Tiffany Q1 Sales Up 8%, Comps Up 4%; Downgrades Outlooks

Tiffany & Co. said Thursday worldwide net sales increased 8 percent, year-over-year, to $819 million and same store sales rose 4 percent for the first quarter of 2012. The luxury retail jeweler also downgraded its outlook for the year based on a softening of sales in the U.S. and abroad.

Net earnings in the period, ended April 30, for the New York-based company increased 1 percent to $82 million, or $0.64 per diluted share, compared with $81 million, or $0.63 per diluted share, for the same period in 2011. Net earnings in the first quarter of 2011 had been reduced by $0.04 per diluted share for nonrecurring items related to the relocation of Tiffany's New York headquarters staff. Excluding those items, net earnings in the first quarter of 2012 declined 5 percent from last year.

“In terms of our sales for the first quarter, regions outside the Americas performed generally as expected,” said Michael J. Kowalski, chairman and chief executive officer. “However, the Americas region underperformed, continuing a soft trend that began in the last quarter of 2011 and compounded by the difficult comparison to substantial sales growth in last year's first quarter. These sales results led to net earnings modestly trailing our expectations.”

Net sales by region are as follows:

* In the Americas region, sales rose 3 percent to $386 million. On a constant-exchange-rate basis, total Americas sales rose 3 percent and comparable store sales were flat (comparable branch store sales increased 1 percent and sales in the New York flagship store declined 4 percent) on top of a 17 percent increase in comparable store sales in last year's first quarter. Combined Internet and catalog sales in the Americas increased 1percent. The Americas region represents slightly less than half of worldwide sales.

* Sales in the Asia-Pacific region increased 17 percent to $195 million. On a constant-exchange-rate basis, total sales rose 16 percent, while comparable store sales rose 10 percent (on top of 26 percent comparable store sales growth in last year's first quarter) due to increased sales in most countries.

* In Japan, sales rose 15 percent to $142 million. On a constant-exchange-rate basis, total sales and comparable store sales rose 13 percent and 12 percent, respectively; comparable store sales had declined 3 percent in last year's first quarter.

* Sales in Europe increased 3 percent to $88 million. On a constant-exchange-rate basis, total sales rose 7 percent while comparable store sales were equal to the prior year (versus 15 percent comparable store sales growth in last year's first quarter) with no meaningful difference between the U.K. and overall continental Europe.

* Other sales declined 14 percent to $9 million due to lower wholesale sales of finished products to independent distributors.

“We are updating our forecast for the full year to reflect these first quarter results and to reflect lower near-term expectations,” Kowalski said. “Although we are very early into the second quarter, worldwide sales are currently increasing by a low-single-digit percentage, reflecting difficult year-over-year comparisons and decelerating rates of economic growth in many countries. In 2011, we achieved extremely strong sales growth in the second and third quarters, especially in the Americas and Asia-Pacific regions.”

The company now expects worldwide net sales (in U.S. dollars) to increase 7-8 percent, versus the previous forecast calling for 10 percent growth with its operating margin modestly below the prior year.

The company also is forecasting net earnings per diluted share in a range of $3.70 - $3.80. This compares with the previous forecast of $3.95 - $4.05 per diluted share; approximately $0.20 of the decrease is tied to a reduction in operating expectations and $0.05 is related to the additional debt incurrence. All of the annual earnings growth over 2011 is expected to occur in the fourth quarter, with net earnings in the second and third quarters expected to be below last year.

The company opened four stores in the first quarter: in Mexico City, Montreal, Salt Lake City and Wuhan, China. It now operates 251 stores (105 in the Americas, 59 in Asia-Pacific, 55 in Japan and 32 in Europe), compared with 232 stores a year ago. For the year, Tiffany plans to add 24 company-operated stores including nine in the Americas, eight in Asia-Pacific, two in Europe, and commencing operation of five stores in the United Arab Emirates.

Other financial highlights for the first quarter of 2012:

* Gross margin (gross profit as a percentage of net sales) declined to 57.3 percent in the first quarter, from 58.3 percent a year ago, due to higher product acquisition costs.

* SG&A (selling, general and administrative) expenses increased 9 percent in the first quarter. Excluding nonrecurring costs related to the relocation of Tiffany's New York headquarters staff in 2011, SG&A expenses increased 11 percent primarily due to increased labor, store occupancy and marketing costs.

* The effective income tax rate was 34.5% in the quarter, versus 35.6 percent a year ago.

* Net inventories increased 27 percent to $2.2 billion at April 30, 2012 from $1.7 billion a year ago. Finished goods inventories increased 16% year-over-year due to higher product acquisition costs, expanded product assortments and new store openings, as well as some effect from the lower-than-expected sales growth. A 44 percent increase in raw material and work-in-process inventories reflected higher product acquisition costs, expanded rough diamond sourcing and internal manufacturing.

* Capital expenditures were $44 million in the first quarter, versus $52 million a year ago.

* The company spent $46 million in the first quarter to repurchase approximately 700,000 shares at an average cost of $66.42 per share. At April 30, 2012 there was $171 million available for future repurchases under the currently authorized share repurchase plan which expires in January 2013.

* Cash and cash equivalents and short-term investments totaled $343 million at April 30, 2012, compared with $622 million a year ago. Short-term and long-term debt totaled $834 million at April 30, 2012 and represented 35% of stockholders' equity, compared with $687 million and 30% a year ago.

Last week, the company's board of directors approved a 10 percent increase in the quarterly dividend rate, marking the 11th increase in the past 10 years.