Good day, everyone, and welcome to the Tiffany & Co. Second Quarter Conference Call. Today's conference is being recorded. Participating on today's call is Mr. Patrick McGuiness, Senior Vice President and Chief Financial Officer, and Mr. Mark Aaron, Vice President of Investor Relations. At this time, it is my pleasure to turn the conference over to Mark Aaron. Please go ahead.
Mark L. Aaron
Thank you. Good day, everyone, and thanks for joining us. On today's call, Pat and I will review second quarter results and comment on the full year financial outlook. Before continuing, 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 Form 10-K, 10-Q and 8-K 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 review the results. When we reported first quarter results on May 24, we indicated that worldwide sales in the first few weeks of the second quarter were increasing by a low-single-digit percentage and that we expected net earnings in the second quarter to decline from the prior year when excluding last year's nonrecurring costs. The overall results we report today were in line with those internal expectations. Net worldwide sales rose 2%, led by strong growth in Japan, while sales in the Americas, Asia Pacific and Europe were virtually equal to the prior year. And while net earnings on a GAAP basis rose 2%, adjusted net earnings declined 17% from the prior year, which was about what we expected when excluding nonrecurring costs in last year's second quarter related to the relocation of our New York headquarters staff. The year-over-year comparisons we faced in the quarter could not have been much more difficult, so it's worth reminding you that in last year's second quarter, worldwide sales had increased 30%, net earnings had increased 33% and net earnings excluding nonrecurring costs had surged 58%.
Let's now look at second quarter sales by region. In the Americas, total sales declined 1% in the quarter. An increase in the average price per unit sold was offset by a decline in unit volume. On a constant-exchange-rate basis, total sales were equal to the prior year, and comp store sales were down 5% on top of a 23% comp increase last year. Of that 5% comp decline in the quarter, brand store comps were down 4% on top of a 19% increase last year, with most regions performing in a relatively narrow band except for solid growth in Florida, Texas and our Pacific market of Hawaii and Guam. Sales in the New York flagship store declined 9% on top of a staggering 41% increase last year. Data published by MasterCard Spendingpulse continues to indicate weak customer spending for the entire U.S. jewelry industry and most pronounced among the high-tier jewelers.
From a customer mix perspective, the sales decline in the U.S. in the quarter was entirely due to lower spending by local customers. While overall sales to foreign tourists were roughly unchanged from the prior year, higher sales to Japanese and Chinese visitors were offset by a decline in spending by European tourists in the U.S., which obviously affected the New York flagship store as well. Also in the Americas region, total sales rose in Canada, although comps declined, while we had strong growth in local currency comps in Latin America.
Beyond stores, combined e-commerce and catalog sales in the Americas rose 3% in the quarter due to an increase in the average sales per order. That was on top of a 16% increase last year. I'm pleased to add that based on successful results measured both quantitatively and creatively from a test mailing of a new catalog format we did earlier this year, our catalogs will soon have a fresh new look starting with the upcoming holiday season.
During the quarter, we added one store in the Americas when we opened our ninth store in Mexico in the Altavista neighborhood of Mexico City. In the second half of the year, we will be adding 3 stores in the U.S., 1 in Brazil and 5 in Canada, which now includes converting from wholesale distribution 4 Tiffany boutiques in Holt Renfrew department stores into company-operated locations.
Turning to the Asia Pacific region, total sales rose 1% in the second quarter, resulting from increased unit volume with an offsetting decline in the average price per unit sold. On a constant-exchange-rate basis, total sales increased 3%, and comp store sales in local currencies declined 5%, which compared with an extraordinary 41% comp increase in last year's second quarter. Australia posted the strongest growth in the quarter in contrast to softness in Hong Kong tied to restrained Chinese consumer spending and softness in Korea.
We remain enthusiastic about Tiffany's longer-term potential in China, and we continued to expand our store base in the second quarter by opening our 18th and 19th stores there, one in Nanjing and the other in Shanghai's Grand Gateway mall, which represents our fifth store in that city. We have 5 additional stores on track to open in the Asia Pacific region in the second half of the year.
Among our various regions, the strongest performance in the quarter came from Japan, where total sales rose 11% due to a healthy increase in jewelry unit volume and an increase in the average price per unit sold. In local currency, both total sales and comparable store sales rose 10% in the quarter. This came on top of an 8% comp in last year's second quarter. Sales growth was broad-based throughout Japan, with no significant variations by region. The number of Tiffany stores in Japan remained unchanged.
Turning to Europe, total sales declined 1% in the quarter due to a modest decline in units, although mixed by category, and a small increase in the average price per unit sold. On a constant-exchange-rate basis, total European sales increased 8% and comp store sales rose 2%, which was on top of an 11% comp increase in the second quarter of last year. Considering the obvious challenging economic conditions, we're pleased with our European results, although we do acknowledge that sales are getting a boost from non-European tourists who are offsetting spending declines by local customers in some markets. By market, sales growth in Germany, France and some other countries was largely offset by weakness in the U.K. and Italy. We opened one European store during the quarter when we entered the south of France with a store in Nice, and initial results are very encouraging. We plan to open one more European store later in the year.
Lastly, other sales increased 12% in the second quarter. In addition to increased wholesale sales to independent distributors in certain markets, we assumed control in July of 5 Tiffany stores in the United Arab Emirates, 3 in Dubai and 2 in Abu Dhabi. We are now operating those stores and recording the retail sales and expenses as opposed to previously recording wholesale sales. As we expected, it will take some time for us to get that business fully up to speed, but we are pleased with initial results and very excited about long-term prospects throughout the Middle East.
That wraps up the regional sales review. From a global merchandising perspective, most product categories posted sales that were relatively close to last year's levels. In addition, our worldwide price stratification analysis in the second quarter indicated fluctuating demand at various price point levels from which we can't draw any conclusions. Not to belabor the point, but the year-over-year comparisons were tough in pretty much all product categories and, therefore, difficult to analyze. There are quite a few exciting product introductions coming in the next few months that Pat will address shortly.
Let's now look at the rest of the earnings statement. Gross margin of 56.3% in the second quarter was 2.7 points below last year and virtually on our expectations mostly tied to higher product acquisition costs from last year as well as the lack of sales leverage on fixed costs. SG&A expenses in the quarter on a GAAP basis declined 8% from last year. However, excluding roughly $34 million of nonrecurring costs in the second quarter of last year related to the relocation of our New York headquarters staff, SG&A expenses rose but only by 1%, which was modestly below our expectation and not indicative of future increases as higher store occupancy costs were mostly offset by the timing of marketing spending. Other expenses net of $14.3 million in the second quarter were $4.6 million above the prior year. This primarily resulted from increased interest expense.
Tiffany's effective tax rate in the quarter came in at the expected 34.6%. The prior year rate of 31.2% had reflected a reversal of the tax valuation allowance. In total, second quarter net earnings increased 2% on a GAAP basis but, excluding last year's nonrecurring costs, declined 17%, which was in line with our last forecast.
I'm now pleased to turn the call over to Pat.
Patrick F. McGuiness
Thanks, Mark. While Tiffany's sales growth in the second quarter was restrained due to both macroeconomic reasons and difficult year-over-year comparisons, we were pleased that operating results met our expectations. From a balance sheet perspective, during the quarter, we took advantage of attractive interest rates to secure $250 million of long-term debt with principal payments due over a 10- to 30-year period at a coupon of 4.4%. Of the $250 million of proceeds, $60 million went toward repaying in full our 6.56% senior notes that came due. The remaining $190 million of proceeds is for general corporate purposes, including reducing short-term debt outstanding under our revolving credit facility.
At July 31, our cash, cash equivalents and short-term investments totaled $367 million versus $565 million a year ago. Short-term and long-term debt totaled $940 million versus $694 million a year ago, and total debt represented 39% of stockholders' equity versus 29% a year ago. Accounts receivable at the end of the quarter were in very good shape, declining 6% from the prior year, and the receivables turnover remained at a very high 18x per year.
The largest use of cash over the past year has been in net inventories, which were up 21% from July 31 last year. By stages of inventory, there were similar rates of growth for both finished goods and combined raw material and work in process, reflecting higher product acquisition costs, new store openings, expanded product assortments and an expansion of our rough diamond supply chain and internal jewelry manufacturing. We continue to expect net inventories to increase approximately 10% for the full year, and we continue to exceed our objective for returns on assets and equity. ROA was 11%, and ROE was 19% through the second quarter.
I now want to review the full year outlook. Starting at the top, we are now projecting net worldwide sales growth of 6% to 7% for the year versus our previous expectation of 7% to 8% growth. We moderated our sales growth expectation for the fourth quarter in Asia Pacific and the Americas to reflect lingering economic uncertainties. At the moment, we continue to compare against unusually strong growth in most regions at this time last year as well as challenging economic conditions in a number of countries. We believe we have appropriately considered those factors in our current forecast. Our full year plan now calls for adding 28 Tiffany-operated stores versus 24 previously, which are inclusive of the 13 stores we added in the first half of the year.
In the second half of the year, we have exciting plans in the Americas to open a store in Manhattan's SoHo neighborhood; a second store in San Francisco in the San Francisco Centre; a store in La Jolla, California; a store in Rio de Janeiro and a third store in Toronto in Sherway Gardens. On top of that, we recently completed an agreement to directly operate 4 existing Tiffany boutiques within Holt Renfrew department stores that were previously operated on a wholesale basis. Earlier this month, we began operation of the stores in Ottawa, Montréal and Calgary, and we'll begin to operate a shop in their Vancouver store later in the year. In Asia Pacific, we plan to open a store in Bondi Junction, Australia, a second store in Singapore's Changi Airport and new stores in China in Harbin, Shenyang and Tianjin. And in Europe, we will soon enter the Czech Republic when we open a store in Prague next month.
We have an attractive lineup of product introductions planned for the second half of the year, including Tiffany's new Enchant jewelry collection, with designs inspired by the natural world and crafted in platinum and diamonds with rose gold and tanzanite. At the same time, we will be expanding our assortment of yellow diamond jewelry, and we're introducing pink diamond accents to a number of our collections.
Building on the success of RUBEDO, which we introduced in the newly designed 1837 collection launched earlier this year, we will also be incorporating RUBEDO into our iconic Return to Tiffany collection. This fall, we will be introducing a spectacular collection of new statement jewelry, and we're pleased with the recent launch of Tiffany Harmony engagement rings and wedding bands, which are currently offered exclusively in Japan.
We've postponed the launch of jewelry designs that we created in relation to the premiere of the movie The Great Gatsby. The movie's premiere, originally scheduled for December, was recently moved to the middle of 2013, and it makes sense for our product launch to coincide with the marketing surrounding the movie's premiere. The lack of expected sales revenues for those collections should not have any meaningful effect on our fourth quarter results.
Moving down the earnings statement, we continue to expect that the full year operating margin will be below last year's 20.6%, which had excluded nonrecurring items. That is based on assumptions for a gross margin decline and that SG&A expense growth after excluding the nonrecurring cost from last year will be roughly in line with sales growth. Product cost pressure is moderating, and we expect to soon benefit from reductions over the past year in precious metal and diamond costs. An expected year-over-year gross margin decline in the third quarter should be smaller than we experienced in the second quarter, and we expect gross margin to increase in the fourth quarter, although any product mix changes could offset some of it.
We did not take any meaningful price increases in the first half of the year, nor do we anticipate doing so for the rest of the year. Therefore, we now expect net earnings for the year in a range of $3.55 to $3.70 per diluted share, down from our previous guidance of $3.70 to $3.80 per diluted share, with earnings declining in the third quarter, as we had previously forecast, followed by a resumption of growth in the fourth quarter. As I mentioned before, our reduced earnings forecast for the year primarily reflects a more conservative assumption for sales growth in the fourth quarter as well as the related margin effect from less sales leverage. We believe our new guidance incorporates an appropriate degree of near-term caution at this point in time.
Longer term, our management team remains enthusiastic about the opportunities we are pursuing in store expansion, product introductions and marketing that will contribute to solid growth. The challenges we are facing this year are pretty obvious, but I want to emphasize that we remain committed to achieving our longer-term financial objectives to increase net sales by 10% to 12% annually and net earnings by at least 15% per year. We believe that Tiffany & Co. is well positioned to achieve those objectives.
Thank you for listening to today's conference call. Please note that we expect to report Tiffany's third quarter results on Thursday, November 29. Here's Mark to close the call.
Mark L. Aaron
Thanks, Pat. That concludes our presentation. 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 September 3. The number to call is (888) 203-1112 in the U.S. and (719) 457-0820 from outside the U.S. The pass code is 5053349. The replay is also on our website at tiffany.com/investor. As always, please feel free to call me with any questions. Have a good day.
Thank you. And once again, that will conclude our call for today. Thank you all for your participation. You may now disconnect.
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