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| TIF > SEC Filings for TIF > Form 10-Q on 1-Sep-2009 | All Recent SEC Filings |
1-Sep-2009
Quarterly Report
OVERVIEW
Tiffany & Co. (the "Company") is a holding company that operates through its subsidiary companies. The Company's principal subsidiary, Tiffany and Company, is a jeweler and specialty retailer whose principal merchandise offerings are fine jewelry. The Company also sells timepieces, sterling silverware, china, crystal, stationery, fragrances and accessories. Through Tiffany and Company and other subsidiaries, the Company is engaged in product design, manufacturing and retailing activities.
The Company's reportable segments are as follows:
o Americas includes sales in TIFFANY & CO. stores in the United States, Canada and Latin/South America, as well as sales of TIFFANY & CO. products in certain of those markets through business-to-business, Internet, catalog and wholesale operations;
o Asia-Pacific includes sales in TIFFANY & CO. stores, as well as sales of TIFFANY & CO. products in certain markets through business-to-business, Internet and wholesale operations;
o Europe includes sales in TIFFANY & CO. stores, as well as sales of TIFFANY & CO. products in certain markets through business-to-business, Internet and wholesale operations; and
o Other consists of non-reportable segments, primarily wholesale sales of diamonds obtained through bulk purchases that were subsequently deemed not suitable for the Company's needs. In addition, Other includes earnings received from a third-party licensing agreement.
The results of IRIDESSE are presented as a discontinued operation in the condensed consolidated statements of earnings for all periods presented. Prior to the reclassification, IRIDESSE results had been included within the Other non-reportable segment. Refer to "Item 1. Notes to Condensed Consolidated Financial Statements - Note 4. Discontinued Operations."
All references to years relate to fiscal years ended or ending on January 31 of the following calendar year.
HIGHLIGHTS
o Worldwide net sales decreased 16% in the three months ("second quarter") and decreased 19% in the six months ("first half") ended July 31, 2009. Difficult global economic conditions that have affected consumer confidence and net worth continue to affect sales in most markets.
o Worldwide comparable store sales decreased 16% in the second quarter and decreased 18% in the first half on a constant-exchange-rate basis (see "Non-GAAP Measures" below).
o The Company continues to open stores, albeit at a more modest rate this year.
o Operating expenses decreased due to reductions in staffing, as well as declines in marketing and variable costs.
o Net earnings from continuing operations decreased 31% to $56,717,000 in the second quarter and 44% to $84,160,000 in the first half. Net earnings from continuing operations per diluted share decreased 28% in the second quarter and 41% in the first half.
o The Company established a new $400,000,000 multi-bank, multi-currency revolving credit facility ("Credit Facility") to replace an existing facility that was scheduled to expire in 2010. The Credit Facility will expire in July 2012.
NON-GAAP MEASURES
The Company's reported sales reflect either a translation-related benefit from strengthening foreign currencies or a detriment from a strengthening U.S. dollar.
The Company reports information in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"). Internally, management monitors its sales performance on a non-GAAP basis that eliminates the positive or negative effects that result from translating international sales into U.S. dollars ("constant-exchange-rate basis"). Management believes this constant-exchange-rate basis provides a more representative assessment of the sales performance and provides better comparability between reporting periods.
The Company's management does not, nor does it suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. The Company presents such non-GAAP financial measures in reporting its financial results to provide investors with an additional tool to evaluate the Company's operating results. The following table reconciles sales percentage increases (decreases) from the GAAP to the non-GAAP basis versus the previous year:
Second Quarter 2009 vs. 2008 First Half 2009 vs. 2008
---------------------------------------- ----------------------------------------
Constant- Constant-
GAAP Translation Exchange- GAAP Translation Exchange-
Reported Effect Rate Basis Reported Effect Rate Basis
---------------------------------------- ----------------------------------------
Net Sales:
----------
Worldwide (16)% (2)% (14)% (19)% (3)% (16)%
Americas (23)% (1)% (22)% (27)% (1)% (26)%
U.S. (25)% -- (25)% (28)% -- (28)%
Asia-Pacific (1)% 2% (3)% (5)% -- (5)%
Japan (4)% 9% (13)% (5)% 8% (13)%
Other Asia-Pacific 6% (8)% 14% (3)% (12)% 9%
Europe (4)% (17)% 13% (6)% (21)% 15%
Comparable Store Sales:
-----------------------
Worldwide (17)% (1)% (16)% (20)% (2)% (18)%
Americas (26)% (1)% (25)% (30)% (1)% (29)%
U.S. (27)% -- (27)% (30)% -- (30)%
Asia-Pacific (2)% 2% (4)% (6)% 1% (7)%
Japan (1)% 10% (11)% (4)% 8% (12)%
Other Asia-Pacific (3)% (8)% 5% (10)% (10)% --
Europe (10)% (15)% 5% (14)% (18)% 4%
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RESULTS OF OPERATIONS
---------------------
Certain operating data as a percentage of net sales were as follows:
Second Quarter First Half
---------------------------------------------------
2009 2008 2009 2008
----------------------- -----------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 44.9 42.2 44.5 42.5
----------------------- -----------------------
Gross profit 55.1 57.8 55.5 57.5
Selling, general and administrative expenses 40.5 39.4 42.3 40.2
----------------------- -----------------------
Earnings from continuing operations 14.6 18.4 13.2 17.3
Interest and other expenses, net 2.0 0.4 2.2 0.4
----------------------- -----------------------
Earnings from continuing operations before income taxes 12.6 18.0 11.0 16.9
Provision for income taxes 3.3 6.7 3.6 6.2
----------------------- -----------------------
Net earnings from continuing operations 9.3 11.3 7.4 10.7
Net earnings (loss) from discontinued operations -- (0.2) (0.2) (0.3)
----------------------- -----------------------
Net earnings 9.3% 11.1% 7.2% 10.4%
======================= =======================
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Net Sales
---------
Net sales were as follows:
Second Quarter
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(in thousands) 2009 2008 Decrease
--------------------------------------------------------------------------------------------------------------------
Americas $ 324,862 $ 422,406 (23)%
Asia-Pacific 211,923 214,233 (1)%
Europe 68,329 71,020 (4)%
Other 7,379 21,975 (66)%
---------------------------------------------------------------------------------
$ 612,493 $ 729,634 (16)%
=================================================================================
First Half
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(in thousands) 2009 2008 Decrease
--------------------------------------------------------------------------------------------------------------------
Americas $ 583,856 $ 795,971 (27)%
Asia-Pacific 413,350 436,270 (5)%
Europe 123,919 131,145 (6)%
Other 8,983 31,728 (72)%
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$ 1,130,108 $ 1,395,114 (19)%
=================================================================================
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Comparable Store Sales. Reference will be made to comparable store sales below. Comparable store sales include only sales transacted in company-operated stores and boutiques. A store's sales are included in comparable store sales when the store has been open for more than 12 months. In markets other than Japan, sales for relocated stores are included in comparable store sales if the relocation occurs within the same geographical market. In Japan (included in the Asia-Pacific segment), sales for a new store or boutique are not included if the store or boutique was relocated from one department store to another or from a department store to a free-standing location. In all markets, the results of a store in which the square footage has been expanded or reduced remain in the comparable store base.
Americas. Total sales in the Americas decreased $97,544,000, or 23%, in the second quarter equally due to declines in the number of units sold and in the average price per unit sold, and $212,115,000, or 27%, in the first half for similar reasons. Comparable U.S. store sales declined 27%, or $92,097,000, in the second quarter and 30%, or $195,541,000, in the first half. Comparable branch store sales declined 26% and 29% in the second quarter and first half, while sales in the New York Flagship store declined 30% and 36%. Combined Internet and catalog sales in the U.S. declined 8%, or $3,068,000, in the second quarter and 12%, or $8,834,000, in the first half.
Asia-Pacific. Total sales in Asia-Pacific decreased $2,310,000, or 1%, in the second quarter primarily due to a decline in the average price per unit sold partly offset by an increase in the number of units sold, and decreased $22,920,000, or 5%, in the first half primarily due to a decline in the number of units sold. Comparable store sales declined 2%, or $3,372,000, in the second quarter and 6%, or $24,444,000, in the first half. On a constant-exchange-rate basis, Asia-Pacific sales decreased 3% and comparable store sales decreased 4% in the second quarter (resulting from an 11% decline in Japan comparable store sales and a 5% increase in comparable store sales in countries other than Japan). On a constant-exchange-rate basis, Asia-Pacific sales decreased 5% and comparable store sales decreased 7% in the first half (resulting from a 12% decline in Japan comparable store sales partly offset by comparable store sales in countries other than Japan equal to the prior year).
Europe. Total sales in Europe decreased $2,691,000, or 4%, in the second quarter and $7,226,000, or 6%, in the first half due to the effect of translating foreign currency-denominated sales into U.S. dollars. On a constant-exchange-rate basis, sales increased 13% in the second quarter and 15% in the first half due to incremental sales from new stores opened during the past 12 months, as well as comparable store sales growth of 5% in the second quarter and 4% in the first half that reflected growth in the United Kingdom and Continental Europe. The overall sales decline in the second quarter consisted of a comparable store sales decline of 10%, or $5,664,000, and a decline of 40%, or $5,664,000, in e-commerce and other sales, while non-comparable store sales were $8,783,000. In the first half, the overall sales decline consisted of a comparable store sales decline of 14%, or $14,826,000, and a decline of 36%, or $9,321,000 in e-commerce and other sales, while non-comparable store sales were $17,121,000.
Other. Other sales decreased $14,596,000, or 66%, in the second quarter and $22,745,000, or 72%, in the first half primarily due to lower wholesale sales of diamonds that were deemed not suitable for the Company's needs.
Store Data. Management expects to open 13 (net) Company-operated TIFFANY & CO. stores and boutiques in 2009, increasing the store base by approximately 6%.
Management's expected openings and closings of TIFFANY & CO. stores are:
Actual Openings Expected Openings
Location (Closings) 2009 2009
-------------------------------------------------------------------------------------------------------------------
Americas:
Toronto - Yorkdale Shopping Centre, Canada First Quarter
Guadalajara, Mexico First Quarter
Roseville, California Third Quarter
Seattle - University Village, Washington Third Quarter
Las Vegas - The Crystals at CityCenter, Nevada Fourth Quarter
Asia-Pacific:
Busan - Shinsegae Centum, Korea First Quarter
Hangzhou, China First Quarter
Ikebukuro - Mitsukoshi, Japan (First Quarter)
Kagoshima - Mitsukoshi, Japan (Second Quarter)
Kagoshima - Yamakataya, Japan Second Quarter
Ikebukuro - Seibu, Japan Second Quarter
Canton Road, Hong Kong Second Quarter
Seoul - Shinsegae Youngdeungpo, Korea Third Quarter
Melbourne - Chadstone Mall, Australia Fourth Quarter
Shenzhen, China Fourth Quarter
Europe:
Manchester - Selfridges, England Third Quarter
Amsterdam, Netherlands Fourth Quarter
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Gross Margin
Gross margin (gross profit as a percentage of net sales) decreased in the second
quarter and first half by 2.7 and 2.0 percentage points primarily due to higher
product costs. In addition, soft market conditions have affected the Company's
wholesale sales of diamonds and its related profitability.
The Company periodically may adjust its retail prices to address specific market conditions, product cost increases and longer-term changes in foreign currencies/U.S. dollar relationships. Among the market conditions that the Company
addresses is consumer demand for the product category involved, which may be influenced by consumer confidence and competitive pricing conditions. The Company uses a limited number of derivative instruments to mitigate foreign exchange and precious metal price exposures (see "Item 1. Notes to Condensed Consolidated Financial Statements - Note 9. Hedging Instruments").
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses decreased $39,649,000, or 14%, in the second quarter, primarily
due to (i) decreased labor and benefit costs of $19,449,000 as a result of staff
reduction initiatives announced during the fourth quarter of 2008 (see "Item 1.
Notes to Condensed Consolidated Financial Statements - Note 3. Restructuring
Charges"); (ii) decreased marketing expenses of $11,433,000; and (iii) a decline
in variable expenses due to lower sales, all of which more than offset
incremental costs of new stores opened in the past 12 months. Additionally, in
the second quarter, the Company received $4,442,000 of income in connection with
the assignment of the Tahera Diamond Corporation commitments and liens to an
unrelated third party, which represents full settlement under the terms of the
assignment agreement. The Company had taken an impairment charge of $47,981,000
in the year ended January 31, 2008 associated with the Commitment. In the first
half, SG&A expenses decreased $83,276,000, or 15%, primarily due to (i)
decreased labor and benefit costs of $36,382,000 as a result of the staff
reduction initiatives mentioned above; (ii) decreased marketing expenses of
$26,967,000; and (iii) a decline in variable expenses due to lower sales, all of
which more than offset incremental costs of new stores opened in the past 12
months. Changes in foreign currency exchange rates had an insignificant effect
on overall SG&A expenses in the second quarter and decreased SG&A expenses by 2%
in the first half compared to the prior year. SG&A expenses as a percentage of
net sales increased by 1.1 percentage points in the second quarter and by 2.1
percentage points in the first half due to the decline in sales and the
de-leveraging effect of fixed costs.
Earnings from Continuing Operations
-----------------------------------
Second Quarter % of Net Second Quarter % of Net
(in thousands) 2009 Sales* 2008 Sales*
----------------------------------------------------------------------------------------------------------------------
Earnings (losses) from continuing
operations:
Americas $ 55,738 17.2% $ 93,597 22.2%
Asia-Pacific 49,272 23.2% 53,895 25.2%
Europe 11,907 17.4% 15,514 21.8%
Other (4,199) (56.9%) 863 3.9%
-----------------------------------------------------------------------------
112,718 163,869
Unallocated corporate expenses (27,606) 4.5% (29,540) 4.0%
Other income 4,442 --
-----------------------------------------------------------------------------
Earnings from continuing operations $ 89,554 14.6% $ 134,329 18.4%
=============================================================================
* Percentages represent earnings (losses) from continuing operations as a
percentage of each segment's net sales.
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Earnings from continuing operations decreased 33% in the second quarter. On a segment basis, the ratio of earnings (losses) from continuing operations (before the effect of unallocated corporate expenses, other income and interest and other expenses, net) to each segment's net sales in the second quarter of 2009 and 2008 was as follows:
o Americas - the ratio decreased 5.0 percentage points primarily resulting from a decrease in gross margin (due to higher product costs) and a decline in sales which more than offset cost savings from the initiatives implemented at the end of 2008;
o Asia-Pacific - the ratio decreased 2.0 percentage points primarily due to a decrease in gross margin (due to higher product costs), partly offset by reduced operating expenses attributed to the cost savings initiatives;
o Europe - the ratio decreased 4.4 percentage points primarily due to a decrease in gross margin (due to higher product costs) and increased operating expenses (associated with new stores opened over the past 12 months); and
o Other - the operating loss is attributable to lower wholesale sales of diamonds and a valuation adjustment related to the write-down of wholesale diamond inventory.
First Half % of Net First Half % of Net
(in thousands) 2009 Sales* 2008 Sales*
----------------------------------------------------------------------------------------------------------------------
Earnings (losses) from continuing
operations:
Americas $ 85,207 14.6% $ 161,888 20.3%
Asia-Pacific 97,215 23.5% 110,260 25.3%
Europe 19,727 15.9% 27,088 20.7%
Other (5,430) (60.4%) 215 0.7%
-----------------------------------------------------------------------------
196,719 299,451
Unallocated corporate expenses (52,093) 4.6% (58,436) 4.2%
Other income 4,442 --
-----------------------------------------------------------------------------
Earnings from continuing operations $ 149,068 13.2% $ 241,015 17.3%
=============================================================================
* Percentages represent earnings (losses) from continuing operations as a
percentage of each segment's net sales.
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Earnings from continuing operations decreased 38% in the first half. On a segment basis, the ratio of earnings (losses) from continuing operations (before the effect of unallocated corporate expenses, other income and interest and other expenses, net) to each segment's net sales in the first half of 2009 and 2008 was as follows:
o Americas - the ratio decreased 5.7 percentage points primarily resulting from a decrease in gross margin (due to higher product costs) and a decline in sales which more than offset cost savings from the initiatives implemented at the end of 2008;
o Asia-Pacific - the ratio decreased 1.8 percentage points primarily due to a decrease in gross margin (due to higher product costs), partly offset by reduced operating expenses attributed to the cost savings initiatives;
o Europe - the ratio decreased 4.8 percentage points primarily due to a decrease in gross margin (due to higher product costs) and increased operating expenses (associated with new stores opened over the past 12 months); and
o Other - the operating loss is attributable to lower wholesale sales of diamonds and a valuation adjustment related to the write-down of wholesale diamond inventory.
Unallocated corporate expenses includes costs related to administrative support functions which the Company does not allocate to its segments. Such unallocated costs include those for information technology, finance, legal and human resources. Total unallocated corporate expenses decreased in the second quarter and first half versus comparable periods in the prior year primarily due to cost savings realized in the current year. As a percentage of net sales, unallocated corporate expenses increased 0.5 percentage point and 0.4 percentage point in the second quarter and first half due to lower sales in those periods versus the prior year.
Other income in the second quarter and first half of 2009 represents income received in connection with the assignment of the Tahera Diamond Corporation commitments and liens to an unrelated third party, which represents full settlement under the terms of the assignment agreement.
Interest and Other Expenses, net
Interest and other expenses, net increased $8,792,000 in the second quarter and
$19,727,000 in the first half primarily due to higher interest expense related
to new long-term debt issued in the past year.
Provision for Income Taxes
The effective income tax rate for the second quarter of 2009 was 26.7% versus
36.9% in the prior year. The effective income tax rate for the six months ended
July 31, 2009 was 32.4% versus 36.8% in the prior year. The effective tax rate
in the second quarter and first half of 2009 included $5,700,000 of favorable
reserve adjustments relating to the settlement of certain tax audits during the
second quarter.
Net Earnings (Loss) from Discontinued Operations . . .
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