Good day, everyone, and welcome to this Tiffany & Co. First Quarter Conference Call. Today's call is being recorded. Participating in today's call are Mr. Mark Aaron, Vice President of Investor Relations; and Mr. Pat McGuiness, Senior Vice President and CFO. At this time, I would like to turn the conference over to Mr. Mark Aaron. Please go ahead.
Mark L. Aaron
Good day, everyone. Pat McGuiness and I appreciate your tuning in for this review of Tiffany's first quarter results and an update of our full year outlook. 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 2011 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.
The first quarter results we reported this morning were mixed. Total sales growth of 8% was a few percent below our expectation due to softness in April, but you should note that it was on top of a 20% increase on last year's first quarter. The shortfall to our expectation was entirely in the Americas while quarterly sales in Asia Pacific, Japan and Europe came in pretty much where we expected.
Gross margin declined in the quarter, which we had anticipated, and SG&A expenses were in line with our expectation. Put it together and net earnings rose slightly over last year on a GAAP basis but declined slightly when adjusted to exclude nonrecurring costs last year. You should also note that net earnings in last year's first quarter had increased by a strong 26%.
We had clearly communicated 2 months ago that we expected only minimal EPS growth when adjusted in the first quarter, and that we anticipated that most of the expected annual increase in 2012 would occur in the fourth quarter. Pat will address our new annual outlook in his remarks.
Let's begin the sales review by looking at the Americas, where total sales rose 3% in the quarter. The increase was due to a higher average price per unit sold. On a constant exchange rate basis, sales also rose 3%, and comps were equal to last year due to a 1% increase in brand store comps, with no meaningful geographical differences by region except for strength in our Pacific market and a 4% decline in New York flagship store sales.
In last year's first quarter, Americas comps had increased 17% due to a 15% increase in brand store comp and a 23% increase in New York flagship store sales. In any case, both the brand stores and New York comps trailed our expectations.
We believe that our performance in the U.S., while disappointing to us, is also reflective of data published by MasterCard spending polls for the high-end segment of the U.S. jewelry industry.
On our last call, we identified a number of factors that we believed affected sales in the Americas, ranging from restrained spending by customers employed in the financial sector to substantial competitive discounting, which we believe has continued, to particular softness in entry-level silver jewelry price points tied to resistance to price increases. We think those factors are all still relevant.
In addition, the first quarter finished on a softer note that we attribute to a difficult year-over-year comparison to strong growth in April 2011, which may have been related to at least some degree to the timing of Mother's Day, which occurred on May 8 last year and May 13 this year.
In terms of customer mix, it was higher foreign tourist spending that drove the modest Americas sales increase in the quarter versus suspending by domestic customers. In fact, our stores in Hawaii and Guam saw the largest increase. Conversely, we noted that foreign tourist spending in the New York flagship store was equal to the prior year, as increased sales to Asian visitors were offset by lower sales to Europeans and other tourists.
In the Americas region beyond the U.S., sales were up in Canada and we had strong sales growth in Mexico, where we have 8 stores, and Brazil, with our 3 stores. We added 3 stores in the Americas in the first quarter, including one in the newly opened City Creek Center in Salt Lake City, one in Montréal in the Ritz-Carlton Hotel and one in Mexico in the Palacio De Hierro's Interlomas department store. Six more stores in the Americas are planned for later this year.
Lastly, combined e-commerce and catalog sales in the Americas rose 1% in the quarter due to an increase in the average sales per order. The increase was slightly below our expectation but came on top of a 14% increase last year.
Let's now turn to the Asia Pacific region, which posted a solid 17% sales increase in the first quarter that was virtually in line with our expectation and was mostly due to increased unit volume, as well as some increase in the average price per unit sold. On a constant exchange rate basis, total sales rose 16% with double-digit sales increases in most countries. Local currency comp store sales rose 10%, despite going up against a substantial 26% increase last year.
While we acknowledge that sales growth trends in China for Tiffany, as well as others in the luxury industry, have decelerated from the extraordinarily strong rates last year, due to both difficult comparisons and some softening in economic growth, we certainly remain enthusiastic about Tiffany's long-term sales growth potential with that important consumer segment. During the quarter, we opened our 17th store in China in Wuhan and are planning to add 7 additional Asia Pacific stores later in the year.
Turning to Japan. Total sales rose 15% in the first quarter due to an increase in the average price per unit sold, as well as a decent increase in unit volume. Excluding the translation effect of the yen, which was 2% stronger than a year ago, total sales in yen rose 13% in the quarter and comp store sales rose 12%, which exceeded our expectation.
In last year's first quarter, we were affected by the tragic earthquake and tsunami, which led to a temporary drop in sales in March and a 3% comp decline for the quarter. Sales growth had resumed a month later, and it has continued to increase since then. And the 12% comp growth in the quarter reflected healthy increases across Japan, although with somewhat greater strength in the Tokyo region. During the quarter, we relocated one of our stores from within one department store to another in Tokyo's Shinjuku district, but the total number of stores we operate in Japan remained at 55.
Economic conditions in Europe are obviously less than ideal, but we achieved a somewhat better-than-expected 3% sales increase in the quarter due to an increase in the average price per unit sold. On a constant exchange rate basis, total European sales rose 7% and comps were equal to the prior year, which was on top of a 15% comp increase in last year's first quarter.
Geographically, the unchanged comp in the quarter was equally reflective of both the U.K. and overall continental Europe. Actually, the strongest sales growth was in Germany while in London, the softest store, not surprising to us, was in the Royal Exchange in the city, which caters to customers employed in the financial industry. The European store count remained at 32 in the quarter.
Rounding out the sales review is other sales, which declined 14% in the quarter due to lower wholesale sales to independent distributors, as we prepare to commence operations of stores in the UAE. We are pleased to have finalized our joint venture agreement with Damas Jewellery, and through that JV, we'll assume operating control of the 5 Tiffany stores in Abu Dhabi and Dubai later in the second quarter.
That covers the sales review by segment. On a worldwide basis, our price stratification analysis in the first quarter indicated no meaningful differences in rates of sales growth by price point. From a global merchandising perspective, there were a few highlights worth mentioning.
We continue to achieve a healthy increase in engagement jewelry sales. Growth in fine and fashion jewelry sales reflected the enormous appeal of our Yellow Diamond Collection, as well as the popularity of gold jewelry. And we're very pleased with initial customer reaction to our recently updated 1837 collection, which showcases the new RUBEDO metal.
Growth in designer jewelry sales reflected the success of Paloma Picasso's designs, including her new Villa Paloma and her Venezia Collection. And beyond jewelry, we're pleased with the sales momentum of our leather goods collection. There are additional introductions to the pipeline for later in the year.
That wraps up the sales review. I'm now pleased to turn the call over to Pat.
Patrick F. McGuiness
Thank you, Mark. As you just heard, first quarter sales, mostly in the Americas, were a bit below what we had initially expected. As a result, we have adjusted our expectation for the next couple of quarters. It probably goes without saying, but those sales results certainly do not affect any of our exciting plans for store expansion, product launches or the pursuit of market share growth opportunities in 2012.
Looking at the rest of the income statement. Gross margin declined by 1 point in the quarter to 57.3%. The decline was based on higher product acquisition costs from last year, as we had expected and previously communicated. Selling, general and administrative expenses rose 9% in the quarter. Excluding roughly $8 million of nonrecurring costs in last year's first quarter related to the relocation of our New York headquarter staff, SG&A expenses rose 11% year-over-year due to higher labor, occupancy and marketing spending, all of which resulted in an increase in the ratio of SG&A expenses to sales.
Other expenses, net of $10.5 million in the quarter, were virtually unchanged from the prior year, and the effective tax rate in the quarter came in as expected at 34.5% versus 35.6% last year. Adding it up, net earnings rose 1% in the quarter. However, excluding last year's nonrecurring costs, net earnings declined 5% versus our expectation for a slight increase, due to the sales shortfall in the Americas.
Looking at our balance sheet. Accounts receivable are in good shape, increasing 3% at April 30 from a year ago, with receivables turning at 20x per year. The more significant use of working capital has been in net inventories, which at April 30, were 27% higher than a year ago. Part of that overall increase was due to higher product acquisition costs.
In addition, the 16% year-over-year increase in finished goods was due to store openings and expanded product assortment, and of course, some effects from the softer-than-expected sales growth. The larger increase in inventories was in raw material and work in process, up 44% year-over-year, due to the continued expansion of our rough diamond supply chain and internal jewelry manufacturing. We now expect net inventory growth of about 10% for the full year versus 15% previously, as we make adjustments tied to our lowered sales expectations.
Capital expenditures of $44 million were modestly lower than the $52 million a year ago. We bought back some of our shares during the first quarter, spending $46 million to purchase approximately 700,000 shares at an average cost of $66.42 per share. As a result of that various spending, our cash, cash equivalents and short-term investments totaled $343 million at April 30 and was lower than a year ago.
Total short-term and long-term debt of $834 million was higher than a year ago and represented 35% of stockholders' equity. We continue to achieve solid returns on assets and equity with ROA running at 11% and ROE at 19% through the first quarter, and we were pleased that Tiffany's Board of Directors last week approved a 10% increase in the quarterly dividend rate. That represented the 11th dividend increase in the past decade.
Before turning to our financial outlook for the rest of the year, I want to make sure you are all aware of the disclosure we made in our report on Form 8-K filed yesterday with the SEC regarding the potential acquisition of Elsa Peretti's intellectual property rights. Please see the 8-K filing on our website for more details.
Now let's review our full year outlook. We indicated in today's news release that the sales in the first few weeks of the second quarter are increasing by a low single-digit percentage. We are experiencing the difficult comparisons to extremely strong growth at this time last year, especially in the Americas and Asia Pacific regions, as well as decelerating rates of economic growth in a number of countries that are affecting our results.
Based on results in the first quarter and revisions we have made from our initial outlook for the second and third quarters, we are now expecting full year worldwide sales to increase about 7% to 8% for 2012 versus our previous 10% objective, with the strongest growth occurring in the Asia Pacific region.
Our plans call for adding 24 Tiffany stores this year, and as you heard, we opened 4 in the first quarter. For the rest of the year, the 20 stores plan includes 6 additional stores in the Americas, with leases finalized for a store in Manhattan's SoHo neighborhood, a store in Rio de Janeiro and a store on Altavista Street in the south area of Mexico City. We have 7 stores scheduled to open in Asia Pacific, with leases finalized for a store in Bondi Junction, Australia and a second store in Singapore's Changi Airport.
We'll have 2 additional stores in Europe, with a store in Nice opening tomorrow and a store in Prague opening later this year. A store planned to open in the Berlin airport is now delayed until early 2013 due to airport construction delays. And we will soon begin to operate the 5 stores in the UAE, in Dubai and Abu Dhabi.
We have a strong lineup of product introductions planned for this year in a wide range of materials and price points, including an Art Deco jewelry collection, tied to the launch of The Great Gatsby movie, and Tiffany's new Enchant jewelry collection, with the designs inspired by the natural world in platinum, gold and tanzanite. Those and other introductions will receive strong marketing support, both in print and digital media, to create awareness among customers.
We now expect the operating margin for the full year to be modestly lower than last year's 20.6%, which had excluded nonrecurring items. We expect SG&A expense growth, after excluding the nonrecurring costs from last year, to be somewhat below sales growth, leading to an improvement of perhaps a 0.5 point in the ratio of SG&A expenses to sales, but being more than offset by a decline in gross margin.
We are pleased to see precious metal and diamond costs stabilizing in recent months, which, if it continues, should bode well for gross margin by the fourth quarter and into next year, but not before then. We are not currently anticipating taking any meaningful price increases for the rest of the year.
Also related to gross margins, I'm pleased to say that our manufacturing facilities and distribution centers are operating efficiently to support our product needs in our stores and shipping to customers. We believe we have sufficient room to leverage that infrastructure capacity and receive a margin benefit based on achieving solid sales growth.
Therefore, we now expect earnings for the year to increase to a range of $3.70 to $3.80, with all of the year-over-year growth coming in the fourth quarter. Our current expectation calls for earnings declines in the second and third quarters. You should also note that of this $0.25 per share decrease in our full year guidance, approximately $0.20 is related to a reduction in our operating expectations while $0.05 is tied to the expected cost of additional debt incurred for working capital, repayment of maturing debt and general corporate purposes.
Our initial sales plan, primarily for the Americas, but also for Asia Pacific, did not factor in enough of the difficult year-over-year comparisons, as well as, more recently, the economic conditions in sales trends that have softened in some markets in Asia Pacific and elsewhere. We believe those conditions may remain soft for the next couple of quarters.
As a reminder, local currency comp store sales in the second and third quarters of last year had increased 23% and 15%, respectively, in the Americas and 41% and 36%, respectively, in Asia Pacific. The adjustments we've made in our new sales outlook take into account soft macro conditions and those difficult year-over-year comparisons in the next 2 quarters.
Despite the challenges we are addressing in 2012, I want to emphasize that 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. We believe that our company, now in its 175th year, is better positioned than ever to achieve greater prominence in our industry.
Thank you for listening to today's conference call. Please call Mark with any questions, and also note that we expect to report Tiffany's second quarter results on Monday, August 27. Here's Mark to close the call.
Mark L. Aaron
Thanks, Pat. That concludes 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 May 31. The number is (888) 203-1112 in the U.S. and (719) 457-0820 when calling from outside the U.S. The passcode is 4057832. The replay is also on our website at tiffany.com/investor. Have a good day.
This concludes today's conference call. You may disconnect your line. Thank you.
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