Good day everyone, and welcome to this Tiffany & Co. third quarter conference call. Today's call is being recorded. Participating on this call is Mr. Jim Fernandez, executive vice president and chief financial officer, and Mr. Mark Aaron, vice president of investor relations. At this time I would like to turn the call over to Mr. Mark Aaron. Please go ahead sir.
Thank you. Hello and thank you to everyone for joining us. On today's call, Jim and I will provide you with a review and analysis of Tiffany's third quarter financial results and also comment on our outlook for the balance of the year.
Before continuing, please note Tiffany's Safe Harbor provision 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 2009 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 we can proceed. We're pleased to deliver another quarter of strong financial performance. Worldwide sales growth of 14% was higher than we expected. Gross margin was also better than we expected, and SG&A expense growth was in line with our expectations, all of which contributed to a solid 27% increase in net earnings and a 43% increase in net earnings from continuing operations when excluding non-recurring items.
Despite challenging conditions that continue in some markets, these results reflect the powerful benefits from having a globally diversified store base. In fact, the combined sales of the Asia-Pacific, Japan, and Europe regions actually exceeded our U.S. sales in the third quarter.
Let's now look at the details. In the Americas, sales increased 9% in the third quarter. The overall sales growth came from increased average price per unit sold, as strong unit growth in the engagement, fine, and designer jewelry categories was offset by unit declines in silver jewelry. Comparable store sales on a constant exchange rate basis rose 5% in the quarter, versus a 10% decline last year. The trend improved as the quarter progressed, with increases of 1% in August, 6% in September, and 10% in October. This compared with declines last year of 17%, 8%, and 4% in the respective three months.
Please note that effective with our next report we will be discontinuing the disclosure of specific monthly comp store sales numbers for the Americas. Instead, in the future we will discuss intra-quarter changes and trends in a more general and directional sense as we do for our other geographic regions, which we think is more relevant.
Continuing with the quarterly review, sales in the New York flagship store declined 3% in the quarter, but our annual Blue Book customer event in New York occurred last year in October and this year in November. The eight New York-area branch stores posted a 1% comp increase. Comparable sales for branch stores in the Americas rose 8% in the quarter on top of a 10% decline last year.
Looking around the Americas, it was generally consistent single-digit comp growth in most regions, with the exception of greater strength in the Pacific Northwest as well as in Hawaii and Guam. Sales to local market customers increased in the quarter, but a larger portion of the sales growth in the Americas continued to come from higher sales made to foreign visitors. The sales results in the New York flagship store reflected no significant changes in sales to either local customers or tourists.
In terms of price stratification, we continued to see bifurcated performance, with declines in sales and transactions below $500, but double-digit percentage increases in most every other higher price category, indicating to us the diverging effects to one degree or another that the economy is having on consumer spending.
During the third quarter we opened new stores in Baltimore, Maryland, in the Towson Center, and in Santa Monica, California, in Santa Monica Place, and are very pleased with initial results. And just earlier this month, we opened our jewel salon in the New York flagship store where we invite our highest spending clients from throughout the world to see our statement jewelry collection in a luxurious new environment.
Complementing our stores in the Americas are Internet and catalog sales, which increased 7% in the quarter due to an increased average order size. This compared with an 8% decline last year. And lastly, the Americas region includes Canada, Mexico, and Brazil, and we are pleased to say that local currency comps in the quarter rose nicely in all three countries. We definitely see the potential for additional stores in those countries.
Let's now turn to the Asia-Pacific region, where a 24% sales increase was generated by higher spending per transaction tied to unit volume growth, especially in the fine and engagement jewelry categories. On a constant exchange rate basis, sales rose 20% and comparable store sales rose 11% on top of a 9% increase last year. The trend during the quarter showed the largest increase in October.
The greater China market now represents more than half of our Asia-Pacific sales and it posted the highest total sales growth in the region, while most other countries were up to lesser degrees, and Australia continued to be relatively soft.
We held a glamorous event in Beijing in October within the Forbidden City, attended by over 400 customers and members from the press. We were extremely pleased with the favorable reactions and extensive media coverage, which had served to heighten awareness of our brand and support Tiffany's growing position as a diamond authority throughout China as we move to double our store base there in the next few years.
Also during the quarter we opened our sixth store in Taiwan and we were pleased to launch informational websites last month in Korea, Hong Kong, and Taiwan, which we know from historical experience should benefit our stores from the increased brand and product exposure that the websites provide.
Turning to our business in Japan, total sales rose 12% in the quarter, as an increased average price per unit sold more than offset lower units. However, the sales growth was magnified by the yen being about 10% stronger than the U.S. dollar versus last year. Measured in local currency, total sales in Japan rose 2%, but comparable retail store sales declined 2%, which was on top of a 13% decline last year. The monthly trend improved during the quarter and the comp in October was actually positive, although it's certainly too early to draw any conclusions from that.
Now let's look at our continued strength in Europe, where a robust 22% sales growth was due to increases in jewelry unit sales and in the average price per unit sold, in the quarter 9% and 4% weaker than last year. Therefore, total European sales, excluding translation, rose 29% and comparable store sales increased 24% on top of a 9% increase in last year's third quarter. Comps rose by at least 20% in all three months, and there was no meaningful difference in the strong performance between sales in the U.K. and most continental European countries.
A large majority of our sales in Europe are to local customers, but we are seeing increasing sales to foreign visitors as well. In addition, this past June we introduced ecommerce in continental Europe and it is generating sales above our expectations and probably also stimulating customer visits to our stores.
Rounding out our segments, our other sales, which rose 26% in the third quarter, primarily due to increased wholesale sales of Tiffany products to third party distributors in emerging markets such as Russia and the Middle East.
Looking at a few merchandising highlights in the quarter, sales of engagement jewelry were strong in the Americas, Asia-Pacific, and Europe. Statement jewelry and the fine jewelry category, including the Tiffany Garden and Metro collections, celebration rings, and many others, performed very well, reflecting the overall strength of higher-end transactions in platinum, diamonds, and gold.
Conversely, worldwide silver jewelry sales rose only modestly, although pretty strongly, in Europe and Asia. And the Keys collection continues to perform well, especially in platinum and gold, despite tough year-over-year comparisons. The designs of Elsa Peretti and Paloma Picasso posted healthy sales increases, led by Elsa's always-popular Diamonds By the Yard and Paloma's distinctive new Marrakesh collection.
We are delighted with initial customer response to our new collection of extraordinary yellow diamonds. Tiffany brand watch sales continued to post strong growth in our stores. In fact, you can see one of the beautiful new watch designs today in our ad on page three of both the New York Times and the Wall Street Journal. And lastly, we are very pleased with initial sales of our new leather accessories collection. So you can see that sales growth in the quarter spanned the majority of product categories.
Turning to the rest of the earnings statement, gross margin in the quarter rose 3.7 points to 58.5%, which was higher than we expected. An important contributor to the higher margin was the price increase that we took earlier in the year to offset higher product costs over the past two years. In addition, there were also meaningful manufacturing efficiencies and sales leverage on the fixed costs that are in cost of sales.
Selling, general, and administrative expenses increased 15% in the third quarter, which were close to our expectations. We had said at the start of the year that SG&A would increase all year due to higher staffing and occupancy costs tied to store growth and that marketing costs would rise sharply all year in absolute terms and as a percentage of sales to reverse a steep reduction last year. In addition, we said that the increase in marketing spending would be even greater in the third quarter to support the major event we held last month in Beijing.
SG&A in the third quarter also included about $6 million of non-recurring costs tied to the pending relocation of our New York headquarters staff. Last year, SG&A expenses included a $4 million charge related to terminating a management agreement after we bought out some minority interests in connection with our diamond sourcing and polishing operations in South Africa and Botswana. You can refer to the non-GAAP measure schedule in today's news release. Excluding those one-time items, the SG&A increase over last year was also 15% and the ratio of SG&A expenses to net sales was 43.3% in the quarter versus 43% last year.
Other expenses net, which is largely interest expense, was $13 million in the quarter, versus $11.3 million last year. The effective tax rate was 34.9%, in line with our expectations, compared with 22% last year when there were favorable tax reserve adjustments tied to the expiration of certain statutory periods.
Adding it all up, net earnings from continuing operations rose 27% in the third quarter to $55.1 million and EPS rose 26% to $0.43 per diluted share. And excluding the various non-recurring items, net earnings from continuing operations increased 43% in the third quarter and have increased 63% in the year-to-date.
I'll now turn the call over to Jim.
Thanks Mark. We are obviously very satisfied with Tiffany's overall financial performance in the third quarter, with better than expected sales and earnings growth. New stores and new products are being well received and our infrastructure is performing efficiently to ensure product supply availability and timely distribution. So we believe we are well-positioned for a successful finish to 2010 and of course the sustained solid performance over the longer term.
We certainly have the financial strength to achieve our objectives. Our balance sheet at October 31 had $530 million of cash, cash equivalents, and short-term investments versus $375 million a year ago. Total short-term and long-term debt at October 31 stood at $755 million versus $753 million a year ago and stockholders' equity was about $2 billion. At October 31, Tiffany's return on average assets was 10%, and return on average stockholders' equity was 18%, both of which achieve our objectives.
Looking at a few other items on the balance sheet, accounts receivable at October 31 were up 19% from a year ago, largely due to sales growth and receivables are turning at a high 17 times per year. Net inventories at October 31 were up 7% from a year ago, primarily due to the addition of new stores and new products. In addition, about a third of the year-over-year increase resulted from translating foreign inventories into U.S. dollars. Inventory availability in our stores is high, and we expect a low double-digit percentage increase for the full year.
I want to add that our internal manufacturing facilities, complemented by outside suppliers, are performing very well to ensure that we have strong product supply. Last year we internally produced 60% of merchandise sold, and that number will move higher in the coming years. In fact, we recently finalized plans to expand our U.S. jewelry manufacturing capacity, and we broke ground for a 25,000 square foot facility in Lexington, Kentucky. Earlier this year, we began some production at a temporary facility in Lexington, and look forward to opening this new facility next spring, which will ultimately employ approximately 125 skilled workers.
Capital expenditures were $89 million in the year-to-date, versus $47 million last year when we restricted spending wherever we could, and we are now forecasting full-year cap ex of approximately $150 million, which is down from our previous forecast of $180 million, which results from some projects being carried over into 2011. You should still assume that cap ex in future years will represent approximately 6-7% of sales, with 2011 cap ex probably at the upper end of that range.
We've been repurchasing stock this year on a regular and also opportunistic basis. In the third quarter we spent $26 million to buy back approximately 588,000 shares at an average cost of $43.68 per share. In the year-to-date, we've spent $73 million to repurchase approximately 1.7 million shares at an average cost of $42.68. While we have $329 million of remaining purchase authority under our currently authorized program, which will expire in January, we do not expect to spend that full amount in the next two months.
We previously indicated our intentions to refinance a portion of the current maturity debt that was on our balance sheet at July 31. In September, we paid off 15 billion yen, or approximately $179 million of maturing debt and entered into 10 billion yen, or $118 million of new six-year debt in Japan at an attractive rate of 1.72%. At October 31, we had about $100 million of current maturity long-term debt, which we intend to pay off as it comes due over the next year.
While we reduced our cash balances for debt reduction and share repurchases, I want to reiterate that we intend to maintain what we consider higher than normal liquidity in light of lingering economic uncertainties. Mark mentioned some of the new stores that we opened in the third quarter. There are additional exciting store openings in this fourth quarter.
In the U.S., we will be opening stores in the next few weeks in Jacksonville, a second Houston area store in the Woodlands, and another store in Los Angeles in the Beverly Center. In Asia-Pacific this month we've opened a store in Kunming, China, another store in Seoul, Korea, and will soon open a major store in China World, Beijing that will mark our 14th store in China.
In Europe, two weeks ago we opened our ninth location in London, a 260-square meter store in Canary Wharf, and next week we will add our second store in Spain when we open a 360-square meter location on Paseo de Gracia in Barcelona. Worldwide, this will bring us to 14 stores added in 2010 and one closed in Japan, representing a net 6% increase in the number of company operated stores. We have not finalized our store opening plans for next year, but I will share with you that we are looking at quite a number of attractive markets, and will accelerate the rate of store openings in 2011.
We indicated in today's news release that the fourth quarter has started very nicely, with sales growth exceeding our expectations. Even though the vast majority of the holiday season is certainly still ahead of us, we're pleased with the strong start.
In terms of our financial outlook for the full year, we are now projecting worldwide sales growing 12% to just over $3 billion. This implies a high single-digit percentage worldwide sales increase in the fourth quarter, with sales by region in the quarter in dollars expected to be up by a high single-digit percentage in the Americas, a slight increase in Japan, a low teens percentage in Asia-Pacific, and a mid-teens percentage in Europe. We expect a slight decline in other sales for the year.
We've raised our gross margin expectation based on recent margin dynamics, and now look for about a 2 point increase in gross margin in the fourth quarter. For the full year, this implies more than a 2 point increase versus the previous expectation of 1.5 points.
Related to that, since increasing our retail prices earlier this year, precious metal and diamond costs have moved higher. We use substantial quantities of platinum and silver, and their costs have increased substantially year-to-date. Gold has also increased, but our usage is much smaller than platinum and silver, and costs for Tiffany quality diamonds are also up. Of course, keep in mind that labor can be a meaningful portion of product cost, and labor costs have increased only modestly.
Our strategy has always called for increasing retail prices when necessary and appropriate to offset higher product costs, and we would expect to take such action probably early next year. But as long as we assume that every jeweler also passes through their cost increases, Tiffany will maintain its strong competitive position.
Looking at the rest of our forecast, we continue to manage our SG&A expenses very effectively, and we expect SG&A expenses, excluding non-recurring items, to increase 10-11% for the year, which implies a high single-digit percentage increase in the fourth quarter. We continue to expect other expenses net of about $50 million for the full year and we expect an effective income tax rate of approximately 34% for the year.
In total, based on our higher than expected third quarter earnings, and our increased assumptions for gross margin, we're now projecting net earnings from continuing operations in a range of $2.72 to $2.77 per diluted share. Consistent with previous forecasts, this does not include net expenses related to the pending location of our New York headquarters staff and a net tax benefit recorded in the first quarter, which in total is estimated at $0.06 per diluted share. And it compares very favorably with our initial 2010 expectation of $2.45 to $2.50 per diluted share.
I'll close my remarks by reiterating that Tiffany's experienced organization, financial, and brand strength position us very well to continue to reward our stockholders. Please feel free to call Mark with any questions or comments about these results. Please also note on your calendars that we plan to publically report Tiffany's sales results for the November-December holiday period on January 11, 2011. However, we will continue our practice to not hold a conference call for that interim period.
That concludes this call. Thank you for joining us today and we hope that you enjoy the upcoming holidays.
For a replay of this call, you may dial toll-free at 888-203-1112, or our toll number is 719-457-0820.
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