Good day, everyone, and welcome to this Tiffany & Co. First Quarter Conference Call. Today's call is being recorded. Speaking on today's call will be Mr. Jim Fernandez, Executive Vice President and Chief Financial Officer; and Mr. Mark Aaron, Vice President of Investor Relations. I would now like to turn the call over to Mr. Aaron. Please go ahead, sir.
Thank you, everyone, for joining us on today's conference call on which Jim and I will be reviewing Tiffany's first quarter performance, as well as addressing our full year outlook.
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 2010 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. In our opinion, Tiffany's first quarter results were nothing short of outstanding. Sales growth was strong in the Americas, Europe and Asia-Pacific while sales in Japan were better than expected after the tragic earthquake and tsunami. And strong sales growth contributed to a higher than expected operating margin and net earnings, which led us to increase our full year earnings outlook.
Let's begin by looking at sales in our geographical segments. Starting with the Americas, total sales increased 19% in the quarter, primarily due to an increase in the average price per unit sold, as well as higher unit volume, especially in engagement jewelry and other high-end jewelry. Comparable store sales in constant currency rose 17% on top of a 15% increase last year. We achieved double-digit comps in all 3 months, and the trend strengthened as the quarter progressed.
Geographically, we achieved solid sales growth in the U.S. as well as growth in Canada and Latin America. Sales in our New York flagship store rose by a strong 23%, which was on top of a 26% sales increase in last year's first quarter. Comparable Americas brand store sale rose 15% on top of a 13% increase last year. U.S. sales growth was solid from coast-to-coast. Interestingly, despite some speculation that sales in Hawaii and Guam would suffer from a decline in Japanese tourism following the earthquake, sales in that 6 store region rose more than 30% in the quarter. And from a customer mix perspective, the sales increase in the Americas came from higher spending by domestic customers and foreign visitors, which was also true in the New York flagship store. The 5 new stores opened in the past year in the Americas are performing well. We did not add any new stores in the first quarter, although earlier this month, we opened a store in Northbrook, Illinois, representing our fourth store in the important Chicago market and a store in Calgary, Alberta, which represents our fourth company operated store in Canada.
Our direct marketing sales in the Americas also did well in the quarter. Combined e-commerce and catalog sales rose 14% due to similar increases in the number of orders and in the average size per order. That was on top of a 23% sales increase last year.
Let's now turn to the Asia-Pacific region, where sales rose 37% in the quarter due to increases both in the average price per unit sold and in the number of jewelry units sold. On a constant exchange rate basis, total sales rose 31% and comparable store sales rose 26%, which was on top of a 21% comp last year. This was substantially better than we expected. Sales were consistently strong in most markets throughout the quarter, with noteworthy strength in the Greater China market, as well as in Korea.
I should also mention that we are pleased with the overall initial performance of the 7 new stores that we opened over the past year in that region.
Now let's look at Japan, which has been of concern since the tragic earthquake and tsunami on March 11. Tiffany's business has improved there, although the total sales increase of 7% was due to the translation of the yen, which at JPY 82 to the $1 in the quarter was 10% stronger than last year. We are currently forecasting the yen to remain in the 80s for the rest of the year.
Excluding the translation effect, sales in Japan in yen in the quarter declined 3% both in total and on a comparable store basis, which compared with a 10% comp decline last year. This was still much better than what we expected when we last reported to you on March 21 during a time of considerable uncertainty. The sales trend in Japan during the quarter was understandably very volatile, with almost 1/2 of our stores closed for about a week after the earthquake. In fact, comps in Japan in yen increased 3% in February then declined 16% in March and finished the quarter with a 6% increase in April. This compared with declines of 10%, 10% and 9% in February, March and April of last year. Not surprisingly, sales were softer in the Northern Tohoku and centrally located Kanto regions, which were more directly affected by the earthquake and its aftereffects as opposed to the Southwestern Kansai region. We would not be surprised with continued volatility in Japan sales for a while.
During the first quarter, we opened a new department store boutique in Hakata, and closed 2 department store boutiques in Kokura and Wakayama as we have planned and finished the quarter operating 55 locations in Japan.
Now turning to Europe. Total sales increased 25% due to strong unit volume growth that exceeded an increase in the average price per unit sold. On the constant exchange rate basis, total sales rose 19% and comparable store sales rose 15% on top of a 14% comp increase in last year's first quarter. This was slightly better than we expected and the intra-quarter trend was strongest in April.
Geographically, we strong saw sales growth in most continental European countries with the greatest gains in France, Germany and Italy. Sales growth was more modest in the U.K., although sales there did strengthen later in the quarter. And the new stores we opened late last year in London's Canary Wharf and in Barcelona are exceeding our expectations.
Lastly, other sales declined 18% in the first quarter due to a decline as we expected in wholesale sales of rough diamonds. However, wholesale sales to independent distributors in emerging markets rose strongly in the quarter.
Turning to some first quarter product highlights. The broad-based strength in our geographic segments was also true across most product categories. On a worldwide basis, all major jewelry categories posted double-digit percentage growth in the quarter. At the high end, statement jewelry had a good increase. The fine and fashion jewelry categories performed very well, highlighted by Celebration Rings, the Metro and Victoria collections, Keys, Return to Tiffany and the relatively new Garden and yellow diamond collection. Engagement jewelry sales were strong as were gold jewelry sales.
There was also a decent growth in silver jewelry sales for Tiffany's own designs, and we were pleased to see some growth in silver jewelry sales in the Americas as well. Sales of the design of Elsa Peretti and Paloma Picasso rose nicely too. But the U.S. economic environment that is affecting spending by some of our silver jewelry customers at entry-level price points will likely remain challenging for a while.
In other categories, watch sales continued to post 30-plus percent growth in our own stores, and we're pleased with the Tiffany Leather collection. In fact, this year, we are expanding leather distribution into more of our stores in the Americas and to some stores in other regions. As an example, we launched the Leather Collection in a few stores in Japan in April, and are quite pleased with initial results. So that covers the sales review.
Looking at the rest of the earnings statement, gross margin in the first quarter rose 0.5 point to 58.3% from 57.8% last year, primarily due to lower wholesale sales of diamonds and sales leverage on fixed costs. Conversely, changes in product mix and higher product costs had an unfavorable impact on gross margin. As we previously reported, we raised retail prices in many product categories earlier in the year to mitigate substantial increases in precious metal and diamond costs. You should, of course, keep in mind that the labor costs component is increasing to a lesser degree. In any case, customers are certainly aware of rising commodity costs, and we have not experienced any meaningful resistance to higher prices.
SG&A expenses rose 18% in the quarter, largely due to higher occupancy costs for new and existing stores, increased staffing and increased marketing spending.
SG&A expenses also included $8 million or $0.04 per share after-tax of non-recurring items for the upcoming relocation of our New York headquarters staff. Those expenses relate to accelerated depreciation in property and equipment, incremental rent during this transition period until the move occurs in the second quarter and payments related to terminating leases for certain floors that we will soon be vacating.
The ratio of SG&A expenses to net sales improved by 0.7 point to 40.4% in the quarter versus 41.1% last year. However, if you exclude the nonrecurring items from SG&A expenses, the ratio would have improved year-over-year by 1.6 points.
Based on the strong sales growth and our gross margin and SG&A expense performance, we achieved a substantial increase in operating margin in the quarter. In fact, the operating improved 1.3 points over last year and excluding nonrecurring items, it improved an even greater 2.1 points over last year.
Other expense net, which is primarily interest expense, was slightly lower in the quarter, and the effective tax rate was 35.6% in the quarter.
Last year's effective tax rate of 30.9% reflected a nonrecurring net tax benefit, primarily related to a change in the tax status of certain subsidiaries, which had benefited earnings by $0.02 per share in the first quarter last year.
Adding it all up, Tiffany's net earnings increased 26% in the quarter, and earnings per diluted share were $0.63. Excluding nonrecurring items in both years, net earnings rose 39% and EPS was $0.67. This was above our previously stated guidance of $0.57 per share for the first quarter, which also excluded nonrecurring items.
Lastly, return on average assets and return on average stockholder's equity are 11% and 18%, respectively.
I'm now pleased to turn the call over to Jim.
Thanks, Mark. I'm delighted to review with everyone other aspects of the strong results we reported this morning and to comment on our outlook. Tiffany has a strong balance sheet and a well-developed infrastructure to support the expansion of our business. I'd like to address both these areas.
Tiffany finished the quarter with $622 million of cash, cash equivalents and short-term investments. Total short-term and long-term debt was $687 million.
In April, we paid off a JPY 5 billion or $59 million, 4.50% long-term loan that matured. Total debt to stockholders' equity was 30% at April 30 versus 39% at April 30, 2010. We are using Tiffany's strong balance sheet to expand our business while also returning some of the cash to stockholders.
Net inventories at April 30 were 17% higher than a year ago due to sales growth, new stores, new products and higher product acquisition costs. I should also add that about 1/4 of the inventory increase was due to foreign exchange translation. We are projecting inventories to increase at least 15% this year to support anticipated sales demand and the 19 new stores we plan to open.
In addition, we are increasing our statement jewelry inventory to strengthen our assortments in key markets around the world, and we intend to opportunistically increase our purchases of rough diamonds.
Accounts receivable at April 30 were up 26% from a year ago, primarily due to the strong sales growth as well as some effect from foreign currency translation. Receivables continue to turn at a high 18x per year.
Capital expenditures were $52 million in the first quarter versus $26 million last year. We expect that CapEx will increase to approximately $250 million for the full year versus $127 million in 2010 due to a variety of factors including a higher number of store openings this year, renovations of existing stores, which in some cases reflect the catch up for 2 years of deferred spending; and lastly, the relocation of our New York headquarters staff to a new office facility.
In our share buyback program we spent $28 million in the first quarter to repurchase approximately 453,000 shares at an average cost of $61.68 per share. And that leaves us with $364 million of remaining capacity under the currently authorized program that runs through January of 2013.
Last week, Tiffany's Board of Directors expressed its confidence by approving a 16% increase in our quarterly dividend rate, taking the rate to $0.29 per share or an annual rate of $1.16 per share. That represented the 9th dividend increase in the past 9 years.
I alluded earlier to Tiffany's infrastructure because it plays a key role in the execution of our growth plans. Our centralized distribution centers are very effectively handling worldwide shipments of products to our stores and our customers. Our internal manufacturing facilities in New York and Rhode Island last year produced 60% of the products we sold. We have recently expanded our U.S. production capacity into Lexington, Kentucky with the hiring of skilled workers and will soon move from the temporary space there to a newly constructed 25,000 square-foot facility.
And our diamond sourcing organization has developed a global reach to ensure that Tiffany has the necessary supply of the highest quality diamonds for our customers. We are excited about the upcoming relocation of our New York headquarters staff in a few weeks to 200 Fifth Avenue and 23rd Street. The new location will allow us to operate more efficiently and we anticipate meaningful cost savings over the lease term.
Now let's turn to our financial outlook. The results we reported today unquestionably represented a terrific start to the year and we have factored them into our thought process for the rest of the year. At the same time, the first quarter represents the smallest sales quarter of the year and with lingering macroeconomic uncertainties, we do not want to get ahead of ourselves in our full year outlook.
Our initial plan for the year included solid sales growth in all regions except Japan and we continue to expect that.
For the full year by region, we look for sales in the Americas to increase by a mid-teens percentage with local currency comps up by a low-double digit percentage. In Asia-Pacific, we expect sales to increase by a mid-20s percentage with local currency comps up about 20%. We are also looking for sales in Europe to increase by a mid-20s percentage with local currency comps up by a low-double digit percentage. For Japan, we were previously expecting a mid-single digit decline for the year. As we expected, a substantial decline in the first quarter as a result of the earthquake. We truly appreciate the efforts of our colleagues in Japan during such a challenging experience. There are obviously still uncertainties in Japan and the potential for disruptions and reduced store hours in the coming months related to any power shortages, as well as economic challenges. But based on the better-than-expected results we saw in the first quarter, our Japan sales plan for the year now calls for just a modest total sales decline in dollars and a roughly similar decline in comps in yen with no significant variability in the second, third and fourth quarters.
And we expect October sales -- others, I'm sorry, our other sales to increase about 25%. We are now planning to open 19 new customer operated stores this year and in Japan, we reduced our locations by one, representing an overall 8% increase in our worldwide store base. We were previously forecasting 21 new stores for this year, but one in the U.S. and one in Europe have been delayed until next year. In Europe, we now plan to open 4 stores this year including second stores in Zürich and Frankfurt, as well as a store in Neuss. In Asia-Pacific, we plan to open 8 stores and in the Americas, we plan to open 7 stores including a recently opened stores in Calgary and Northbrook, as well as stores in Richmond and the fashion show mall in Las Vegas among others.
Also in the U.S., later this year, we are planning to relocate one of our stores in the Boston area from the Atrium Mall to a smaller and we believe better location at the nearby mall at Chestnut Hill.
In terms of margin assumptions for the full year, we expect the operating margins to improve about 0.5 point, excluding non-recurring items, coming from improvement in both the SG&A ratio and gross margin, primarily tied to sales leverage on fixed costs.
As everyone knows precious metal and diamond costs increased dramatically in 2010, and it continued to move higher this year. We plan to continue to take price increases in various categories and across various country locations to offset the higher costs, and we also expect other expenses, net, of about $45 million and an effective tax rate of 34%. But based on these better-than-expected first quarter results, our full year outlook now calls for our earnings per diluted share to increase 18% to 21% to a range of $3.45 to $3.55 per diluted share, not including the nonrecurring expenses of about $0.19 per share.
Our previous outlook calls for EPS in a range of $3.35 to $3.45 per share, which also did not include the nonrecurring expenses. We noted in today's news release that worldwide sales growth so far in the second quarter is continuing to exceed our expectation with a solid performance in those regions.
In addition to the new store openings I mentioned, we will have an active line up of new product introductions highlighted by the new Tiffany locks collection, which is enjoying a very strong start. Other new designs include Tiffany Twist, a new collection in 18 karat gold and sterling silver, and we are excited about the revival of Elsa Peretti's bottle collection of pendants, which was her first jewelry design and is now offered in an expanded and distinctive assortment. And we will continue to expand our marketing communications to customers and reinforce Tiffany's brand message, in exciting and new markets through both print and digital media.
I'll close by saying that these first quarter results were a great way to start the year and we certainly have reasons to be optimistic about the future.
Thank you for listening to our call today and please feel free to call Mark with any questions and please note on your calendars that we expect to report Tiffany's second quarter results on Friday, August 26. And that concludes today's call.
A replay of today's call will be available starting today, May 26, 2011, at 10:30 a.m. through June 2, 2011, 11:30 p.m. You can access the replay by dialing replay (888) 203-1112 or (719) 457-0820, and enter pass code 3168288. We thank you for your participation.
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