Good day, everyone, and welcome to today's Tiffany & Co. Second Quarter Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Mark Aaron, Vice President of Investor Relations. Please go ahead, sir.
Thank you. Thank you, everyone, for joining us on today's conference call for our review of Tiffany's second quarter results and the outlook for the rest of the year. Jim Fernandez, who most of you know and who recently became Tiffany's Chief Operating Officer, is also on the call, and we're pleased to be joined by Pat McGuiness, who was recently appointed Tiffany's Chief Financial Officer.
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. On our conference call 3 months ago, we characterized Tiffany's first quarter results as outstanding due to 20% sales growth and 39% earnings growth, excluding non-recurring items. The second quarter results that we reported today deserve at least a similar superlative description. We achieved strong and better-than-expected sales growth in all geographic regions, with worldwide sales up 30%. That enabled us to gain considerable leverage on expenses and achieve a solid improvement in the operating margin when excluding non-recurring charges and record a 58% increase in net earnings, excluding those non-recurring items. EPS of $0.86 excluding the non-recurring items was well above our expectation, and also above analysts' expectations. Please refer to today's news release for further details of those non-recurring items. These results were a further indication of strength in the luxury industry, and we again raised our full year outlook based on the better-than-expected results.
Let's now review sales by segment. In the Americas, total sales rose 25% due to a higher average price per unit sold as well as unit growth in most product categories. In fact, sales increased in all price strata above $250, with notable strength in sales over $20,000 and $50,000. On a constant-exchange-rate basis, comparable store sales rose 23% on top of a 5% increase last year. Comps increased by double-digit percentage in all 3 months. Please note that in the future, while we will continue to disclose comps on a quarterly basis for each geographical segment, we will no longer discuss monthly intra-order trends because of our focus on longer-term performance.
Within the Americas, the sales growth was obviously led by our stores in the U.S., but we also had good growth in our stores in Latin America and Canada. Sales in our New York flagship store surged 41% on top of an 8% increase last year, with a substantial increase in sales to foreign tourists and the remaining portion of the increase due to higher local customers sales. That 41% increase was sharply higher than the comps we saw in our 8 other New York area stores. Comparable Americas branch store sales increased 19% on top of a 4% increase last year.
Geographically, U.S. sales growth was pretty broad-based, although there was greater strength in the Western half of the U.S., and our 6 stores in Hawaii and Guam continued to show very strong sales growth due to Japanese tourist spending. In fact, from a customer perspective, roughly half of our U.S. sales increase in the quarter came from higher spending by foreign visitors, increasingly led by Chinese travelers. The benefit from sales to foreign tourists is most meaningful in New York flagship store as well as in certain of our stores in Florida, Las Vegas and California.
During the quarter, we opened our fourth store in the important Chicago market in Northbrook, Illinois and our fourth company-operated store in Canada in Calgary, Alberta. Rounding out the Americas, our e-commerce and catalog sales, which rose 16% on top of a 2% decline last year due to increases both in the number of orders and in the average size per order.
Turning to the Asia-Pacific region. Sales increased 55% in the quarter due to roughly equal increases in both the number of units sold and in the average price per units sold. On a constant-exchange-rate basis, total sales rose 45%, and comparable store sales rose 41% on top of a 7% comp increase last year. Sales were strong throughout the quarter and in most countries, with especially strong growth in the Greater China market as well as in Korea. We're also very pleased with performance from new stores. The store count was unchanged in the quarter, but we recently opened 2 new stores in Korea this month and had a number of openings scheduled for the next few months. And earlier this month, we completed a dramatic renovation and expansion of our store on Collins Street in Melbourne.
Looking at Japan, our business there continued to show improvement that began a month after the tragic earthquake and tsunami in March. Total sales in Japan in yen in the quarter rose 8%, entirely due to 8% comp growth that was on top of a 7% comp decline last year. When translated into dollars, total sales in Japan rose 21% in the second quarter due to an increase in the average price per unit sold, which benefited from the stronger yen, which averaged JPY 80 to the U.S. dollar in the second quarter versus JPY 90 last year. We were pleased to see that sales growth was geographically broad based throughout Japan and that the sales trends improved as the quarter progressed. The store count held steady during the quarter.
Sales in Europe continued at a strong pace for the second quarter. Total sales increased 32%, largely due to unit growth in all categories as well as a smaller increase in the average price per unit sold. European currencies have strengthened against the dollar, which means that in constant currencies, total sales increased 17% while comps rose 11% due to solid performance throughout the quarter. This was on top of a 21% comp increase in last year's second quarter.
Geographically, comps range from good growth in our U.K. stores to even stronger growth on the continent. While the largest portion of our sales growth in Europe was to local customers, the results have been a noticeable increase in sales to foreign tourists, especially from China and Russia. The new stores we opened last year in London's Canary Wharf and Barcelona are performing very well. And during the quarter, we opened second stores in both Frankfurt and Zürich in their airports. Rounding out the segment review for sales are other sales, which increased 46% in the quarter due to similar growth in the wholesale sales to independent distributors in emerging markets and wholesale sales of rough diamonds.
From a merchandising perspective, our 30% worldwide sales growth in the quarter was generated by double-digit percentage increases in all jewelry categories. High-end statement jewelry sales were robust in the quarter. Engagement jewelry sales were very strong due to substantial increases in the Americas, Asia-Pacific and Europe coming from growth in both units and average price. The fine and fashion jewelry categories were strong, led by well-known designs like Tiffany's Metro, Notes, Keys, Return to Tiffany and 1837 collections as well as our successful Celebration Rings and the relatively new Yellow Diamond Collection. In essence, we enjoyed broad-based strong growth in diamond jewelry and gold jewelry sales, and we also had a reasonably good increase in silver jewelry sales, including continued growth in the Americas. And designer jewelry sales were up nicely, led by the designs of Elsa Peretti. We introduce a multitude of new designs every year, and 2011 is no different, with a strong lineup of new products, including the new Tiffany Locks collection, Tiffany Twist and Elsa Peretti's bottle collection of beautiful pendants. And we are excited about the upcoming launch of Paloma Picasso's Venezia collection.
Let's now look at the rest of the earnings statement. Gross margin increased 1.2 points in the second quarter to 59%. This was entirely due to sales leverage on the fixed costs that are in cost of sales. Rising commodity prices have compelled us to take selective retail price increases on various product categories and in most regions this year. These higher diamond and precious metal costs are obviously affecting everyone in the industry and resulting in price increases. As we said before, our objective is to maintain gross margin on our product. Based on these sales results, we continue to believe in our ability to pass along the higher costs without diminishing our competitive position.
Selling, general and administrative expenses increased 37% in the second quarter. A meaningful portion of that SG&A expense growth was due to $34 million, or $0.16 per share after tax, of non-recurring expenses for the relocation of our New York headquarters staff, which was completed in June. Those expenses are primarily related to the fair value of the remaining non-cancelable lease obligations, reduced by the estimated sublease rental income as well as accelerated depreciation of property and equipment in our former locations, incremental rent and payments related to terminated leases.
In last year's second quarter, we recorded $3.7 million of non-recurring relocation expenses. By and large, we pretty much recorded all the non-recurring expenses related to the headquarters relocation. Excluding those non-recurring costs, SG&A expenses rose 26%, largely due to higher store occupancy costs, increased staffing, higher marketing spending and sales-related variable costs. After reducing marketing spending in 2009 due to external conditions, we have since been increasing the marketing-to-sales ratio toward a previously higher level in 2008 as we enhance brand awareness in existing and new markets.
The ratio of SG&A expenses to sales increased 2.1 points in the quarter, but excluding the non-recurring items from SG&A expenses this year and last year, the ratio would have improved by 1.4 points, showing the strong effect from sales leverage on fixed costs. Other expenses net of $9.6 million, which was primarily interest expense, were modestly lower than last year. And an effective tax rate of 31.2% in the quarter came in lower than the 34% rate last year, primarily due to a reversal of the tax valuation allowance.
Putting it all together, net earnings rose by a substantially better-than-expected 33% in the second quarter. Excluding the non-recurring items in both years, net earnings increased by an even stronger 58%. Return on average assets and return on average stockholders' equity were 11% and 19%, respectively.
And I'll now turn the call over to Jim.
Thanks, Mark. As many of you are aware, we have invested substantially in our infrastructure over the past decade to strengthen Tiffany's sourcing, manufacturing and distribution capabilities, and I continue to be actively involved in that process. I would like to highlight the key initiatives. As a major jeweler selling high-quality diamonds, we have built an organization that has significant wide-ranging abilities to source our needed diamond supply. That does not offset the almost 40% increase in rough diamond prices in the past year that we are experiencing, but it does strongly help us from a supply perspective.
The outlook for diamonds over the long term certainly looks as though rising global demand will continue to put pressure on supply and, therefore, price. Our organization must continue to be proactive in maintaining strong relationships with diamond producers, which may also continue to include providing some financial support when necessary to ensure greater supply.
A recent example of this strategy is our providing financing for the expansion of the Koidu mine in Sierra Leone in return for a supply agreement earlier this year. Similarly, we have developed extensive internal capacity and capabilities for finished goods manufacturing, which last year produced 60% of the products we sold. Our 3 facilities in New York and 1 in Rhode Island have been successfully supporting our growing product needs. And last year, we expanded production into Lexington, Kentucky and earlier this week, moved from a temporary space there into a newly constructed 25,000 square-foot facility that will ultimately employ about 125 people. We have 2 major distribution centers in New Jersey, one which ensures that our store inventories are replenished in a timely way and the other efficiently fulfilling direct shipments to customers. Both of these facilities have capacity to support our planned business expansion for many years to come.
One of the reasons that the expansive infrastructure I've just described supports our business so effectively is because of the investments we have made in information technology. We have developed what I believe is a world-class organization, both in terms of people and system capabilities, providing technology supporting our business from customer-facing transactions to distribution to inventory management. All of these supply chain, distribution and IT strengths support our store base, our e-commerce and wholesale distribution and will enable us to further expand our geographical reach. In addition, the relatively fixed-cost nature of this infrastructure will enable us to continue to improve our operating margin. And thanks to our real estate services group, we are now fully settled into our new headquarters at 200 Fifth Avenue, relocating our organization with a major project that involved the collaborative efforts of numerous people, and we now stand to benefit from organizational efficiencies and cost savings.
All in all, Tiffany's operating capabilities are strong, and we are well-prepared to withstand our business over the long term. As we announced in June, Pat McGuiness has assumed the position of Chief Financial Officer from me. Pat has been effectively in charge of most finance division functions for several years now. And he and I have worked closely, and we'll certainly continue to do so.
I'm pleased to now introduce Pat to offer some comments about our balance sheet and financial outlook.
Thanks, Jim. I certainly agree with you that Tiffany has strong operating capabilities and that our financial strength provides an additional key element of support and competitive advantage. Looking at our balance sheet at the end of the second quarter, we had $565 million of cash, cash equivalents and short-term investments. We had $694 million of short-term and long-term debt, and our total debt to stockholders' equity was 29% at July 31 versus 40% a year ago. We're using that strong balance sheet in several ways.
An 18% year-over-year increase in net inventories at the end of the quarter supported sales growth, new stores and new products. We are expanding our statement jewelry inventory assortment in key markets around the world, and we are being opportunistic in purchasing greater amounts of rough diamonds. Also contributing to the inventory growth were higher product acquisition costs, and almost 1/4 of the inventory increase came from the translation effect of stronger foreign currencies versus the U.S. dollar. As a result, we expect net inventories to increase at least 15% this year.
Accounts receivable at quarter end were 16% higher than a year ago due to strong sales growth, but it also includes some effects from foreign currency translation. Capital expenditures of $111 million in the first half of the year were up from $51 million last year. We continue to expect that CapEx will come in at approximately $250 million for the full year versus $127 million in 2010. This increase is due to a higher number of store openings, a greater number of store renovations and the relocation of our New York headquarters.
CapEx this year will likely represent almost 7% of sales. This is pretty consistent with our longer-term CapEx outlook of 6% to 7% of sales. We were also using some cash for share repurchases. We spent nearly $25 million in the second quarter to buy approximately 330,000 shares at an average cost of $74.29 per share. We have spent $52 million in the first half of the year to purchase about 783,000 shares at an average cost of $67 per share. We have approximately $340 million of remaining repurchase capacity under the currently authorized program that runs through January 2013. We plan to maintain a strong balance sheet and higher-than-normal cash balances while continuing to invest in the business and return capital to shareholders.
Now let's review our financial outlook for the full year. This updated outlook incorporates the better-than-expected results from the second quarter and August trends while maintaining our expectations for the remainder of the year. As Jim discussed on the conference call 3 months ago, enough macroeconomic uncertainty remains, and we don't want to get ahead of ourselves. Therefore, our outlook is not premised upon the continuation of such strong comparable store sales increases that we achieved during the second quarter.
Our full year forecast now calls for a high-teens percentage increase in worldwide net sales. By region, we are looking for sales in the Americas to increase by a high-teens percentage with local currency comps up by a mid-teens percentage, sales in Asia-Pacific to increase by at least 30% with local currency comps up close to 25%, sales in Japan to increase by a high single-digit percentage in total with a low single-digit comp increase in yen and sales in Europe to increase by at least 20% with local currency comps up by low-double-digit percentage. We expect other sales to increase about 25%. We will increase our worldwide store base by 7% this year, which includes opening 17 company-operated stores, and closing one in Japan.
In the Americas, we will now open 6 stores this year. This includes stores already opened in Calgary and Northbrook as well as stores scheduled to open in the Stony Point mall in Richmond, the Fashion Show Mall in Las Vegas, the Iguatemi department store in Brasilia and the second store in Vancouver in the Oakridge Centre. A store plan for Montreal is now scheduled to open at the beginning of fiscal 2012. We will also soon relocate one of our stores in the Boston area from the Atrium Mall to the nearby mall of Chestnut Hill.
In Europe, we are adding 3 stores this year, including the stores we've opened in Zürich and Frankfurt as well as a second store in Milan opening next month. The planned opening of a store in Neuss has been slightly delayed into early 2012. In Asia-Pacific, our plan continues to include opening 4 stores in China, 1 in Taiwan and 3 in Korea, 2 of which have recently opened. Our margin assumptions for the year also factor in the better-than-expected second quarter results. We now expect the operating margin to improve by more than a full point, excluding non-recurring items, coming from improvement in both gross margin and the SG&A expense ratio, both of which are tied to sales leverage on fixed costs.
We continue to expect other expenses net of about $45 million and an effective tax rate of approximately 34%. So we are now forecasting full year earnings per diluted share in a range of $3.65 to $3.75 per diluted share, not including non-recurring expenses of about $0.20 per share. Our previous outlook called for EPS in a range of $3.45 to $3.55 per share, which also did not include the non-recurring expenses.
This new forecast represents a 25% to 28% increase over last year's $2.93 per diluted share, which also excluded non-recurring items. We noted in today's news release that worldwide sales growth so far in the third quarter is continuing to exceed our expectations, with noteworthy strength in the Americas, Asia-Pacific and Japan. This is especially encouraging in light of the recent and well-known stock market volatility.
In closing, we are extremely pleased with our strong performance in the second quarter and first half of the year and are well positioned for the future. Please feel free to call Mark with any questions, and note on your calendars that we expect to report Tiffany's third quarter results on Tuesday, November 29. That concludes our call. Thank you for listening.
If you would like to listen to a replay of today's presentation, you may do so by calling (719) 457-0820 or toll-free at (888) 203-1112, and reference the pass code, 427-1216. That does conclude today's conference. We thank you for your participation. You may now disconnect.
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