thank you and hello everyone. Earlier today we issued Tiffany’s first quarter financial results and I hope I know you’ve had a chance to read the news release. I’m pleased to have Tiffany's new Chief Financial Officer, Ralph Nicoletti here with me to review highlights of those results and to comment on the outlook for the rest of the year.

As always we first ask you to note 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 Form 10-K, 10-Q and 8-K 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 think you will agree that Tiffany has enjoyed a strong start to 2014 with solid sales and earnings growth in the first quarter. Worldwide net sales increased by 13% or 15% on a constant-exchange-rate basis, with strong growth in most regions, including unusually strong growth in Japan which I will address shortly.

We had a net of three stores, sales growth occurred across all of jewelry categories, which we are pleased to say included a healthy increase in the fashion jewelry category. Operating margin rose due to a higher gross margin and an improved expense ratio and net earnings rose 50% on a GAAP basis and 41% when excluding one-time charges in last year’s first quarter.

Looking first at sales performance in the quarter, all regions achieved total sales growth in dollars and on a constant-exchange-rate basis.

In the Americas region, total sales rose 8% due to an increase in the average price per jewelry unit sold. However, while overall jewelry unit volume was almost equal to last year, we were pleased with healthy unit growth in the fine solitaire and statement jewelry and engagement jewelry categories as well as with an improving trend in fashion jewelry.

We believe these improved results in the Americas reflect to some degree enhance selling initiatives being taken by regional management that are focused on better engaging customers through our sales professional and enhanced visual merchandising in our stores. Another factor contributing to the growth were sales from our successful annual Blue Book event in April, in New York.

On a constant-exchange-rate basis, comparable store sales increased 8%, which is on top of a 3% comp increase from last year’s first quarter. Geographically we saw solid comp growth in many of our markets and in our New York flagship store. In addition, net sales growth in both the New York flagship store and the overall region was driven by a combination of domestic customer demand and sales to foreign tourists.

In fact, we even saw slight sales increase in the tourist markets of Hawaii and Guam, which had been challenging for a while. Lastly, I’m sure some of you’re wondering about our Valentine’s Day, so I’m pleased to report that despite snowstorms that affected a number of our stores in the eastern U.S., we enjoyed very good Valentine’s Day results.

In other parts of the Americas region, a lack of sales growth in Canada surely reflected a difficult comparison to several large statement jewelry transactions last year. On the other hand, our stores in Latin America posted solid constant currency sales growth.

During the first quarter we opened a store in Cancun, marking our 11th store in Mexico. We also saw solid growth in the Asia Pacific region with total sales of 17% in the quarter, primarily due to strong unit volume growth across all jewelry categories. On a constant-exchange-rate basis, sales rose 19% in the quarter with comp store sales growth of 10% that was generated by strong sales growth across Greater China as well as in Australia.

This was on top of a 9% comp increase in last year’s first quarter. We didn’t open any stores in Asia Pacific in the quarter, however, to reiterate what’s been said in the past, expanding brand awareness of Tiffany & Co. in China through our store base and marketing activities is important to generate local sales growth, but also the influence Chinese tourists when they travel to our other markets.

As you saw in our news release, Tiffany had a very strong quarter in Japan however you measure it. In dollars, total sales rose 20% due to growth both in the average price per jewelry unit sold and in jewelry unit volume. But the yen was on average about 9% weaker than the U.S. dollar year-over-year. So when excluding that negative translation effect, total sales in the yen increased 29% in the first quarter and comp store sales rose 30%.

We think you will agree that this substantial increase was even more impressive when we consider that comps in last year’s first quarter had increased 21%. Of course it was widely reported in the media that overall consumer spending in Japan surged in March prior to an April 1st increase in their consumption tax. And Tiffany sales surged to due to the pull forward of buying.

As expected, since then, we’ve been experiencing sales declines which have been recently moderating. As a result, we’re not changing our previous expectation for healthy sales growth in the full-year. During the quarter, we opened the store in the Sogo department store, in Kobe.

Looking at Europe, total sales rose 9% in the first quarter. However, a large portion of that sales increase reflected translation benefits from the strengthening of both the pound and euro versus the dollar. Therefore on a constant-exchange-rate basis, total sales rose 2% on higher jewelry unit volume, while comp store sales declined 3% as compared to a 6% comp increase in the first quarter of 2013.

Geographically constant currency comps in the U.K. and overall Continental Europe were similarly soft, although individual performances by country within Continental Europe were mixed. We believe Tiffany is being affected by economic challenges in some European countries, but another factor to consider is tourism.

We have estimated that foreign tourist spending represents more than a quarter of our sales in Europe and those sales in the first quarter were flat with last year, which might reflect the impact from strengthening European currencies.

But looking at the bigger picture, Tiffany continues to expand its brand awareness in Europe and beyond and we’re confident that there are significant long-term store and market share growth opportunities.

We also expanded Tiffany’s presence in Paris last month when we opened a major store on the magnificent Champs Elysees; although the store’s grand opening celebration will be in a few weeks. Not surprisingly the store is already serving many foreign visitors; in fact you might be interested to know that 15 languages are spoken by our staff in the Champs Elysees stores.

Rounding out the regional sales review, Tiffany’s other sales increased 39% in the first quarter. A portion of that increase was due to 18% comparable store sales growth in the five stores we operate in the United Arab Emirates. In addition, we were delighted to open our first company operated Tiffany & Co. store in Moscow in the famous GUM department store during the quarter and initial results were encouraging. The balance of the increase in other sales was due to wholesale sales of diamonds that we acquired through our rough sourcing program and subsequently sell because they don’t need our requirements.

Our worldwide expansion plans continue to call for opening 13 stores in 2014, a few of which have a more noteworthy market presence and closing four smaller ones, which in total represents a net 3% increase in company operated locations and a net 4% increase in gross square footage.

We will also be renovating a number of older stores to enhance their market presence, visual merchandising and the in-store customer experience. Beyond our store base worldwide e-commerce sales increased 6% in the first quarter. In addition to contributing to overall sales growth, our Web site served as an important marketing communications vehicle that helped to drive store traffic.

So that covers the regional sales review. In terms of merchandising highlights for the quarter, as I mentioned earlier, we were pleased with varying degrees of sales growth in all product categories. We continue to see healthy growth in statement, fine, and solitaire jewelry, meaning pieces with diamonds and other gemstones at mid to higher price points.

As we’ve noted on previous calls, we’ve been seeing increasing interest in colored diamonds and other gemstones and some examples would include the Yellow Diamond, Enchant, and Victoria collections among many others. And in statement jewelry, I already alluded to the success of our Blue Book event in April, in New York. That event showcase truly extraordinary and one of a kind pieces for select customers who visited us from around the world. The response was excellent and sales far surpassed the successful Blue Book event we held last year.

The engagement jewelry category was another strong performer in the quarter, reflecting substantial demand for diamond solitaire rings and wedding bands as well. The relatively new Harmony collection continued to perform very well, complimenting of course our iconic six-prong Tiffany setting and other settings too.

And we’re definitely encouraged with solid improvement in our fashion jewelry category in silver, but even more so in gold pieces, probably the biggest story in that category is the success of our distinctive Atlas collection introduced last fall and being expanded now with additional designs.

A few other product highlights worth mentioning in the fine and fashion categories in the first quarter, included strong growth in Elsa Peretti Diamonds by the Yard, a truly timeless collection originally introduced 40 years ago. The continued resurgence of the Keys collection, especially in styles with diamonds, and Paloma Picasso’s Olive Leaf collection that debuted last year.

For later in the year, we’re looking forward to the global introduction in September of a major new fashion jewelry collection with some pieces extending into fine jewelry in a range of precious metals both with and without diamonds. Please stay tuned for that exciting launch. So you can see that this strong sales growth in the first quarter clearly reflected solid results across most regions and product categories.

I’m now pleased to turn the call over to Ralph to review the rest of the earnings statement and the balance sheet, and to update you on our full-year expectations. Ralph?

Ralph Nicoletti

Thank you, Mark. I’m delighted to be at Tiffany. Already in my brief time here, I can clearly see the strength, expansion potential, and earnings power of this great brand. Before going into the specifics, the key points to take away which drove our first quarter results are solid broad based sales growth across product categories and most geographies, accelerated purchasing patterns in Japan prior to the April 1st consumption tax increase, margin improvement on both gross and operating level, primarily driven by product cost, pricing and leveraging fixed cost, all of which leads to raising our full-year outlook to $4.15 to $4.25 per share.

As Mark provided the sales review, I’ll now comment on the rest of the earnings statement. Gross margin of 58.2% was 2 full points higher than last year with the improvement resulting from favorable product costs, price increases taken across all product categories and regions, and meaningful sales leverage on fixed cost, and of course, the strong sales increase in Japan had some positive effect on overall gross margin.

In addition, because of the improvement in fashion jewelry sales, we’re pleased to be seeing a narrowing gap in the rate of sales growth for this category relative to other jewelry categories, which in the first quarter led to a minimal negative effect from sales mix on the gross margin. Overall, we continue to expect an increase in gross margin for the full-year, but not at the first quarter’s magnitude.

Selling, general and administrative expenses increased 5% in the first quarter, largely reflecting higher store related expenses and labor costs, of which a portion is variable. I should add that marketing expenses in the first quarter were lower than last year, but we expect those expenses as initially planned to be considerably higher year-over-year for the remaining quarters of 2014.

As we noted in our release, last year’s first quarter included $9 million of cost for staff and occupancy reductions. Excluding those expenses SG&A would have increased 8% in the quarter. Our outlook for the full-year continues to call for SG&A expense growth below the rate of sales growth.

Operating earnings grew 49%, but 39% when excluding last year’s charges, driven by sizable increases in sales and gross profits and leveraging SG&A expenses which was partly driven by the timing of marketing spending. Therefore the operating margin of 21% in the first quarter represented a solid increase over last year.

Interest and other expenses net were $16 million in the quarter. And Tiffany’s effective income tax rate of 35.1% in the quarter was virtually in line with last year. Putting it all together, net earnings in the quarter rose 50% to $126 million or $0.97 per diluted share. The increase was 41% when excluding the cost for staff and occupancy reductions in last year’s first quarter.

These operating results and efficient balance sheet are contributing to improvements in our returns on asset and equity. As most of you know, our long-term objectives continue to call for achieving at least a 10% ROA and at least a 15% ROE.

Regarding the balance sheet, I believe we’ve a solid financial base to support the growth of our business. Total debt as a percent of stockholders equity declined to 35% at April 30th from 37% a year-ago. Our single largest asset on the balance sheet was inventories, which totaled $2.4 billion at April 30th. That represented a 6% increase over April of 2013 to support anticipated sales growth, but also is indicative of our objective to keep inventory growth less than the rate of sales growth. Of course that objective includes maintaining high levels of inventory availability for our stores while managing them as productively as possible.

Our accounts receivable was 7% above last year due to worldwide sales growth and receivable turnover is a healthy 21 times per year. Capital expenditures were $35 million in the first quarter unchanged from last year’s first quarter.

As we previously disclosed, we’re increasing full-year capital expenditures as a result of making greater information technology investments this year and next as we upgrade and introduce new systems for global customer relationship management and for more advanced order and inventory management capabilities.

As announced in March, Tiffany Board of Directors authorized a repurchase of up to $300 million of our common stock over a three-year period. We resumed repurchases in April and spent approximately $7 million to repurchase 82,000 shares at an average cost of approximately $87 per share. We believe this is a good way to return some excess capital to stockholders and mitigate dilution on earnings per share from stock-based compensation.

Now I want to take a moment to comment on our full-year earnings outlook. We began the year projecting net earnings in the range of $4.05 to $4.15 per share or 9% to 11% higher than the $3.73 per share that was earned in 2013.

Clearly we’ve had a strong start to the year, but it’s only challenging to determine how much of those gains can be extrapolated for the rest of the year, especially considering that the first quarter is historically the smallest one of the year. In terms of the components of our forecast, we’re continuing to project high single-digit percentage sales increase with all regions expected to achieve total sales growth in U.S. dollars and varying degrees of comparable store sales growth on a constant-exchange-rate basis.

And I already mentioned that we’re expecting improvements in gross margin and the SG&A expense ratio for the year. As a result, we’re increasing our full-year EPS forecast by $0.10 per share to $4.15 to $4.25 per share, representing 11% to 14% growth from last year’s $3.73 per share. This reflects our strong start.

However, it is early in the year; there is uncertainty about when sales growth will resume in Japan and/or economic headwinds in Europe. In fact, those two factors that especially in Japan as well as higher marketing spending as we mentioned will likely result in the second quarter’s net earnings to be about equal to the prior-year.

In summary, we hope you’re all in agreement that these results in most respects were a very nice start to the year. We believe we’re well positioned for the rest of 2014 and beyond. And beyond the key benefits derived from heritage and brand strength, Tiffany has an experienced management team a solid base of store distribution with growth potential and extraordinary product assortment and a highly developed infrastructure and product supply chain. I’m delighted to be part of Tiffany’s management team and I look forward to meeting many of you in the coming weeks and months.

I'll now turn the call back to Mark.

Mark Aaron

Thanks, Ralph. We hope everyone found today’s call to be informative. A replay is available on our Web site or by dialing 888-203-1112 in the U.S. or 719-457-0820 outside the U.S. and entering passcode 2628868. As always, please feel free to call me with any questions and please take a moment now to note on your calendars that we plan to report second quarter financial results on Wednesday, August 27 before the market opens. Thanks for listening.

Operator

And that does conclude today’s conference. Again thank you for your participation.

Question-and-Answer Session

[No Q&A for this event]

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