Good day, everyone, and welcome to this Tiffany & Co.'s third quarter conference call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Mark Aaron, Vice President of Investor Relations. Please go ahead, sir.
Mark L. Aaron
Thank you, everyone, for joining us. On today's conference call, Pat McGuiness, Tiffany's Chief Financial Officer, and I, will review Tiffany's third quarter results and the outlook for the rest of the year.
Before we continue, please note Tiffany's Safe Harbor provisions 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 let's proceed. Following a robust first half of the year, we are very pleased this morning to report strong third quarter results. As an overview, the 21% worldwide sales growth, or 17% on a constant-exchange-rate basis, exceeded our expectations to the solid performance in most regions that demonstrate the advantage and opportunities for us from an increasingly [indiscernible] of stores and customers.
The operating margin rose 3.5 points due to excellent SG&A expense leverage. As a result, net earnings rose 63%; and earnings per diluted share were $0.70 in the quarter, up from $0.43 per diluted share last year. Excluding nonrecurring items last year, net earnings still rose by a strong 52%. And despite global economic uncertainties, we slightly raised our full year earnings outlook to reflect some of the better-than-anticipated third quarter performance.
Now let's look at the details of the quarter, starting with a regional sales review. In the Americas, total sales rose by a better-than-expected 17% due to an increase in the average price-per-unit sold. In addition, we continue to see unit sales growth in all price strata above $250, with notable increases at the highest price points. One example of the stronger activity at the high end was the great success of our annual Blue Book event for top customers held in October.
On a constant-exchange-rate basis, comparable store sales in the Americas rose 15% on top of a 5% increase last year. Broadly speaking, our stores in the U.S. performed well, as did our stores in Latin America and Canada. Sales in our New York flagship store rose 24% versus a 3% decline last year, with most of that large increase due to sales from foreign tourists.
Conversely, sales growth in New York area brand stores was more modest, as it reflects a higher percentage of local customer demand. In fact, the sizable portion of our total U.S. sales increase in the quarter came from sales to foreign visitors, particularly to customers from Asia and to a lesser extent from Europe, but there was also good increase in sales to U.S. customers. On a side note, if you are in New York, we invite you to be charmed by our especially festive holiday windows of our Fifth Avenue flagship store.
Comparable Americas brand store sales increased 13% on top of an 8% increase in last year's third quarter. It's worth noting that geographically, the 13% branch store comp increase reflected much greater strength than the Western half of the U.S. including markets like Texas and California, as well as very strong sales growth in Hawaii and Guam driven by Japanese tourist spending.
We opened 3 stores in the Americas in the quarter: including one in Richmond Virginia, our fourth store in Las Vegas and our third location in Brazil, in the Iguatemi department store in Brasilia.
Combined Internet and catalog sales in the Americas increased 11% on top of the 7% increase last year largely due to an increase in average sales per order and the smaller increase in the number of orders shipped.
On a related note, we were pleased to see it recently reported that L2, a think tank for digital innovations ranked Tiffany highest in their digital IQ index in the jewelry and watch categories. L2 cited digital confidence as a point of differentiation for our brand because we offer a website that is searchable, shareable and mobile-optimized, and at high social media efforts to a broader digital strategy. I can share with you that we plan to further enhance our social media program, and dramatically revamp our website next year to derive strong marketing and sales benefits.
Now let's turn to the Asia Pacific regions. Total sales in the quarter surpassed our expectations by surging 44% due to similar growth in both the number of units sold and in the average price-per-unit sold. On a constant-exchange-rate basis, total sales rose 40%, with comp store sales up 36% on top of 11% comp increase last year. The Asia Pacific sales growth was strong throughout the region, with especially strong double-digit growth in the Greater China market, but also noteworthy increases in Australia and Singapore.
In the quarter, we opened 3 Asia Pacific stores: including 2 in Korea, in Daegu and Incheon; and 1 in China, in Guangzhou. As well as relocating our very successful store within the Wynn Resort in Macau. We are on track to open 3 additional Asia Pacific stores planned in December in China, Taiwan and Korea.
Our business in Japan performed a bit better than we expected in the quarter. Total sales in yen rose 3% due to 4% comp growth, versus a 2% comp decline last year. When translated into dollars, factoring in the yen being 9% stronger than last year's third quarter, total sales in Japan increased 12% entirely due to an increase in the average price-per-unit sold. Sales growth is pretty consistent between the Tokyo area and other regions. The store count in Japan was unchanged at 55 in the quarter.
In Europe, total sales on a constant-exchange-rate basis increased 15% in the quarter, while comparable store sales rose 6% on top of the 24% comp increase last year. Including translation effect, total sales in Europe in dollars rose 19% in the quarter, largely due to unit growth and a modest increase in the average price-per-unit sold.
There was a noticeable difference in performance between Continental Europe, highlighted by double-digit comps in France, Germany and Italy versus a modest decline in U.K. comp sales. While Europe is facing challenging economic conditions, we have attributed Tiffany's better performance in some countries to our growing brand awareness and market penetration. Having said that, we are certainly not implying that Tiffany will be completely insulated from these economic challenges.
In addition, although a clear majority of our sales in Europe are to local customers, European sales have been increasingly benefiting in a few countries from growing sales to foreign tourists, notably from China and Russia.
In the third quarter, we opened Tiffany's second store in Milan, in the Excelsior, which now gives us 5 stores in Italy. And we were excited to recently announce that Tiffany will open a store in Prague in 2012, in addition to other planned openings.
Beyond the retail store performance I've just discussed, I should add how pleased we are with the performance of our websites in Europe, Asia Pacific and Japan. These websites are generating e-commerce sales and, along with additional informational sites that we have in some Asia Pacific countries, are also proving to be very effective marketing tools to drive customers to our stores.
Lastly, sales in our other segments declined 19% in the quarter due to lower wholesale sales to independent distributors in emerging markets and modest decline in wholesale sales of rough diamonds. So that covers sales by segment. Let's now take a brief look at some product category highlights.
The 21% worldwide sales growth from the quarter was quite broad-based, with solid percentage gains across the key jewelry categories, ranging from our iconic classics to new designs. This included strong growth in engagement jewelry sales, especially in the Americas and Asia Pacific, and as I alluded to earlier, very healthy increases in high-end statement jewelry sales. We also saw significant increases in our fine and fashion jewelry categories, with stronger growth at higher price points. This was typified by the classics in platinum and diamonds, such as studs and pendants, as well as strong gold jewelry sales; while silver jewelry sales posted more modest growth.
Popular jewelry designs at higher price points include the Victoria collections, our beautiful yellow diamonds collections, Tiffany Metro and, of course, our Celebration Rings. While a couple of popular collections that span more moderate price points include the Return to Tiffany and 1837 collections.
The Keys Collection remains one of our top sellers across its wide range of price points, and this year's introduction of Tiffany Locks collection is already proven to be very successful. Designer jewelry sales posted a good increase in the quarter highlighted by the introduction of Paloma Picasso's new Venezia Collection. And outside of jewelry, we have been expanding our relatively new leather collection with more designs, as well as distributing into more of our U.S. stores. So we are certainly pleased with the wide range of merchandising success in the quarter.
Let's now review the rest of the earnings statement. Gross margin came in at 57.9% in the third quarter versus 58.5% in the year-ago period. The decline was largely due to a shift in the sales mix. We saw a strong growth in higher-priced diamond jewelry that earns a lower gross margin, but of course, contributes substantial gross profit dollars that generate incremental sales leverage on SG&A expenses. And gross margin was also marginally reduced by higher commodity costs despite the price increases we've taken this year.
Precious metal and diamond costs appeared to have stabilized or even slightly declined in the recent months, but we will not attempt to predict future near-term move. Most importantly, we continue to believe at our competitive ability to pass along the higher costs without diminishing our relative market position.
Selling, general and administrative expenses rose 10% in the quarter, excluding $6 million of nonrecurring costs in last year's third quarter tied to the New York headquarter's relocation. SG&A expenses rose 12% year-over-year, largely due to higher store occupancy costs and increased staffing and sales-related variable costs. Those same factors, as well as higher marketing spending, contributed to a 21% increase in year-to-date SG&A expenses, or 18% excluding nonrecurring items.
We continue to achieve excellent sales leverage on fixed SG&A costs in the quarter. On the adjusted basis, to exclude nonrecurring items, the ratio of SG&A expenses to net sales in the quarter improved by 3.2 points to 40.1%, while in the year-to-date, the ratio improved by 2 points to 39.5%.
While adding up the third quarter's strong sales growth with increased gross profit and contained SG&A expense growth, earnings from operations rose 50% over last year, and excluding nonrecurring items were up 41%. Other expense net, which is primarily interest expense, was $10.4 million in the quarter. That was somewhat lower than last year. The effective tax rate of 33.9% in the quarter was in line with our expectations and compared with 34.9% last year.
Bottom line, third quarter net earnings rose 63% to almost $90 million, and with $0.70 per diluted share. Excluding nonrecurring items, net earnings increased 52%. So we consider these third quarter results to be quite good and presume most of you will agree with that assessment. I'm now pleased to turn the call over to our CFO, Pat McGuiness, to review balance sheet highlights and our outlook for the rest of the year.
Patrick F. McGuiness
Thanks, Mark. And good day to everyone. The third quarter was encouraging with strong sales and earnings growth, and the company continues to generate strong returns, with the return on average assets running at 12% and return on average stockholders' equity at 21%. We are pleased with this strong demand and equally pleased that we are well-positioned with an efficient infrastructure and strong balance sheet to move forward.
On our balance sheet, at the end of the third quarter, we had $297 million of cash, cash equivalents and short-term investments. Short-term and long-term debt totaled $709 million, representing 31% of stockholders' equity at October 31 versus 38% a year ago. We view our strong balance sheet as a competitive advantage, especially in times of macroeconomic challenges and uncertainties. Combined with an efficient supply network, we are able to maintain high inventory availability in our stores. Net inventories at the end of the quarter were 25% higher than a year ago, due to a 58% increase in combined raw materials and work-in-process inventories, as well as the modest 8% increase in finished goods inventories.
Overall, the increases supported sales growth, new stores and new products. The increase also reflected significantly higher production acquisition in raw material costs. Part of the increases, as we have forecasted at the start of 2011, has been to expand our statement jewelry assortments in key markets to create additional sales opportunities. We have been purchasing greater amounts of rough diamonds in support of sales growth and to secure a supply for our expanding internal production. I should add that only a couple percentage points of the inventory increase resulted from the translation effects of stronger foreign currencies versus the U.S. dollar.
We expect net inventories at year end to increase roughly 15% above the prior year end. On a related note, we are pleased with the start-up of a new jewelry manufacturing facility that we opened a few months ago in Lexington, Kentucky. That additional capacity is nicely complementing our existing locations in the New York area and Rhode Island, and positions us well to continue to expand internal production.
Now moving to the rest of the balance sheet. Accounts receivable are in excellent shape, declining 5% in the past year, reflecting a decline in receivables owed by independent distributors. Our capital expenditures were $182 million in the first 9 months of the year, compared with $89 million in the same period last year. We continue to expect that CapEx will come in at approximately $250 million for the full year versus $127 million in 2010. The delta is a function of store openings and a greater number of store renovations, but it also reflects the buildout of our new headquarters.
As we continue to expand our business, we are also returning some cash to stockholders. We have been repurchasing our common stocks steadily and opportunistically. In the third quarter, we spent $86 million to buy approximately 1.3 million shares at an average cost of $65.37 per share. In the first 9 months of the year, we have spent $139 million to purchase about 2.1 million shares at an average cost of $65.97 per share.
At quarter end, we had $250 million of remaining repurchase capacity under the current re-authorized program that runs through January 2013.
Now let's turn to our forecast for the year, which mostly reflects some fine-tuning of assumptions from our previous guidance, as well as the better-than-expected third quarter results. For the full year, we are still forecasting a high-teen percentage increase in worldwide net sales to approximately $3.7 billion. That annual forecast implies a low-teen percentage increase in worldwide sales in the fourth quarter. We highlighted our full year sales assumptions by regions in today's New York news release.
Those full year assumptions imply that in the fourth quarter by region, we are looking for sales in the Americas to increase by a low double-digit percentage, with local currency comps up by mid to high-single digit percentage; fourth quarter sales in Asia Pacific to increase by more than 20% with local currency comps up around 20%. Total sales in Japan to increase by mid-single-digit percentage in the fourth quarter with a low-single-digit comp increase in yen. And for sales in Europe in the fourth quarter to increase by mid-teens percentage with local currency comps up by a low-single-digit percentage. And we expect that other sales will decline about 10% in the fourth quarter.
By year end, we will have increased our worldwide store base in 2011 by 6%, or 4% growth in square footage, which reflects adding a net of 14 company-operated stores. A few locations originally planned to open in 2011 were delayed due to construction and site availability beyond our control, which will contribute to a higher rate of store expansion planned for 2012.
In the Americas, we have added 5 stores during the year. This includes 3 stores in the U.S.: in Northbrook, Richmond and Las Vegas; 1 store in Canada, in Calgary; a store in Brasilia, which now gives us 3 stores in Brazil. We recently relocated one of our stores in the Boston area from the Atrium Mall to the nearby Mall at Chestnut Hill. And we are getting ready to open the second store in Vancouver.
In Europe, we have added 3 stores this year: in the airports in Zürich and Frankfurt, as well as the second store in Milan.
In Asia Pacific, we have opened 3 stores with 3 more planned in the fourth quarter in China, Korea and Taiwan. Two additional stores originally planned for China in the fourth quarter have been delayed into early 2012. And year-to-date, in Japan, we have opened 1 new store, while closing 2 other locations.
We still expect the operating margins to increase by more than a full point for the year, coming mostly from SG&A expense leverage. This implies an operating margin in the fourth quarter roughly equal to last year. We're looking for full year other expenses of about $43 million and an effective income tax rate of approximately 34%.
Adding it all up, our forecast now calls for full year earnings per diluted share in the range of $3.70 to $3.80 per diluted share. This excludes a $0.20 per share of nonrecurring expenses that we have already recorded. This EPS range would be up 26% to 30% from last year's $2.93 per diluted share, which also excluded nonrecurring items. We are previously forecasting EPS in the range of $3.65 to $3.75 per share, which also did not include the nonrecurring expenses. This implies fourth quarter net earnings in the range of $1.48 to $1.58 per diluted share. As we noted in today's news release, worldwide sales growth, so far in this fourth quarter, is meeting our expectations despite recent weakness in Europe as well as in the Northeast and mid-Atlantic markets of the U.S.
Although it's probably too early to draw any conclusions, we are cognizant of the challenging economic conditions and uncertainties in a number of markets, and believe we have factored a reasonable degree of caution into our latest forecast.
In closing, we have every reason to be pleased with Tiffany's performance so far in 2011. We are well positioned in this holiday season and over the longer-term horizon; the Tiffany & Co. brand remains strong; customers are increasingly attracted to our well-designed, high-quality products; our stores have strong inventory positions; we have a well-developed and efficient infrastructure; and we have a solid balance sheet to pursue our expansion plans.
That concludes my comments, please feel free to call Mark with any questions. And please note on your calendars that we expect to report Tiffany's holiday period results on Tuesday, January 10. Our best wishes to you during the holidays, and thank you for listening.
Ladies and gentlemen, please note that today's conference has been recorded and will be available for replay beginning at 10:30 a.m. Central Time today, and remain available until 10:30 Central Time on December 6, 2011. The replay can be accessed by dialing (888) 203-1112 or (719) 457-0820, and using the confirmation code of 7063947. That does conclude the conference. Thank you for your participation.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!