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Tiffany & Co. (NYSE:TIF)

Q4 2011 Earnings Call

March 20, 2012 8:30 am ET

Executives

Mark L. Aaron - Vice President of Investor Relations

Patrick F. McGuiness - Chief Financial officer and Senior Vice President

Michael J. Kowalski - Chairman, Chief Executive Officer, Member of Management Board, Member of Corporate Social Responsibility Committee and Member of Dividend Committee

Operator

Good day, everyone, and welcome to this Tiffany & Co. Fourth Quarter Conference Call. Today's conference is being recorded. Participating on today's call will be Mr. Mike Kowalski, Chairman and CEO; Mr. Pat McGuiness, Senior VP and CFO; and Mr. Mark Aaron, Vice President of Investor Relations. At this time, I would like to turn the conference over to Mr. Aaron. Please go ahead.

Mark L. Aaron

Good day, everyone, and thank you for joining us on this call. Pat McGuiness and I will review fourth quarter and full year results as well as the company's outlook for 2012, and then Mike Kowalski will wrap up the call with some remarks.

Before we continue, 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 let's proceed. One year ago, we reported broad-based strong financial results for fiscal 2010 with sales up 14% and net earnings from continuing operations up 39%. We are now pleased to also report strong performance for fiscal 2011, with net sales up 18%, net earnings up 19% to $3.40 per diluted share and net earnings excluding nonrecurring items up 24% to $3.60 per diluted share.

At the same time, we are disappointed that the year finished on a softer note than we initially expected, with fourth quarter sales up 8%, net earnings down 2% and net earnings excluding nonrecurring items down 4%, but that does not diminish our satisfaction from achieving another successful year. And it's worth noting that the $3.60 per diluted share of earnings in 2011 excluding nonrecurring items was above the initial guidance we provided to you one year ago that called for $3.35 to $3.45 per diluted share.

Let's first review some key sales highlights by region for the fourth quarter and full year. Sales in the Americas increased 5% in the fourth quarter, with comp store sales up 3% on top of an 8% comp increase last year. This was a slight improvement from the 4% increase in November, December holiday sales that we had previously reported. The 5% sales increase in the fourth quarter was due to an increase in the average price per unit sold. In fact, while price stratification for the Americas in the fourth quarter indicated continued declines in sales and transactions below $250, it was more than offset by sales growth in most of the higher-priced categories. It was a pretty similar dichotomy for the full year, with the greatest strength in sales over $20,000 and $50,000.

We believe that the slower sales growth in the Americas in the fourth quarter might have been in varying degrees due to restrained spending by customers employed in the financial sector, which especially affected our sales in the Northeast and mid-Atlantic regions of the U.S., substantial competitive discounting and particular softness at our entry-level silver jewelry price points that might be tied to some resistance to price increases among other factors.

Sales in the New York flagship store rose 2% in the quarter, which was a bit better than the 1% decline in the holiday period. The 2% increase was due to higher sales to foreign tourists. The overall Americas region also benefited from higher sales to foreign tourists but also saw increased sales to local customers. Comp store sales in branch stores rose 3%, with growth somewhat skewed toward the western half of the region, which includes continued strong growth in Hawaii and Guam, driven by Japanese tourists. Our stores in Canada and Latin America posted solid sales growth in the quarter.

For the full year, sales in the Americas rose 15% due to an overall increase in the average price per unit sold. Growth in jewelry units sold at higher price points was offset by declines in the silver jewelry category. The Americas region represented 50% of worldwide sales versus 51% in 2010. Americas comps rose 13% in the full year. Sales in the New York flagship store rose 20% in 2011 and remained at 8% of worldwide sales.

In 2011, more than 40% of sales made in the New York flagship store were to foreign tourists versus somewhat less than 40% in 2010. Americas branch store comps rose 11% in 2011 on a constant exchange rate basis due to strong increases in most parts of the U.S. as well as in Canada and Latin America.

I mentioned that higher foreign tourist spending generated a good portion of the fourth quarter sales growth in the U.S. That reason also applied to the full year. In fact, full year sales to foreign tourists represented an estimated 23% of U.S. sales in 2011 versus 17% and 15% in 2010 and 2009. European, Japanese and Chinese tourists represented roughly similar amounts of that spending in 2011.

The 5 highest-volume branch stores in the Americas in 2011 included 3 in the U.S. and 2 in Canada, and they are South Coast Plaza in Costa Mesa, California, San Francisco and Chicago as well as in Vancouver and on Toronto's Bloor Street. We opened 6 new stores in the Americas in 2011, including one in Richmond, Virginia, a fourth store in Las Vegas in the Fashion Show Mall, a fourth store in the Chicago market in Northbrook, a store in Calgary, a second store in Vancouver in the Oakridge Centre and a third store in Brazil in Brasilia. Their results range from quite good to very strong, and that follows excellent first-year results from the 5 Americas stores we opened in the previous year.

We finished 2011 with 102 stores in the Americas, including 87 in the U.S., 5 in Canada, 7 in Mexico and 3 in Brazil. Rounding out the Americas are Internet and catalog sales, which declined 4% in the fourth quarter as an increased amount per order was more than offset by a decline in the number of orders shipped. Internet and catalog sales rose 6% in the full year due to increased sales per order and accounted for about 10% of sales in the Americas for the year. We continue to believe that our Internet presence serves the dual purpose of generating online sales and expanding brand awareness, which drives traffic to our stores. We are currently in the process of revamping our website with some exciting enhancements that will debut later this year.

Tiffany's second-largest region by sales is Asia-Pacific. Sales rose 19% in the fourth quarter due to increased units sold and a smaller increase in the average price per unit sold. On a constant exchange rate basis, total sales for the quarter rose 18% with growth in most countries and especially in Australia, Hong Kong and Macau contributed to a 13% increase in comp store sales. That was on top of a 16% comp increase in last year's fourth quarter and was basically in line with the previously reported November, December sales results.

For the full year, total Asia-Pacific sales rose 36% due to similar increases in units and in the average price per unit sold. On a constant exchange rate basis, sales rose 31%, and comp store sales rose 27% on top of a 14% comp increase in 2010, with strong increases in most countries.

Asia-Pacific represented 21% of worldwide sales in 2011 versus 18% in 2010. Sales in Greater China represented 12 points of the 21%. We have a meaningful opportunity to achieve much higher brand awareness in China, and as we proceed, we should undoubtedly see the benefits through sales growth in China as well as in other markets serving the growing numbers of Chinese tourists.

During the year, we opened 6 stores in Asia-Pacific, including 3 in Korea, in Seoul, Daegu and Incheon; 2 in China, in Guangzhou and Dong Cheng; and one in Taiwan, in Taichung. And their early results are good. We also did a major renovation and expansion, which doubled the size of our very successful store on Collins Street in Melbourne. We ended 2011 with 58 stores in the Asia-Pacific region. Our 2 largest stores by sales volume in the region are on Canton Road in Hong Kong and in Ngee Ann City in Singapore.

Now let's turn to Japan. Total sales rose 12% in the fourth quarter due to an increase in the average price per unit sold. This was essentially in line with the 13% sales increase in the holiday period. On a constant exchange rate basis, sales rose 5% in the quarter and comps rose 4% on top of a 1% increase last year due to relatively similar growth throughout Japan.

One year ago this month, we were looking at a sales decline and considerable uncertainty in Japan following the tragic earthquake and tsunami. But our sales growth resumed one month later, demonstrating the enduring value and emotional resonance of our brand combined with the extraordinary efforts of our Tiffany colleagues in Japan. For the year, on a constant exchange rate basis, total sales increased 3% and comparable store sales rose 4%. However, due to the yen strengthening by 10% against the U.S. dollar in 2011, total sales increased 13% due to an increase in the average price per unit sold.

Our flagship store on the Ginza in Tokyo generates the highest volume of our stores in Japan and accounted for 12% of our total retail sales in Japan last year. During 2011, we opened a new store in Hakata and closed 2 locations in Kokura and Wakayama and finished the year with 55 locations in Japan. For the full year, Japan represented 17% of worldwide sales in 2011 versus 18% in 2010.

Now let's review performance in Europe. Sales in the fourth quarter increased 3% due to an increase in the average price per unit sold. This was slightly better than the previously reported holiday sales result. On a constant exchange rate basis, sales rose 3% and comp store sales declined 2% on top of the 16% comp increase on last year's fourth quarter. The 2% comp decline reflected mixed results that range from solid growth in Continental Europe, with the highest growth in Germany and Austria, to a sales decline in the U.K.

For the full year, sales in Europe increased 17% due to increases in units sold as well as in the average price per unit sold and continue to represent 12% of worldwide sales. On a constant exchange rate basis, total European sales rose 12% and comp store sales rose 6% on top of an 18% comp increase in 2010. Strong sales growth across Continental Europe surpassed a more modest increase in U.K. sales in the year. We think that softness in London has probably reflected restrained spending by customers in the financial industry, similar to what we've experienced in New York, along with overall challenging economic conditions.

The vast majority of our European sales are generated by local customers. However, Tiffany stores in Europe also derive a growing benefit from sales to non-European tourists, which we estimate now represent about 1/4 of European sales, with the highest percentage of those sales in Paris. In addition, Tiffany's Internet sales in Europe through websites in 9 countries are also growing very nicely and represented almost 10% of total European sales in 2011.

During the year, we opened 3 stores in Europe, including a second store in Milan, in the Excelsior, which is posting excellent initial results, as well as second stores in both Frankfurt and Zürich, in their airports. And I should add that we've had excellent results from the 2 stores we opened in 2010 in London's Canary Wharf and in Barcelona.

The U.K., with 10 stores, accounted for slightly less than half of our European sales in 2011. Our 2 highest-sales-volume stores in Europe in 2011 were on Old Bond Street in London and on via della Spiga in Milan. We operated 32 stores in Europe at the end of 2011.

Putting it all together, our solid sales growth contributed to improved sales productivity in 2011 coming from comp store sales growth and the successful results from new stores. Looking at that sales productivity by region, the 247 stores we operated in 21 countries at year end generated total worldwide sales per gross square foot of $3,000 in 2011 versus $2,600 in 2010.

By region, the Americas generated $2,300 in 2011 versus $2,100 in 2010. Europe generated $3,400 versus $3,000 in 2010. Japan was at $4,100 versus $3,500 in 2010. And the highest productivity continued to be in Asia-Pacific, with $4,700 per gross square foot versus $4,000 in 2010.

Let's briefly look at other sales, which declined 22% in the fourth quarter. That segment consists primarily of wholesale sales of diamonds and sales to independent third-party distributors of our products, primarily in the Middle East and Russia, and the sales decline reflected lower sales in both components, as we had expected. For the full year, other sales declined 5% as sales growth to independent distributors was more than offset by a decline in wholesale sales of diamonds.

We recently announced that we have signed a memorandum of understanding with Damas Jewelers to establish a joint venture in the UAE. The JV will give us overall responsibility for 5 existing stores in Dubai and Abu Dhabi, and we will soon commence new merchandising and marketing initiatives there to drive sales growth.

Let's now review some merchandising highlights. While total sales growth decelerated to 8% in the fourth quarter after increasing 24% in the first 9 months of the year, there were some differing patterns by category and price point in some regions. High-end statement jewelry sales softened after experiencing strong growth in the first 3 quarters of 2011. On the other hand, the most resilient category was engagement jewelry, with a very solid increase in the quarter, continuing its strong growth from earlier in the year. Fine and fashion jewelry sales were up modestly in the quarter after strong growth in the first 3 quarters of the year. We are extremely pleased with the continued success of our extraordinary yellow diamond jewelry collection and with its long-term potential.

We've also seen customers all year attracted to platinum- and diamond-focused products, such as studs and pendants, and to important collections, such as Victoria, Metro and Celebration Rings. There's also been a growing desire for gold jewelry in collections like Return to Tiffany, 1837 and the new Locks Collection, which followed the unprecedented success of the Keys Collection. Conversely, silver jewelry sales have been growing more modestly.

We were pleased with growth in designer jewelry sales in the quarter that continued our success from earlier in the year. Elsa Peretti's designs had a healthy sales increase, led by the always alluring Diamonds by the Yard collection. Paloma Picasso sales growth was stimulated by her stunning new Venezia Collection, and we are also continuing to be pleased with the sales growth of Tiffany's Leather Collection.

Product development has always been an important strategy and sales driver at Tiffany's, and you can expect to see a very exciting and eclectic array of new jewelry designs over the coming year.

I'm now pleased to turn the call over to Pat McGuiness.

Patrick F. McGuiness

Thanks, Mark. I will now focus my remarks on the rest of the earnings statement. Let's start with gross margin, which at 60.4% in the fourth quarter was 0.5 point lower than the prior year. The downward pressure in the quarter came from higher product cost, a continued shift in sales mix toward higher-priced products that earn a lower gross margin, and a lack of sales leverage on fixed cost.

For the full year, gross margin of 59% was 0.1 point lower than the prior year. Higher product acquisition costs and shifts in product sales mix were mostly offset by sales leverage on fixed costs. Throughout the year, we have spoken about gross margin pressure from significantly higher cost of precious metals and diamonds, which, in turn, have led to increased retail prices at Tiffany and in the overall jewelry industry. If product input costs stabilize, we would expect less pressure on gross margin in the latter part of 2012, and future pricing actions, if any, would be more modest. For the full year, though, we expect gross margin to be lower than the prior year based on our assumptions for product cost, inventory turnover, sales volume and sales mix.

Selling, general and administrative expenses increased 10% in the fourth quarter primarily due to growth in store occupancy, labor and marketing costs. In last year's fourth quarter, we recorded $6 million of nonrecurring expenses related to the relocation of our New York headquarters staff in June 2011. Excluding that expense, SG&A expenses increased 11% in this fourth quarter, and the ratio of SG&A expenses to net sales would have been 36.3% versus 35.1% last year. For the full year, SG&A expenses rose 18%. This is also primarily due to higher cost for store occupancy, labor and marketing.

SG&A expenses also included $43 million of nonrecurring expenses in the first half of 2011 related to the headquarters staff relocation. In 2010, we recorded $17 million of those nonrecurring expenses. So excluding nonrecurring expenses in both years, SG&A expenses increased 16% for the year, and the ratio of SG&A expenses to net sales improved to 38.4% from 39.2% in the prior year.

We will remind you that the vast majority of our SG&A expenses are relatively fixed, in fact, about 80%. So there's further opportunity to leverage those costs and improve the ratio to sales. For 2012, we believe we have put together a well-controlled and prudent expense plan. Our plan calls for high-single-digit expense growth, which includes increased spending for new stores, labor, occupancy and marketing. Our plan will enable us to improve the expense ratio to sales for the full year. Excluding nonrecurring charges, the improvement will be comparable or better than the 80-basis-point reduction achieved in 2011. The SG&A expense growth in 2012 also factors in higher pension and post-retirement costs due to asset performance and a reduction in the discount rate.

For the full year, the slight decline in gross margin and the improved SG&A expense ratio gave us an operating margin of 19.4% versus 19.3% last year. However, excluding nonrecurring items, the operating margin was 20.6% versus 19.8% last year. For 2012, the expected decline in gross margin and improvement in the SG&A expense ratio will likely result in the operating margin being unchanged from 2011 to 20.6% excluding the nonrecurring items.

Other expenses rose to $13 million in the fourth quarter from $11 million last year, while other expenses in the full year declined to $43 million from $47 million due to lower interest expense. We expect other expenses in 2012 to be roughly unchanged from 2011. The effective income tax rate of 34.5% in the fourth quarter was a bit higher than we anticipated, which cost us a few cents per share in the fourth quarter. The effective tax rate for fiscal 2011 came in at 34%. That was higher than the 32.7% rate in fiscal 2010, which included benefits from nonrecurring items primarily related to a change in tax status of certain subsidiaries. We are projecting an effective tax rate of 34% to 35% for 2012.

Adding it all up, net income declined 2% in the fourth quarter to $178 million or $1.39 per diluted share. For the full year, net earnings rose 19% to $439 million or $3.40 per diluted share. Excluding nonrecurring items, net earnings declined 4% in the fourth quarter but rose 24% in the full year to $3.60 per diluted share. Due to the higher-than-expected effective tax rate, this was at the lower end of the range we had projected when we reported holiday sales results on January 10. The full year net margin rose to 12.1% in 2011 from 11.9% in 2010. Excluding the nonrecurring items, net margin was 12.8% in 2011 versus 12.2% in 2010.

Whichever way you measure it, Tiffany had a very strong year, and earnings surpassed the healthy objective that we set at the start of 2011. Our return on average equity and return on average assets improved in 2011. ROE was 19% for the full year versus 18% in 2010, while ROA was 11% for the full year versus 10% in 2010. While the improved ROA reflects the strong earnings in 2011, it also reflects a large increase in inventory levels, which I'll discuss in a moment.

We finished the year with a solid balance sheet that we believe serves as a competitive advantage. Accounts receivable of $184 million at year end was 1% below the prior year end, and receivable turnover remained very high at 20x. Net inventories of $2.1 billion at January 31 were 28% higher than the prior year end, but it's important to look at the components of that increase.

Finished goods inventories rose 16% in fiscal 2011, reflecting higher product acquisition costs, new stores, product launches and expanded product assortments, including our statement jewelry category. And the lower-than-expected sales growth in the fourth quarter temporarily inflated year-end inventory levels. It's worth noting that the larger driver of inventory growth was in raw material and work-in-process inventories. Combined, they increased 46% in the year, reflecting higher product acquisition costs, increased internal manufacturing and substantially higher rough and polished diamond purchases.

For 2012, we are planning for a 15% increase in net inventories, partly due to new stores, expanded product assortments and further vertical integration of our diamond supply chain. The inventory growth also includes a meaningful increase of extraordinary statement jewelry pieces to support the celebration of Tiffany's 175th anniversary over the 2012, 2013 timeframe.

Capital expenditures were $239 million in 2011 or 7% of sales. This was substantially higher than the $127 million we spent in 2010. The largest single piece of the CapEx increase resulted from the relocation of our New York headquarters staff. We also increased our CapEx by renovating more of our store base, and CapEx also went toward opening 14 stores. Our CapEx budget of $240 million for 2012 reflects both a higher rate of new store openings and an increased number of store renovations. The budgeted amount represents about 6% of sales and is consistent with the long-term plan to spend about 6% to 7% of sales per year.

As a result of the factors I've cited, Tiffany's 2011 free cash flow, which we define as cash flows from operating activities minus capital expenditures, was an outflow of $29 million. At year end, we had cash, cash equivalents and short-term investments of $442 million, total short-term and long-term debt was $712 million, and stockholders' equity was $2.3 billion at year end. As a result, the ratio of total debt to equity was 30% at year end compared with 32% at the end of fiscal 2010 and 40% at the end of fiscal 2009. In 2011, we paid off $61 million of maturing long-term debt in Japan. We also entered into a JPY 4 billion or about $50 million one-year credit facility in Japan, which was fully utilized at year end.

During the year, we continued returning cash to stockholders. We remained active in our share repurchase program in 2011, spending $174 million to repurchase 2.6 million shares of our common stock at an average cost of $66.23 per share. And once again, we increased the quarterly dividend rate on common stock, announcing a 16% increase in May 2011. That represented the 10th dividend increase in 9 years, which has also led to a meaningful increase in the dividend payout ratio over that period. The annual dividend of $1.16 per share represents a payout ratio of 34% on 2011's earnings per share of $3.40.

Looking to our financial guidance for 2012. We stated in today's news release that we are projecting an approximate 10% increase in worldwide sales in 2012 primarily driven by sales growth in Asia-Pacific and the Americas. Our expected 10% worldwide sales increase in dollars equates to a 12% increase on constant exchange rate basis with comp store sales growth of 8%.

I've already mentioned our full year assumptions for gross margin, SG&A expense growth, other expenses and the effective income tax rate. Bringing it all together, we are projecting net earnings for 2012 in a range of $3.95 to $4.05 per diluted share, representing growth of 10% to 13% over 2011 EPS of $3.60 per diluted share, which excluded the nonrecurring items.

As we noted in today's news release, we expect a large portion of the earnings growth to be weighted toward the fourth quarter. The unusual spread is largely due to our expectation for some continued gross margin pressure in the next few quarters. We also noted in today's release that we are now halfway through the first quarter, and worldwide sales growth is tracking in line with our internal expectation.

We know there are economic challenges and uncertainty in a number of markets around the world, as evidenced by the fourth quarter results, and we believe we have factored a reasonable degree of caution into our forecast. However, we also continue to take a long-term approach to managing our business and are striving to increase Tiffany's presence and customer base. Our 2012 plan includes making those investments to reap both immediate and longer-term benefits.

I'm now pleased to turn the call over to Mike Kowalski.

Michael J. Kowalski

Thanks, Pat and Mark. I'm glad to be on this call and pleased to say that we achieved, if not exceeded, the objectives we set for 2011. We generated strong sales and earnings growth for the year despite the softness in the fourth quarter, and we continue to build an even stronger platform for future growth. The new stores we opened and the new products we introduced performed well, and we have exciting plans for 2012. Specifically, one of our key initiatives will be the continued expansion of our company-operated worldwide store base. Our plan for 2012 is to open a net of 24 stores, representing a 10% increase in the number of locations.

In the Americas, we are planning to open 9 stores, comprised of 4 stores in the United States, including a store we are opening this week in Salt Lake City and a store in Manhattan SoHo in September. We are planning for 2 new stores in Canada, including one we opened last month in at Montréal, and we are planning to open 3 stores in Latin America, with 2 in Mexico and 1 in Rio de Janeiro.

In Asia-Pacific, we plan to open a net of 7 stores this year, including one store in Bondi Junction, Australia, our sixth in Australia; our second store in Singapore at the airport, which will be our fifth store in Singapore; and a net of 5 stores in China, bringing us to 21 stores in China by year end. Our plans continue to call for expanding our store base to 30 stores in China in the next several years. In Japan, the store total will be unchanged.

Our plans for Europe call for adding 3 stores this year in Prague, in Nice and in the Berlin airport, which will bring us to 35 European stores by year end and closer to our goal of 50 stores in Europe in the next 5 or so years.

Our worldwide store expansion plans in 2012 also include adding 5 company-operated stores in the Middle East. Two months ago, we announced our signing of a memorandum of understanding to establish a joint venture in the UAE with Damas Jewelers. Under the JV, Tiffany will soon take on responsibility for merchandising, assortment and pricing, advertising and promotional activities, staffing, store design and visual display and financial services in 5 existing Tiffany company stores, including 3 in Dubai and 2 in Abu Dhabi. We are very excited about converting these stores into company-operated locations and believe there is substantial potential for us to reach a large base of customers who undoubtedly appreciates Tiffany's extraordinary product offerings. Beyond the Middle East, we are also exploring opportunities to expand Tiffany's modest existing presence in Russia and Brazil and to eventually enter India.

Tiffany's website has been widely recognized for its innovative excellence in the jewelry category. We believe we can enhance the customer experience even further and are working on a comprehensive revamp of the website to launch later in the year, which we expect will generate additional marketing and sales benefits.

We also have developed an exciting and impactful array of new products to be introduced in 2012. I'm sure you are all aware that Tiffany's 1837 jewelry collection has been an enormous success. To commemorate the year of Tiffany's founding, we are excited about the current launch of the next generation of 1837, with new designs in gold and silver and a significant portion of the collection executed in Tiffany's new RUBEDO metal. RUBEDO is a luminescent blend of copper, silver and gold, which our metallurgists took several years to develop. It has a radiant, innovative glow, and initial customer reception has been very strong. We plan to further expand our assortment of statement jewelry with important pieces, and we'll continue to offer our extraordinary engagement jewelry in a compelling and competitively dominant assortment of styles.

Beyond engagement and statement jewelry, we have developed a new Enchant Collection for later this year with designs inspired by the natural world in platinum, gold and tanzanite. There will also be new designs featuring pink diamonds, a continued focus and expansion of our very successful Yellow Diamond Collection, additions to our Somerset jewelry collection and new pearl jewelry offerings. And we will debut a new collection of designs inspired by the Art Deco period to coincide with the fourth quarter debut of the movie The Great Gatsby, for which Tiffany has designed the jewelry. We are also currently launching Paloma Picasso's new Villa Paloma collection in gold and silver, inspired by the beauty found in Paloma's favorite gardens around the world.

Finally, we will continue to build on the strength of our core collections with additions to our very successful Return to Tiffany, Keys, Locks and Charms collections and new additions to our Leather Collection. And of course, you can be certain that we will employ an active marketing program through advertising and print and digital media, public relations and store events to focus on these new designs as well as the wide range of Tiffany classics.

Supporting our ongoing business and store and product expansion is our strong infrastructure. Tiffany's 2 distribution centers are very effectively handling worldwide store replenishment and direct-to-customer shipments. Very importantly, we have developed excellent product manufacturing and sourcing capabilities. In 2011, we internally manufactured about 60% of Tiffany's merchandise sold. The new jewelry manufacturing facility we opened in Lexington, Kentucky in 2011 gives us additional capacity to complement our facilities in New York and Rhode Island and can support our future growth.

Tiffany has built an extraordinarily powerful diamond supply chain through relationships with many of the world's diamond producers. Less than 1% of the world's diamonds meet Tiffany quality standards. As we continue to seek global wealth creation in the future, we and others in our industry expect that the worldwide supply of diamonds, especially at our quality levels, keep pace with growing customer demand, and therefore, diamond cost will likely move higher. While we cannot mitigate higher cost, we can feel assured that the diamond supply chain we have developed will enable us to serve our growing customer base with a comprehensive supply of the finest-quality diamonds that they expect from Tiffany.

The 2012, 2013 period marks the 175th anniversary of Tiffany's founding. Our brand is now globally recognized and admired. 54% of our worldwide sales in 2011 were transacted outside the United States, and the percentage of sales made to non-U.S. customers is even greater if you include the spending by foreign tourists shopping in our U.S. stores.

Tiffany will continue to grow as the place that customers from around the world come to celebrate life's most important occasions. The Tiffany & Co. brand is flourishing because it represents the finest product quality and craftsmanship, enduring value, a rewarding shopping experience and a bond of trust with consumers. We know that these traits will remain the keys to our future growth and our success.

We believe we have put together a reasonable and achievable financial plan for 2012 with approximately 10% worldwide sales growth and net earnings growth of 10% to 13%, excluding last year's nonrecurring items. What we accomplish in 2012 should yield benefits for years to come, and we remain committed to our longer-term financial objective to increase net sales by 10% to 12% annually and net earnings by at least 15% per year.

Thank you for joining us today for our review of Tiffany's results and outlook. I look forward to seeing many of you during the year and updating you on Tiffany's progress. In fact, please note that we expect to report Tiffany's first quarter results on Thursday, May 24. I appreciate your ongoing and growing interest. Here's Mark again.

Mark L. Aaron

Thanks, Mike and Pat. That wraps up our remarks, but if you missed any portion of this call, a replay will be available today beginning at 10:30 a.m. Eastern Time and running through March 27. The number is 1 (888) 203-1112 in the U.S. and 1 (719) 457-0820 when calling from outside the U.S. The passcode is 6449837. You can also access the replay on tiffany.com/investor. That concludes our call. Have a good day.

Operator

Thank you. Once again, ladies and gentlemen, that will conclude today's call. Thank you, all, for your participation. You may now disconnect.

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