Tiffany (TIF) Q3 2016 Results - Earnings Call Transcript

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Tiffany & Co. (NYSE:TIF)

Q3 2016 Earnings Conference Call

November 29, 2016, 08:30 AM ET

Executives

Mark Erceg - Executive Vice President and CFO

Mark Aaron - Vice President, Investor Relations

Analysts

Operator

Please standby, we are about to begin. Good day, everyone. Welcome to this Tiffany & Company Third Quarter Conference Call. Today's call is being recorded. Participating on today's call is Mr. Mark Erceg, Executive Vice President and Chief Financial Officer; and Mr. Mark Aaron, Vice President of Investor Relations.

At this time, I’ll turn the conference over to Mr. Mark Aaron. Please go ahead.

Mark Aaron

Thank you. Good day, everyone, and welcome to our third quarter conference call. Joining me for today’s call is Tiffany's new Chief Financial Officer, Mark Erceg.

Before proceeding, please note that statements made on this call that are not historical facts are forward-looking statements. Actual results might differ materially from the planned, assumed, or expected results expressed in or implied by these forward-looking statements.

Additional information concerning factors, risks, and uncertainties 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, including the news release filed today under cover of Form 8-K. The company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances, except as required by applicable law or regulation.

Okay. By now you should have had a chance to read the news release which we issued earlier today, which indicated worldwide sales increased 1%, net earnings were up 5% and net earnings per diluted share were up 9% during the third quarter versus a year ago.

So in order to make the most efficient use of today’s call, I will provide some additional perspective on segment sales and product trends, after which Mark will take us through the rest of the P&L and comment on Tiffany's outlook for the remainder of the year, and as always you can refer to the report on Form 10-Q we filed earlier today for additional details.

Starting in the Americas, total sales were 2% below prior year at a modest decline in jewelry units was mostly offset by an increase in the average price per unit sold. Comparable store sales improved to a 2% decline with no effect from currency translation after a 10% decline in the first half. While this is encouraging we did have an easier comparison to last year.

Sales in the U.S. were again pressured by lower spending attributable to local customers, which we believe was tied to macro, market and political uncertainties. Interestingly, spending by customers that we identify as foreign tourist actually rose in the quarter in contrast to a decline in the first half, as continued lower spending attributed to Chinese tourists was more than offset by increased spending attributed to visitors from Japan and elsewhere.

I presume you saw the comment in today’s news release regarding our Fifth Avenue Flagship Store in New York. Sales in that store in every quarter of last year represented less than 10% of worldwide sales and had been a similar level so far this year in the third quarter and year-to-date through October 31st.

There certainly has been a lot of attention focused on the potential effect of activities related to the recent U.S. Presidential Election on stores along the relevant part of Fifth Avenue. What we've seen has been some adverse effect on traffic in our Flagship store, as well as the continuation of sales softness relative to last year and to our other U.S. stores this year. Because of obvious uncertainty, we will maintain a cautious outlook in the near-term and we cannot provide any assurance that sales in these both in the fourth quarter and beyond will not be negatively affected.

During the quarter we relocated one of our Canadian stores located within the Holt Renfrew department store in Vancouver and also relocated one of our U.S. stores located within the King of Prussia Mall, which is in the Philadelphia market.

In the Asia-Pacific region we were pleased to return to sales growth in the third quarter, with total sales up 4% as reported and 3% on a constant exchange rate basis. There was an increase in jewelry units and a decline in the average price per unit sold. Comp store sales declined 7%. Currency translation had no year-over-year effect on comps in the quarter.

The growth in the region partly reflected the continuation of solid total and comp store sales growth in Mainland China. We were also pleased to experience a smaller sequential sales decline in Hong Kong and elsewhere in the region sales were strong in both our retail and wholesale business in Korea, but remained especially soft in Australia and Singapore.

The Asia-Pacific region had a lot of store activity in the quarter, where we opened four stores and closed two. In China, we opened the store in Ningbo-Heyi and one in Tianjin incense, also in China we closed a very small store in Beijing in the Peninsula Hotel and we closed one in the Tianjin Friendship Store. We also opened our 15th store in Korea in the Shinsegae Gangnam Department Store and we opened our first store in New Zealand in Auckland’s magnificent Britomart precinct.

Sales in Japan in the quarter were mixed. Total sales rose 13% and comp store sales rose 20%, but that entirely resulted from the favorable translation effect of the stronger yen versus the dollar. However, translation aside, there was a solid increase in jewelry unit sold.

On a constant exchange rate basis, total sales declined 4% in the quarter and comps rose 2%. I should point out that the disparity between the total sales declined and the comp sales increase, reflected lower wholesale sales in Japan.

The strengthening of the yen this year has made purchasing by foreigners more expensive in Japan, which we believe is negatively affecting our business as a result of the reduced tourist spending.

In addition, while the modest comp increase in yen that I noted earlier was a sharp contrast to the substantial local currency sales increase in last year’s third quarter, when spending attributed to domestic customers and Chinese tourists, likely tied to the weekend at that time was exceptionally strong, the two-year run rate is still quite positive.

It’s also worth noting that in addition to higher local spending attributed to Japanese customers in this latest quarter, we are seeing, as I mentioned earlier, a solid increase in spending attributable to Japanese tourists in other regions.

In Europe, total sales declined 10% due to a combination of lower jewelry units sold and the lower average price per units sold, and comp store sales declined 14%. On a constant exchange rate basis, comp store sales were down 7%, which compared with a healthy increase in last year’s third quarter.

Demand across Continental Europe remained soft, although, varying degrees and has been especially soft in Paris since the tragic events of last year. Economic conditions also likely contributed to weak spending by domestic customers in many countries.

On the other hand, the bright spot for us in Europe was the U.K., where we attribute sales growth of spending by foreign tourists reacting favorably to the weakening of the pound after the Brexit vote. It is worth noting that we recently took a single-digit price increase in the U.K. to partly offset the effect of the weaker pound.

Lastly, sales in our other segment increased 18% in the quarter, but that entirely reflected an increase in wholesale sales of diamonds since comp store sales actually declined [technical difficulty] due to continued weak sales in our five stores in United Arab Emirates.

In terms of product categories, funds in the quarter were similar to what we experienced in the first half of the year, with jewelry at lower price points outperforming pieces at higher price points.

The best performing jewelry category was fashion jewelry, which posted a modest increase over last year. This was driven by an increase in gold jewelry sales tied to the strength of the T collection, which we have continued to build upon with new designs.

In addition, fashion silver jewelry stabilized with sales up slightly from the prior year, although, that varied by region and was led by the popularity of the Return to Tiffany Love collection. We’ve added quite a bit of product newness in silver jewelry this year, with a double-digit percentage increase in the number of new SKUs under $500.

At the other extreme was continued softness across the statement, fine and solitaire jewelry category, led by decline in high-end statement sales, which in contrast had posted strong growth last year, performing roughly in line with the prior year on a worldwide basis was the engagement jewelry and wedding bands category, with results varying by region.

Rounding up the product review is the watch category, which posted strong growth, albeit from a still small base, as we continue to be pleased with our customer’s interest in new designs. Finally, worldwide e-commerce sales in the third quarter increased in line with overall sales growth.

To summarize our topline results, we would say that third quarter results were mixed with some improvement in certain geographies and product categories, but with softness in other areas making it premature to say that there has been a meaningful turn in the business.

I am now pleased to turn the call over to Mark Erceg.

Mark Erceg

Thanks, Mark. Welcome everyone. Before jumping straight into the P&L, let me take a minute to explain why I joined Tiffany. Simply put I joined Tiffany, because I believe we have tremendous opportunity to increase the profitability of our business and in so doing create attractive total shareholder returns in the years ahead.

Consistent with this my three primary objectives will be helping Frederic and the rest of Tiffany’s strong management team. But; first, identify profitable and sustainable growth opportunities; second, to invest behind those opportunities with funds generated from tight cost control efforts and the efficient deployment of capital; and third, to drive execution discipline in order to enable us to achieve that growth in the way that enhances shareholder value.

Now let’s quickly look at the rest of the income statement. Gross margin was up 80 basis points versus year ago at 61% as we continue to see some benefit from lower product input costs and a continued shift in product sales away from statement jewelry and towards fashion jewelry, which as you know carries a higher gross margin.

SG&A rose 4% in the third quarter, after having declined 4% in the second quarter. The increase partly resulted from some marketing spending that was shifted from the second quarter into the second half of the year. The increase also reflected higher store occupancy and depreciation costs along with higher labor and incentive compensation costs.

Interest and other expenses were lower than last year due to a combination that reduced foreign currency transaction losses and lower interest expense, and our effective tax rate came in at 34.6%.

Turning to the balance sheet, we believe Tiffany’s strong balance sheet is a competitive advantage in giving our cash balance, available liquidity and modest leverage we are well-positioned to support all of our key business initiatives going forward.

That said, we will continue to explore ways to improve asset productivity, including through the proactive management of inventory both at the store level and throughout the entire supply chain in order to generate healthy levels of free cash flow. And speaking of free cash flow, inventory at quarter end was 2% lower than a year ago. Our long-term objective of keeping inventory growth below the rate of sales growth remains unchanged.

Accounts receivable were 4% higher than at this time last year, with the increase being mostly currency related. Capital expenditures were $157 million in the first nine months of the year versus $159 million during the same period last year. A large part of that spending was to support our global store network. For the full year, our plan is to open 11 company-operated stores. We also plan to relocate six stores and close six stores, and we expect square footage to increase by approximately 3%.

We’ve also been devoting significant portions of our CapEx budget to upgrade and enhance our IT systems, which we continue assess and evaluate. We believe these investments will over time make our supply chain more efficient, improve our in-store experience and generate incremental sales by leveraging both our CRM and omnichannel capabilities.

Share repurchase activity continued throughout the quarter, with approximately 455,000 shares purchased at an average cost of just under $68 per share, which along with the dividend increase from earlier this year continues to demonstrate our practice of returning excess cash to our shareholders. Total short-term and long-term debt represented 38% of stockholders equity versus 37% last year.

Looking forward, despite the modest sales improvement in the third quarter, we remain cautious about the near-term outlook for several reasons. First, overall global economic conditions remain highly volatile, so we would like to see several quarters of sales acceleration before making any conclusion that our turn in global luxury goods spending.

Second, and as a practical matter, given the close proximity of our Fifth Avenue Flagship Store to the Trump Tower, we have noted that recent election related activity has caused the minor disruptions to pedestrian foot traffic around that store. Federal, state and local officials and Tiffany security personnel are all doing a fabulous job trying to minimize any disruptions. However, given the importance of the holiday selling season to our Flagship Store, we remain understandably cautious at the how this situation might impact sales over the coming weeks.

Finally, we are mindful of the uncertainty which surround the upcoming Hong Kong elections next year and how that might impact tourism and spending in one of our largest markets.

So taking all those into accounts and despite third quarter results coming in better than expected, we are holding to our previous annual forecast. Specifically, we continue to expect that full year sales will decline by a low single-digit percentage from the prior year and diluted EPS will decline by a mid single-digit percentage from last year's adjusted EPS, which you may recall excluded loan impairment and certain staffing and occupancy charges.

These expectations are based on our plans and assumptions, including those set forth in the news release we issued earlier today. We expect to report Tiffany’s holiday period sales results on January 17 and planned to follow that up with our year-end report later in March, when Frederic will join Mark and I for commentary and your questions.

So, with that, let me turn the call back over to Mark.

Mark Aaron

Thanks, Mark. That concludes this conference call. [ph] Sharlon (16:42), please provide our audience with the replay information, and investors and analysts I look forward to speaking with you soon.

Question-and-Answer Session

Operator

A replay of today’s call will begin November 29, 2016 at 9:30 a.m. Central Time and will end December 6, 2016 at 9:30 a.m. To access the replay, please dial 888-203-1112 or 719-457-0820 and use the passcode of 8603179 to access the automated system. That does conclude today’s Tiffany & Company Third Quarter Conference Call. You may now disconnect.

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