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Executives

Mark Aaron – Investor Relations

James Fernandez – Chief Financial Officer

Tiffany & Company (TIF) Holiday Sales Call January 11, 2008 8:30 AM ET

Operator

Good day, everyone and welcome to the Tiffany & Company Holiday Sales conference call. Today’s call is being recorded. Participating on today’s call is the Vice President of Investor Relations, Mr. Mark Aaron; and the Executive Vice President and Chief Financial Officer, Mr. Jim Fernandez.

At this time, I’d like to turn the call over to Mr. Mark Aaron. Please go ahead, sir.

Mark Aaron

Good morning and Happy New Year. We reported Tiffany’s holiday sales results earlier today and hopefully you’ve seen the press release by now. On this call Jim and I will review the results and comment on the outlook for the rest of the fiscal year.

First, 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 2006 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.

We would characterize the 2007 holiday season as mixed. Total company sales growth for the two-month period was below our expectations, but fourth quarter earnings should be in line with the expectation we had at the start of the season.

We entered the holiday season facing well-known, challenging macro conditions in the U.S. and these results reflect it. Therefore, soft U.S. result were not too surprising, although the magnitude of the softness in our stores and direct marketing sales was more than we expected.

At the other extreme, international sales exceeded our expectations due to strength in Asian countries outside Japan as well as in Europe. Let’s look at sales in our channels of distribution.

U.S. retail sales increased 4% in the holiday season. There was increased spending per transaction on both total store and a comp store basis, but the number of transactions declined. Those dynamics are the opposite of what we have historically experienced in a period of soft consumer spending, but it’s premature for us to draw any conclusions from such a brief period of data.

From a U.S. price stratification perspective, there was some sales softness above $50,000. On the other hand, the best increases were in the $10,000 to $50,000 range, which includes a significant portion of engagement jewelry, as well as in the $500 to $1,000 range, which is comprised primarily of silver jewelry.

Comp store sales declined 2% versus our expectations for a mid single-digit increase, but it’s worth noting that it compared with an 8% increase last year. The New York flagship store was up 10% on top of a 15% increase last year, while comp brand store sales declined 4% versus a 7% increase last year.

In the third quarter of 2007, an 8% increase in U.S. comps had reflected a moderation in brand store sales and a continuation of very strong growth in New York flagship store sales. Since then, consumers moderated their spending at most locations.

Overall, U.S. comps increased 7% in November and then declined 5% in December. Last year U.S. comps had increased 11% in November and 8% in December and then we finished the fourth quarter with a 15% increase in January. The sales softness was broad-based around the country. Just beyond the New York flagship store, the seven comp stores in the New York suburbs declined 10% in the holiday period. We’re pleased to say that sales in our new Wall Street store exceeded our expectations and that more than half of its customers were new to Tiffany.

Despite some expected cannibalization on other stores, total sales at the eight comparable New York area stores -- that is the seven brand stores and the flagship store combined with the Wall Street store -- increased 8%.

Looking at other parts of the country, we saw modest sales declines in California, where we have 12 stores; and in Florida, where we have eight stores. Sales in Hawaii were equal to the prior year. But there were some stores with noteworthy increases, including Palo Alto, Dallas and Houston, Bal Harbor, Cincinnati, Old Orchard and Edina.

Foreign tourist spending was definitely a factor in our U.S. retail sales increase. In fact, the 4% increase was entirely due to increased spending by international visitors, of which most were from Europe as well as some from China.

Not surprisingly, our New York flagship store got the biggest benefit from the foreign tourist spending, while sales to local customers in that store were just slightly lower than last year.

We have opened seven new U.S. stores in 2007. Earlier in the year, we opened in Austin, Las Vegas and Natick, followed by new stores in Santa Barbara, Red Bank and Providence in November and we are generally pleased with their initial results. As noted, the Wall Street store has enjoyed a strong start.

Staying in the U.S. for a moment, direct marketing sales in the holiday period were fractionally higher than the prior year, which was well below our mid-teens expectations, but was on top of a 10% increase in last year’s holiday period. An increase of a few percent in the number of orders was mostly offset by lower delivery revenues due to the free shipping that we offered.

Looking overseas, international retail sales rose by a strong 18% in the holiday season, which was better than we expected and was on top of an 18% increase in last year’s holiday season.

On a constant exchange rate basis, international sales rose 12% and comparable store sales increased 5%. My following remarks are on a constant exchange rate basis.

Total retail sales in Japan declined 1% from last year and comp store sales declined 5%. That was below our expectation and compared with a 4% comp decline last year. Comps in Tokyo declined 4% and comps outside Tokyo declined 6%.

The comp trends included a 4% decline in November and a 6% decline in December, compared with respective declines of 4% and 5% last year. We continue to attribute some of that performance to challenging retail conditions in Japan.

However, comparable store sales in Asia Pacific outside Japan surged 24%, which exceeded our expectations and was on top of a 23% increase last year. We achieved exceptional results in all markets.

We also achieved solid growth in Europe, a 7% comp increase was somewhat below our expectation, but was on top of a 19% increase last year. We posted a good increase in London, which represents more than half of European sales, as well as in most countries in Continental Europe.

We are also pleased with the initial performance of the new stores and boutiques that we have opened up in 2007 in Japan, Asia Pacific and outside Japan and Europe.

Lastly, sales in our other channels decline due to lower wholesale sales of diamonds.

From a merchandising perspective, we saw a strong sales increase in the engagement jewelry category, including strong unit growth in the U.S. and international markets including Japan. Sales of high end statement jewelry and other fine jewelry were roughly equal to the prior year although we were pleased that statement jewelry units sold actually increased over last year. At more modest price points, silver jewelry sales were up in the U.S. and most international markets except Japan.

Lastly, a nice increase in the designer category was primarily driven by worldwide growth in Elsa Peretti’s jewelry sales, which we attribute to heightened marketing focus. Considering the overall sales mix, the gross margin implication is favorable.

I am now pleased to turn the call over to Jim.

James Fernandez

Thanks, Mark. It was a challenging holiday season with mixed sales results, but I commend all the members of Tiffany for helping to deliver the best possible results. While the U.S. sales results were disappointing, they were not too surprising given the current environment and versus some other retailers, our strategic opposition to price promoting can sometimes negatively affect our sales growth in the short term, but it maintains brand integrity and enables us to achieve respectable gross margins.

Having said that, Tiffany in total remains on track to achieve strong sales and earnings growth for the year, which excluding several one-time items should in fact exceed the EPS guidance we provided at the start of 2007.

Retailers at all end of the price spectrum face occasional external challenges and Tiffany is no exception, but our strong industry positioning, competitive strengths and proven growth strategies enable us to weather such challenges, increase our market share and prosper in the long run.

Our fiscal year ends on January 31. The month of January typically represents 15% to 20% of fourth quarter sales and we have not seen any improvement from recent trends. As a result, we now expect worldwide net sales in the fourth quarter to increase approximately 8% over 2006.

Despite the sales short fall versus our expectation, our operating margin should benefit from favorable sales mix and SG&A savings. Therefore, we expect earnings in the fourth quarter of approximately $1.10 to $1.13 per diluted share. This includes an estimated obsolescence charge of $20 million or $0.09 per diluted share after tax to discontinue certain watches as part of our recent agreement with The Swatch Group for them to commence and manage distribution of Tiffany company watches.

Excluding that charge, we expect earnings of $1.19 to $1.22 per diluted share in the fourth quarter. This would represent a solid increase over last year’s $1.02 per diluted share, which included the $0.05 impairment charge associated with the Little Switzerland business.

For the full year, we are projecting a 14% increase in net sales, which would reflect reasonably balanced growth among our key channels of distribution. We expect gross margins to be lower than the prior year, mostly due to the large obsolescence charge. SG&A expenses, excluding the contribution to the Tiffany & Company Foundation, to increase approximately 12%, which would give us an improved expense ratio for the year; and, we expect a tax rate of approximately 37%.

This should all lead to net earnings, excluding the watch obsolescence charge, the contribution to the Foundation and the gain on the sale of our Tokyo flagship store property in the range of $2.25 to $2.28 per diluted share, which is consistent with our previous guidance of $2.25 to $2.30 per diluted share.

Including those three items and the charge related to the sale of Little Switzerland and its losses, we are looking at net earnings in a range of $2.40 to $2.43 per diluted share.

As noted in today’s press release, these earnings projections do not include any potential impairment to the loans made to Tahera Diamond Corporation.

As we approach the start of fiscal 2008, our businesses are thriving in a number of international markets, but there is uncertainty about macro conditions and the state of consumer spending in the U.S. This makes it even more difficult than usual to forecast our overall business for the coming years.

Therefore, we are still engaged in our planning process and will provide our expectations for fiscal 2008 when we report our fourth quarter and full year results on March 24. We believe providing guidance right now based on such limited information would be a disservice to investors.

December U.S. sales results notwithstanding, 2007 was a very active year at Tiffany and we have many exciting plans for 2008. For store expansion we are currently planning to open five new U.S. stores. We will also roll out our new collections concept with one store later in the year.

We plan to increase our rate of store expansion on the international side for 2008 and have plans to open 15 to 20 stores and boutiques across Asia and Europe. In total, we expect to increase the number of company-operated stores and boutiques by approximately 12% to 15% which would represent a high single-digit percentage increase in square footage.

In addition as I mentioned, distribution of Tiffany watches will begin this year through our agreement with The Swatch Group, although the meaningful ongoing benefits from that agreement are not expected until 2009.

We also have a full line-up of new jewelry designs in 2008 that will span a wide range of materials and price points, and Tiffany’s first ever eyewear collection is currently being launched through our venture with Luxottica.

The global jewelry industry is very large and competitively fragmented, and Tiffany has an excellent opportunity to increase its market share now and in the coming years. So despite the near-term uncertainty about consumer spending, primarily in the U.S., we enter 2008 with excitement about maintaining the leading position in our industry. We hope you share our excitement.

That concludes our remarks about the holiday season. Please feel free to contact Mark with any questions and as I said, we plan to report fourth quarter and full year results on Monday, March 24. Thanks for listening.

Question-and-Answer Session

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