Tiffany & Co. Q4 Earnings Conference Call: Full Transcript

Operator:

Good day, everyone and welcome to the Tiffany & Company Fourth Quarter and Full Year Conference Call. Today's conference is being recorded. Participating on today's call is Mr. Frederic Cumenal, Tiffany's CEO, and Mr. Ralph Nicoletti, Executive Vice President and Chief Financial Officer, and Mr. Mark Aaron, Vice President of Investor Relations.

Now at this time, I'd like to turn the call over to Mr. Mark Aaron. Please go ahead, sir.

Mark Aaron: Vice President of Investor Relations:

Thank you. Good morning everyone. We issued Tiffany's full year and fourth quarter financial results earlier today and hope you've had a chance to read the news release. On today's agenda, I'll review sales results, Ralph will cover the rest of the earnings statements, the balance sheet and the 2016 outlook and then Frederic will close with some comments on strategies before we then answer your questions.

Before continuing, please note 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 proceed. I think we can begin with the assessment that overall financial results in 2015 were disappointing.

On the positive side, we accomplished many ongoing strategic initiatives tie of spending and optimizing our store-based and web presence, introducing new product design that resonated with customers, managing inventories well and achieving strong free cash flow. We improved Tiffany's gross margin by a four point in the year and managed our SG&A expenses prudently while increasing marketing spending.

However a worldwide sales increase of only 2% on a constant exchange rate basis and 3% declined as reported combined with a 9% decline in EPS excluding charges in 2014 and 2015, clearly did not meet our initial targets. For a good part of the year, we achieved healthy sales growth on a constant exchange rate basis in most regions outside the U.S. but sales were negatively affected by the translation effect of the strong U.S. dollar.

In the Americas our largest region, we faced the daunting challenges in the U.S. Of sharply lower foreign tourist spending along with weaker sales to domestic customers and then the year concluded on a softer note in most markets around the world. While we can attribute some of the pressure on results to the strong U.S. Dollar and other macro factors that affected consumer spending both with local customers and foreign tourist which we expect will continue into 2016 as Frederic will discuss.

We continue to focus on catalyst to drive our business effectively and efficiently as we invest in longer term growth opportunities and wrapping up the summary on a positive note, our disciplined inventory management enables us to exceed our objective from free cash. While a portion of that cash gets reinvested into growing our business, we also were pleased to return cash to shareholders through dividend, including our 14th dividend increase in the past 13 years and share repurchases with our Board authorizing a new and larger repurchase program in January.

So now let's look at sales performance in our various regions. First there were no meaningful changes in geographical mix in 2015 versus 2014. With the Americas is again representing just under 50% of worldwide sales, followed by Asia Pacific at 24%, Japan at 13% and Europe at 12%.

In the Americas, on a constant exchange rate basis total and comp store sales in the full year, were down 2% and 4% and the trends were bit softer in the fourth quarter, with declines of 6% and 8%.

In dollars, total sales declined 4% in a full year and 8% in a fourth quarter, reflecting lower unit volume across categories especially in silver jewelry under $500, partly offset by favorable pricing mix.

I already mentioned the adverse effect from the strong US dollar on foreign tourist sales in the Americas, although it cannot be tracked precisely, we now estimate that foreign tourist sales represent less than a quarter of US sales but roughly 40% of sales in the New York flagship stores.

We saw a mark deceleration in Chinese tourist spending in the fourth quarter in the Americas and frankly and most other regions as well. In addition it's worth noting that domestic sales were also generally soft across the US in varying degrees in the full year and more sell in the fourth quarter. However we were pleased with local currency total sales growth in Canada and Latin America.

During the year we added a net of 2 stores in the Americas. Opening in the U.S. In the Miami designed district in Ottawa Canada and in Santiago Chile and closing the U.S. Store in the Mohegan Sun Resort.

We also relocated a few stores in the Americas region, in line with our strategy to optimize the store base and continued with our worldwide program to renovate stores to a new design aesthetic.

In the Asia Pacific region on a constant exchange rate basis, total sales in the full year rose 3% and comparable store sales were unchanged. While total and comp store sales soften in the fourth quarter, declining 3% and 8%. Within the region greater China is comprised of the 51 total stores we operate across China, Hong Kong, Taiwan and Macau and represents more than half of total sales for the region.

For the year we experience some growth throughout most markets in the Asia-Pacific region led by strength in Mainland, China and Australia but we also saw substantial softness in Hong Kong. Growth decelerated in the fourth quarter across most of the region, reflecting the further softening of Chinese tourist spending that I alluded to earlier.

Spending within China was strong throughout the fourth quarter but it's been more volatile since then. In addition there is clearly no way to predict one sales growth resume in Hong Kong, so we are assuming that softness will continue through 2016. When measured in US dollars, total Asia-Pacific sales declined 2% in the full year and 8% in the fourth quarter due to generally lower jewelry unit volume in most categories partly offset by higher average price in mix. We continue to be pleased with our progress of developing brand awareness of Tiffany with the Chinese customers.

Volatile economies currencies in stock markets certainly effect short-term spending by customers of all nationalities including those in China.

However we remained committed to serving the growing desires of those customers, picking extraordinary jewelry of the finest quality and with the wonderful in-store experience. There was substantial store activity across the Asia-Pacific region during the year with the net addition of 8 stores. We opened 11 stores including five in China, two in Macau and one each in Korea, Singapore, Taiwan and Thailand. We also closed three existing stores in the region including one each in China, Korea and Taiwan.

Now turning Japan, we had a very successful year in 2015. On a constant exchange rate basis total sales rose 10% and comp stores sales rose 5% in the full year, and we finished with increases of 12% in total sales and 10% in comps in the fourth quarter. Throughout the year our results in Japan benefited from higher foreign tourist spending predominantly Chinese. While domestic customers spending fluctuated and was roughly unchanged for the full year.

The weaker yen versus the dollar had a substantially negative effect on the translation of those sales into dollars in the year although the less sales in the fourth quarter, and when measured in dollars total sales in Japan declined 2% to full year but rose 9% in the fourth quarter.

We kept the number of Company operated stores in Japan unchanged to 56, although during the year we expanded two stores and relocated two others. We also achieved strong sales growth in Europe through most of the year on a constant exchange rate basis due to a combination of higher foreign tourist spending likely tie to a weak euro and pound as well as local customer demand. But sales growth decelerated considerably in the fourth quarter especially in France, following the tragedy in Paris that reverberated across other countries in the region as well.

However for the full year on a constant exchange rate basis, total and comparable store sales grows 12%, 9% with strength across Continental Europe and the UK which represents about 40% of our European sales. In the fourth quarter, however total sales grows 2% and comp store sales declined 3% due to the pronounce softness in France and mixed results elsewhere. When translated into US dollars, total sales in Europe declined 1% for the full year and 6% in the fourth quarter, partly due to modest declines in jewelry unit volumes lower average price that was largely currency related. We were active on the store front Europe in 2015, opening our first store in Geneva and our second in Madrid and we also enhanced our store presence in London with relocations in both Harrods and Selfridges.

We also now include our store which is been posting strong growth since opening in early 2014 within the Europe region instead of in the other segment. We concluded 2015 with 41 stores in Europe and last month we opened a third store in Rome on Via Condotti.

Lastly, other sales declined 13% in the full year and were down 6% in the fourth quarter. Both periods were affected by comp store sales declines in our stores in the UAE and they were lower wholesale sales of diamonds in the full year.

From my comments and as you can see that it was an active year on the store development front, as we continue to optimize our store base partly with store openings but also with the substantial number of renovations and relocations and some closings. The ultimate objective is to drive better top-line growth through stronger comparable store sales growth rather than from simply opening the substantial numbers of stores.

For the full year we opened 16 stores and closed 4, representing a 4% increase in the number of Company operated stores and a corresponding 4% increase in worldwide gross square footage.

Our plan for 2016, is to open 11 stores across most region, while also closing our relocating some existing one, resulting in a 2% net increase in Company operated retail square footage. The longer term expectation is to approximately maintain that square footage growth rate. In terms of store productivity worldwide sales per gross square foot, for Company operated stores declined slightly, $2900 compared with $3100 per foot in 2014. Resulting from the 4% increase in worldwide square footage, but lesser growth in sales.

By region sales productivity in 2015 range from $4300 in Asia-Pacific the $3100 in Japan the $2900 in Europe the $2300 in the Americas region.

Of course keep in mind that the negative translation effects on sales from the strong dollar had a meaningful effect on any declines in productivity.

Before concluding the regional sales review it's worth reminding everyone that the meaningful benefits that we derive from complementing our store presence with our website which reinforce brand and product awareness and can drive store traffic. E-commerce sales and dollars grows modestly in the full year which was better than the 3% worldwide sales declined and continue to represent 6% of worldwide sales. This dual focus on stores and online reports our global strategy to enhance our relationships with customers and optimize their overall experiences with Tiffany.

Finally from a merchandising perspective, the decline in fourth quarter sales did not include any significant differences and performance among our product categories on a worldwide basis. For the full year the 3% worldwide sales decline in dollars or the 2% increase on the constant exchange rate basis included virtually inline performance relative to overall sales with the statement fine and solitaire jewelry category. Although with strong sales growth of statement jewelry. Inline relative performance for the fashion jewelry category although with continued strong gold jewelry sales and a slight relative under performance in the engagement jewelry category although a new marketing campaign that we launched last month is intended to address that engagement softness.

We were pleased with customer response in new products that we introduced in the fashion and fine jewelry categories, including design reinterpretations in our return to Tiffany and infinity collections which have been successful in medicating some of the softness in silver jewelry sales under $500.

Our new designs in the Victoria and Bow fine jewelry collections including diamonds. The continued success of the Tiffany T collection which reach the highest sales level ever for a jewelry collection in its first 12 months and we were pleased with sales of our new watch collections including the CT 60 and the East West collections. So that covers the regional and product sales highlights and I'll now turn call over to Ralph.

Ralph Nicoletti: EVP and Chief Financial Officer:

Thank you Mark. Before looking at the rest of the results, I would like to reinforce a few points. Sales growth was challenged by the strong US dollar throughout the year both from its effect on the translation of results and the effect on tourist spending in the U.S. While we saw a higher gross margin in the full year and fourth quarter, the operating margin was pressured all year by the lack of sales growth and the resulting sales deleverage on SG&A expenses.

The 9% declined in EPS for the full year excluding charges in 2015 and 2014 was below our actual expectation a year-ago that had called for minimal growth. However we managed inventories more efficiently meaning our objective to keep inventory growth below sales growth and finish the year generating higher amount of free cash flow have been initially planned. We returned cash to shareholders through substantial share repurchases and another increase in dividend and we expect a further strengthening of the dollar along with challenging and volatile external conditions that effect customer spending to continue to pressure results in 2016, and especially in the first half of the year.

Let's look at the rest of the earnings statement the balance sheet and our forecast. Gross margins grows in the full and the fourth quarter, we benefited throughout the year to a varying degrees from favorable product input cost, while sales mix fluctuated during the year. We also took price increases during the year, that address most of the pressure from the strong dollar and has enabled us to restore our global pricing structure, pretty much back to normal levels.

Our forecast for gross margin in 2016, calls for some increase primarily due to lower product input cost as well as benefits from price increases taken within the past year and anticipated modest increases in the coming year.

Our expectations for minimal sales growth will continue to put some pressure on gross margin as it will be difficult to get sales leverage on fixed cost.

Selling, general and administrative expenses grows 5% in the full year and 6% in the fourth quarter. Both of those results include a translation benefits from the strong dollar. You would also note that the full year SG&A expenses included a $38 million of loan impairment charge, with $10 million of that in the second quarter and $28 million in the fourth quarter, related to a diamond mining company in Sierra Leone and also included a $9 million charge recorded in the fourth quarter, for staffing and occupancy reduction.

Excluding these charges, SG&A grows in the quarter and year, was due to store related spending and higher pension cost, partially offset by lower variable cost. In addition marketing spending grows in the full year to represent 7.4% of net sales from 6.7% in the prior year. Although marketing spending declined in the fourth quarter as we expected due to disproportionally high spending in the fourth quarter of 2014, tie to the launch of the Tiffany T collection.

We expect SG&A expenses in 2016 to increase over 2015 SG&A expense excluding charges due to increased store related and marketing expenses with some benefit from lower pension cost.

Our projections for 2016 of a modest increase in the gross margin, and for SG&A expense growth exceeding sales growth mostly due to higher store related cost will result in the decline in operating margin for the year. Interest and other expenses net declined in the full year due to our refinancing of long-term debt to lower interest rates in October of 2014.

Interest and other expenses net were about flat in the fourth quarter, we are projecting interest and other expenses net to be approximately unchanged in 2016. The effective tax rate for the full year were slightly higher than last year, and we are projecting a fractionally lower rate in 2016. Getting it all up net earnings declined 5% in the fourth quarter and 9% in full year excluding charges in both years. This follows a 13% increase in net earnings in 2014 excluding charges.

Putting together our assumptions for 2016 we arrive at forecast calling for net earnings, ranging from unchanged to a mid-single digit decline compared to the $3.83 per diluted share excluding charges in 2015. While we expect a gradually improving pace of sales over four quarters, we also expect a similar progression in terms of earning with earnings declining in the first quarter by 15% to 20% 5% to 10% decline in the second quarter and then followed by a resumption of growth in the second half. Most importantly we will continue throughout the year to focus on investing and improving the business despite a choppy and uncertain environment.

Looking at our balance sheet, we finished the year in a very solid position net inventories of $2.2 billion at January 31 were 6% lower than the prior year end. Raw material and working process inventories declined 4% and finished goods inventories declined 7% reflecting more efficient inventory management. Even excluding the translation effect from the strong dollar, net inventories would have decline 4% in the year compared with the 2% increase in worldwide net sales on a constant exchange rate basis. We are projecting inventories in 2016 to be roughly unchanged.

Accounts receivable of $206 million with 6% higher than a year-ago largely reflecting in house credit tie to strong sales of statement jewelry but the receivable turnover remained at a very high 21 times per year. Our capital expenditures totaled $253 million in 2015 versus $247 million in the prior year and represented 6% of sales in both years. Approximately half of our CapEx is store related for openings renovations and relocations with that store related mix shifting more towards renovation and relocation. CapEx also currently include substantial spending during a multi-year period to introduce new IT systems with the major focus on a global customer relationship management system, and a new inventory management system.

We begin 2015 projecting that we would generate free cash flow of at least $400 million and later in the year revised the forecast upward to at least $500 million based on better inventory management. We are pleased to now report that actual free cash flow for 2015 amounted to a $561 million, and for 2016 we are projecting to generate free cash flow of at least $400 million.

In addition to continuing to reinvest some in the business, we regularly evaluate opportunities to return cash to shareholders through dividend growth and share repurchases. We are quite active in this area in 2015. In the second quarter we increased our quarterly dividend rate by 5% which represented a 14th dividend increase in the past 13 years, and as the year progress we steps up the pace of share repurchases to take advantage of a lower stock price.

For the full year we spent $220 million to repurchase 2.8 million shares at an average cost of $78 per share. In January our Board replace an existing $300 million repurchase program, that had only about $59 million of authorization remaining, and replaced it with a new authorization permitting repurchase of up to $500 million of common stock. At January 31, approximately $494 million remained available for repurchase under that new program. That expires in January of 2019.

Factoring everything we've highlighted, we finish the year with cash and short-term investments of $887 million, and a $1 billion of short-term and long-term debt that represented 38% of stockholders equity. Despite the lower earnings Tiffany's full year return on assets as recorded was approximately 9% and the return on stockholders' equity was approximately 16% close to our long-term objective for at least a 10% ROA and at least the 15% ROE.

Looking our longer term, we believe that by continuing to invest in sales growth opportunities and managing cost effectively helped by more favorable external environment, Tiffany will be well positioned to achieve improved and sustainable financial performance. Given this, our earnings objective ultimately include reaching high single-digit net earnings growth driven by mid-single-digit worldwide net sales growth on a constant exchange rate basis, while also continuing strong free cash flow.

Wrapping up my remarks, with the challenging year with overall disappointing financial performance, however, that should not over shadow the progress we are making to operate Tiffany's business more profitably over the longer term.

I'll now turn the call over to Frederic and then we'll take some questions.

Frederic Cumenal: Chief Executive Officer:

Thank you Ralph and thank you Mark for those reviews. While our financial results in 2015, we are clearly disappointing. I also believe that challenges can help us to learn and sharpen our focus on a number of important initiative within our control in order to drive better financial performance going forward, and I believe that Tiffany has many fantastic growth opportunities On our call year ago, I talked about a clear road map for the future focused on the products, marketing the supply chain and margin improvement. I believe we made progress in all of those areas in 2015 and we have continued opportunities to do more in 2016 and beyond.

Our overall objective is to drive superior total shareholder return through sales growth improving margins and cash flow, strengthening the brand and the customer experience and achieving operational excellence.

The key strategy focused on and what I mean by that is to better engage with our customers through a conservative approach in our stores, through enhanced visual merchandising presentation, through better customer data analysis using a new global the R&D spend and through optimizing our store base.

In regard to stores we were active in 2015, through openings relocations, renovations and few closings. In the coming year, we'll continue to be very focus on optimizing our existing store base with the 2% net increase in worldwide square footage, that includes opening 11 new stores across most regions.

As we continue to increase Tiffany's worldwide store base our ultimate objective is to ensure that we are best positions in every market, where we have a presence.

We were pleased with customer reaction to the new designs that we have introduced in 2015, those designs included extraordinary statement pieces in the art of the sea collection in our bluebook that was introduced to very strong and the other extreme we worked toward improving our entry level silver jewelry assortment, with some encouraging early results. We were also very proud to make our official strategic re-entry into the watch category and double our watch sale or be it on a very small base. I also believe that our marketing through print and digital media and catalogs is more effectively communicating Tiffany as a global luxury brand with appeal to both the giver and the self-purchaser.

With an extraordinary product assortments and a 178 year heritage we had strong messages to convey to customers. I am pleased to say that we attracted some highly skills members of management at value -- an in different areas of responsibility over the past year and now have experience teams in place at the global and regional level to execute our strategy and despite the pressure on sales and earnings in 2015, I was pleased that we increased our gross margin and managed expenses prudently and with all well we maintain a strong financial position.

While we invested in our business in stores in products sourcing and in developing new IT systems we were still able to return a meaningful amount of cash to shareholders.

I'll close by reiterating our objective to reinforce Tiffany's position amongst the world's most important luxury brands. External pressures on our business will eventually abate and we believe that the long-term global growth opportunities for the Tiffany brand are compelling. We will remain committed to building on Tiffany's great heritage by delivering the finest products and experiences to a growing number of customers. I hope that many of you will participate in our Investor Day meeting on April 12 whether in person or on the webcast and I look forward to seeing many of you throughout the year and updating you on our progress.

I will now turn the call back Mark and we can open up the call to answer some questions.

Mark Aaron:

Thank you, Frederic. Taylor, I think we are ready to take some questions.

Question & Answer

Operator:

[Operator Instructions] We will take our first question from Lorraine Hutchinson with Bank of America Merrill Lynch.

Lorraine Hutchinson: Bank of America Merrill Lynch:

Thank you. Good morning. I have a follow up on the state of the domestic consumer spending in US. What do you think is driving the sales decline there and then what does the pace of newness look like to try to reinvigorate that business from here?

Frederic Cumenal:

Talking specifically about the domestic consumer in the US, because we all know the very negative impact of foreign tourists that we had to deal in '15 and frankly that we will most likely have to continue to deal with in '16, the domestic consumers in the U.S. Behavior has been quite fickle and frankly we can put that partly on the economic uncertainty on the volatility of the financial markets and on a possibly tense electoral campaign in a year of Presidential election. The introduction, the pace of introduction of novelty will continue to remain high and frankly we will continue and we will factor the introduction of units at or below $500 price point. What we've seen and what we've experienced by the end of the year in the US through the introduction of new SKUs namely Beyond Infinity as a collection and return to Tiffany, we've really enjoyed some significant success beyond those introductions.

So what we are going to plan for the year is to faster the pace of introduction especially below $500 price point on unfavorable collections.

Lorraine Hutchinson:

Thank you.

Frederic Cumenal:

Okay. Next question.

Operator:

We will take our next question from Anne-Charlotte Windal with Bernstein.

Anne-Charlotte Windal: Bernstein Research:

Good morning. So looking at your Q1 EPS guidance, it seems to imply a little bit of a deterioration in supplying trend compared to Q4. So could you please elaborate for us on the trends and drivers you are currently seeing across regions and I think you alluded to a little bit of weakness in China going into Q1. Thank you.

Ralph Nicoletti:

Anne-Charlotte, it's Ralph. Good morning. What I'll do is maybe talk a little bit about the earnings that I spoke about on just previously in the remarks and then may be Frederic will turn a little bit more to a view of the regions in your questions as it related to what we were seeing at the end of the fourth quarter. Clearly we're in a very choppy volatile environment and saw that coming out of the fourth quarter so when we look at the progression of our sales and particularly in the first quarter, and what the comparisons also look like we see the first half of the year more challenging than the second half, and then with that as you know on this business you need solid growth to get expense leverage, and frankly we're going to be not seeing that it's going to build through the year.

So it's difficult to get expense leverage and that put some pressure on EPS in particularly in first half of the year, and more securely in the first quarter.

Frederic Cumenal:

Last year I mean 2015 the first part of the year we've enjoyed a very nice growth in Europe thanks to influx of tourists and we believe that because of what's going on in Europe as a combination of breaks it in the UK migrant in Continental Europe and in the UK and risk of terrorism of perception of risk of terrorism, we believe that the tourism business in Europe that is a main driver of sales for this region will be very, very significantly down. You also remember that Q1 of last year we have had by comparison to Q1 of '14 sorry a very good performance in Japan. We despite the fact that we are continuing to grow and we plan to continue to grow in Japan frankly we won't enjoy such higher growth and the one that we have been able to enjoy during the first part of the year of '15, and lastly just on your comment on China frankly we are quite pleased with Mainland China and our performance in China, we have had very solid performance in '15 in China and we've no reason to think that our performance won't be good in Mainland China in '16. Truth is that greater China because of Hong Kong, Hong Kong continues to be a nightmare, there is no other word and I believe this is the same for all of us, all the luxury player, we don't know when we'll bottom up and we don't believe that the situation was significantly improve in Hong Kong during '16, so this is why we are not to bullish and Honk Kong is a significant market despite the decrease in '15 and this is why despite our overall good performance so we planned for good performance in '16 overall in Asia, but it will be negatively impacted by a low performance in Hong Kong.

Mark Aaron:

Okay next question.

Operator:

We'll take our next question from Omar Saad with Evercore ISI.

Omar Saad: Evercore ISI:

Thanks for all the information and thanks for taking question. I wanted to follow-up on the topic of newness and innovation and fashion, trying to understand it sounds like those areas outperformed the rest of the categories and portfolio I am trying to understand why didn't may be help the overall business more, can you talk a little bit more about the opportunity to accelerate the process of bringing new products and collections and innovation to the stores to the consumer, it sounds like the under $500 price point is going to be a focus, but is there opportunity to do more at higher price points as well, are there supply chain constraints that make it more difficult? Just trying to understand the overall picture around newness and new collections and new products? Thank you.

Frederic Cumenal:

Okay. Omar, you know in a nutshell, we will continue and we will accelerate the newness on some of our core collection. Remember as stated by Mark that we are very successful Tiffany Tea but it's only the beginning. So we are going to continue to focus on establishing Tiffany Tea as an income and we are to continue to leverage on newness and so you will see this year some newness on Tea to engage even more with a consumer.

You will also see newness on a very important collection that is particularly relevant on silver and under $500 around return to Tiffany. That is going to be supported by new marketing assets and frankly we know that this collection is particularly relevant it's not the only one but to--. You will also see some more refresh on 1837 and some other collections.

But at the same time, I mean not only we see that collection having between $750 and $5,000 that you will see newness on some more classic fine jewelry. We've introduced big refresh collection around Victoria and both in Q4 of '15. We are going to continue to push beyond those collections and to introduce some more newness behind those collections. You are going to see us to continue to activate and to refresh and to introduce new things on Tea so we are going to be particularly active in '16 on the front of newness, frankly at every price point, not only under $500.

Ralph Nicoletti:

And Omar, it's Ralph. On the back end of your question around the supply chain, I just want to really highlight this is where our unique vertically integrated manufacturing and diamond sourcing capabilities, position us very well here. So, there is no issues in the supply chain and in fact we think it's a strong asset that we have to execute against the areas that Fredric just mentioned.

Omar Saad:

Thanks for all the information.

Frederic Cumenal:

Thanks.

Operator:

And we'll take our next question from Brian Nagel with Oppenheimer.

Brian Nagel: Oppenheimer:

Hi. Good morning. Thanks all of us--thanks for taking questions on the call. So, the question I have, to be a strange one but, a lot of talk, I followed Tiffany for a while and so a lot of talk for a while and on today's call about the impact the stronger US dollar has upon the domestic business now.

To get it, given that you have the stores elsewhere so it--when currency shift, did you see sales move throughout your system but the question I have is there a lever or levers that Tiffany can pull to attempt to mitigate the impact of a stronger dollar in the US?

Ralph Nicoletti:

Maybe I'll start maybe from the of course supply chain and how we think about it in terms of capital and net side and then Fredric pick up back on the more strategic end of it. First as we look at and I know Brain we've talked about this before in different conferences and such that our cost base and our footprint is largely still in evolving way going from a US centric when most of our revenue not long ago was mostly coming from the US and maybe to a lesser extent Japan to a real global footprint, and building out our global capabilities in terms of how we source from a procurement standpoint, how and where we manufacture all areas that we're taking a hard look at and have some action plans on to expanding our capabilities there.

So there is -- so on the I'll call on the infrastructure side we are taking steps that over the next few years is going to make us I'd say better position to manage a strong dollar environment or frankly a more volatile currency environment overtime in any direction as the dollar moves. To taking a lot of steps in that direction, and then on capital allocation these what I'll call volatile conditions from a strategic standpoint on capital allocation doesn't deter us from investing in key locations and key markets that we think strategically are important to be at, and you saw some of that in our investments and stores this year particularly in Asia in Europe and then I think you'll continue to see us invest smartly in locations to just even better position our global footprint stores.

Frederic Cumenal:

Yes, and the question of volatility of currencies is really the critical one, because it's not from as a value of the dollar that is the concern -- the concern is if the disability and the reality for consumers, if that perception is reality, so when you've the currency moving in one direction of the or the other direction, consumers and tourists really tent to believe that everything is on deal, in a given country or that everything is super expensive in another country and brands as powerful as we can be, or as powerful as some other brands can be, we there is not a lot of things that we can due to counter this perception. Frankly when we look internally at our price differentials in the world, we are not any cheaper in Europe then we are in the US, so for Chinese consumers, I mean buying Tiffany in Europe is not really a better deal than buying Tiffany in the US.

But they believe that everything in Europe is cheaper and you know there is no thing that I can do, we're not going to enter in term of promotional, we're going to reinforce promotional activities and started to discount things and we will never do that. So we are doing -- we have a lot of concerted effort to manage and to track tourists, but the key for us is really always and always the brand equity the brand management, we're enforcing the relevance of the brand, with all of our customer throughout a great job in their local markets and second reinforcing the customer experience, both online and offline, in our retail stores when they are paying us a visit.

Brian Nagel:

Absolutely. It's all very helpful, thank you. If I get sort of one short follow-up in there, it is a very short-term question but with the market rebounds this recently, have you seen a positive impact? Now we have the guidance you laid out for Q1 and such but have you seen a positive impact in your trends here and recognized this as a shorter question?

Mark Aaron:

Yes it's very short term so we'll pass on it.

Brian Nagel:

Okay. Thanks anyway. Thank you.

Ralph Nicoletti:

Thank you.

Operator:

We'll take our next question from Antoine Belge with HSBC

Antoine Belge: HSBC

Yes, hi. It's Antoine Belge with HSBC. I have got three questions. First of all you discussed the product pipeline but could you also discuss the marketing initiatives especially in terms of traditional marketing but at the same time of digital, do you think that you could do a few things better? Second question is on the rhythm of special store openings and it's indicated to be only near around 2% but actually it looks like it's to be going to be structural because it's also what is becoming your long-term guidance so could you maybe elaborate a little bit on that and finally can you returning to gross margin we've seen favorable raw material prices at the end of last year.

Usually there is a certain time lag like 12 or 18 months and could you so tell us when you expect those tailwind to pitch for the gross margin? Thank you.

Ralph Nicoletti:

Antoine, Hi. It's Ralph. Good morning. I'll take the gross margin question first and ended on that one.

First overall we are pleased with our gross margin performance. As we said in our remarks, we grew 100 basis points in 2015 and I guided to making some improvement in 2016. In 2016 we are seeing the benefit from lower product costs benefiting gross margin principally in the metals area. On the diamond side, where we've said in the past we've seen some recent declines in rough diamond prices.

We do have some of that lower cost diamond inventory in our process but it's going to take really into 2017 for that work in to the P&L. So 2016 low product cost metal driven and some of our manufacturing initiatives and then 2017 would be beginning to get the benefit from diamond pricing.

Frederic Cumenal:

On the store front, I guess that we've always been very clear in terms of messaging about the fact that we are very much about locations, locations, and locations. So we are working a lot at always improving the quality of our location and that the line is changing in the world so some of our stores where that may be perfectly located 10 or 15 years ago and they are not anymore. So this is why you can see us relocating or even closing some places.

But the future or future is not about opening a very high number of stores per year. We are still the very unique position of being able to continue to grow geographically and to reinforce our position that is more critical for us to reinforce the customer experience through new designs, better seating, better lightings and by design, I am talking about the store design, the store concept and always working on that than opening a very high number of stores. So we are very selective and very picky making the case for this kind of long-term 2% growth in term of square footage.

In term of marketing because your question was different question. In term of marketing and communication specifically two things; you have seen the beginning of the year and this is what we are doing right now that we've introduces 360 marketing approach beyond bridal and yes, this is year of the celebration of the anniversary of the introduction of fixed prong setting the Tiffany setting and frankly we are using that as an alibi to highlight our craftsmanship, heritage and authority that we are on a category that is quite to the jewelry segment. And lastly on digital, we are spending -- we have been spending and we are trying to be state-of-the-art on digital we no, will we ever be no, because always someone will do better than us than ones after but not in luxury actually. We will argue that we are probably more leading the fact and the group in luxury than following all the luxury players, do we have lot of things to improve absolutely, will you see some new things in digital frankly you will see from us new things on digital every day because this is a pace and this is very demanding, this is eye cost of doing business because you need to have your own team you need to work with the lot of different partners and nevertheless you need to try the right balance between allowing social media to in the world of malls to do a top of the job for you but also to control the key messaging.

Antoine Belge:

Thank you very much.

Mark Aaron:

Next question.

Operator:

And we will take our next from Bob Drbul with Nomura Securities.

Kevin: Nomura Securities:

Hi, good morning,

Frederic Cumenal:

Good morning.

Kevin:

This is Kevin in on for Bob. I was just wondering if you could discuss some of the efforts and progress you've made on improving the store experience although it's the quality of relationship of sales associates with the customers, the presentation of product, and then maybe what you've seen from the renovations you've done in Chicago and then I think you talked about San Francisco and Beverly Hills as other locations that you were looking at to do some renovations?

Ralph Nicoletti:

Kevin its Ralph, I will start just maybe responding to the renovation question, and what we see in the -- not getting into any specific stores which is how we think about, how we think about renovations is first we have a disciplined process to approaching these, two our priorities to renovate to upgrade the experience for the customer in the stores and we prioritize around key locations. So stores like Chicago as an example, are very evident to that and its important. Frankly our results and we've said this in the past our results in terms of incremental revenue growth from an after renovation is been mixed it really depends on the store it depends on what we're bringing in and around it, and nonetheless it's very important that we do that for making sure that we are providing a great customer experience, and so some ways you could think of it is a cost of doing business and others investment in our presentation to customers.

Frederic Cumenal:

Yes, the store experience by itself is only a part of a larger ambition that is again about better engaging the customers to frankly improve our sales overall and it may not differently mentioned nor its related to leveraging better on outlying base and frankly, we have been ramping up clientele programs and CRM activation, a little bit everywhere in the world but frankly we are focusing a lot on the US.

It's also about raising the level of statesmanship of our store associates to better program of animation and employee engagement around what I call a service signature that is beyond excellence and we are deploying very aggressively and generally training and catching and we've big programs and they ongoing. It's importantly there is not a d-day about that. There is not the day where things are done but really we are investing significant time and money behind that.

And it's also as you rightly pointed out about the content optimization of a store design to provide a better experience in terms of basic things, comfort, lighting, seating. Its depending of the categories or range of product that we're talking about. We need seating, so, we don't need seating's and so about mobility better use of tablets and things like that. So, we just recently opened a new store in Chengdu in China where we have tried to implement And prevented the latest concepts that we've right now and we are tracking and learning day by day, but we are extremely pleased by the results so some more to come.

Kevin:

Thanks very much.

Operator:

We will take our next question from Dana Telsey with Telsey Advisory Group.

Dana Telsey: Telsey Advisory Group:

Good morning everyone and thank you very much for doing this question and answer session. As you think about the refresh of Tiffany's, would experience omni-channel product innovations store selling, how far along are you and as you do move along, how do you see the long term ability for operating margins? Could they return to a 20% plus type of level or what do you see on the horizon? Thank you.

Ralph Nicoletti:

Hi Dana. It's Ralph. On the operating margin question, we've said in the past and we continue to be confident that we could grow our operating margin about 50 basis points a year over time. We don't have a clear view of where the sealing is on that but we think we have plenty of room to grow our operating margin and it's driven by a combination of mid-single digit sales growth with a focus frankly on comp store sales which as you know would help margin, improving our manufacturing and distribution foot print for more global presence and real sharp attack on costs in the SG&A area and driving that.

So I think the combination of those areas, while continuing to invest in marketing is an equation that we're comfortable saying that we could over time grow 50 basis point, but we need to get as now in the near term we need to get the sales growth back to mid-single-digit level

Frederic Cumenal:

And if I may and we can be very clear about that. We don't believe that the structure of our business should be around 20% gross margin we have much higher operating margin sorry, we have much higher ambition, now along that it takes is really the question but you know it's really our ambition is not to come back and to stay at 20% but to achieve much higher numbers and on the first part of your question, there is no final line there is nothing you know I believe that you will never hear us at least not me saying oh! this is don't I mean it's an endless journey because the day you believe that you've done everything that you wanted to do there are more things to do because consumers are more - rightly so they had different experience, they want to enjoy themselves even more and that said and we have to take on the challenge of delivering.

Dana Telsey:

Thank you.

Operator:

We'll take our next question from Randy Konik with Jefferies.

Randal Konik: Jefferies:

Hey great, thanks a lot. I just want to go back to the product focus in collections et cetera. When you think about the innovation strategy just want to be clear you have about 15 collections on the website, how should we be thinking about the number of collections over the next few years and then as you add newness should we be thinking about just gross ads for the skew count of the portfolio or are you looking to kind of pare down some of the existing skews in the portfolio of products as you ramp up innovation and from Francesca standpoint which did a great job with the Tiffany T collection is it from her vantage point is it something where she believes that the Company needs to have more named collections or more stand out pieces within the existing collections of the portfolio. I am just trying to get some prospective there and then lastly as relates to your price strategy you talked a lot about really innovating price points below 500 can we get some perspective on what the penetration is of the price points below 500 today and what's the goal of that penetration over the medium term? Thanks

Frederic Cumenal:

So, to start on the number of collections and frankly just for reference I mean the role of a design director is to design on so the design director by definition doesn't have any opinion about the number of collections because any design director will had to developed 100 or 200 different collections and we are clearly not of this could afford. Now the skews, it is clear that when we are introducing new skew, we also using that as an opportunity to review the skew base and we are not about proliferation of skews so if anything within the past few years we've reduced the number of skews and we need to do a better job and specifically on the net on all sides because we are presenting 2 minutes skews that some of them you won't find them in stores and it -- the tale of the collections so it's probably and we are considering that -- it's not making a good service and it's not helping us in this direction. So not to proliferation if anything less skews than more skews.

About the number of collections, frankly we have got 6 or 7 key collections. Will we introduce new collection in the future? Yes, absolutely we will and the life of some of the collections that are maybe smaller and some we will focus let in the future on some of them but remember that those collections a lot of them have the capability and the ability to cover different price points. Not necessarily for all of them below $500 price points but let's you see today or see tomorrow it's yes we have got one or two hues actually at $500 price point but we all know that the core offering of tea is more on $1500 than anything else but this is a collection that can go much higher and today it's going as high as $5000 but there is no reason not to consider in the future this collection to have more accent diamonds and some of the things so those collections can play a role of very different price points.

So it will be a mix of reworking refreshing collections and innovating in existing collection but it will also be completed by a new tea or something totally different but in coming few years.

Randal Konik:

And then just on price points $500 below, what's the penetration? Where do you want the penetration to be?

Frederic Cumenal:

Thank you.

Ralph Nicoletti:

Yes, Randy on that, we don't have a specific goal on that but rest assure we have growth opportunities across the whole portfolio and in the under $500 price point, it's an important part of our business but it's not the core of everything we have going on here as Fredric said we have a lot of, a lot of strong initiatives across all price points.

Frederic Cumenal:

And the way I was talking about those initiatives because as you know they are past few real eventful strong US customers, they are most event outside the US.

Randal Konik:

Really helpful.

Mark Aaron:

As we've said Randy, we are not, we haven't been looking to turbo charge that price point silver jewelry. But we certainly want to stabilize that category at some point and new products have indicated that we are moving in that direction actually.

Randal Konik:

Great. Thanks guys.

Frederic Cumenal:

Thanks.

Operator:

And we will take our next Dorothy Lakner with Topeka Capital Markets.

Dorothy Lakner: Topeka Capital Markets:

Thanks and good morning everyone. I wondered if Ralph you talked about initiatives in manufacturing and kind of making sure that Tiffany has a true global footprint there. So I just wondered if you could provide a little bit more color on what you're working on, how you are planning to do that? Thank you.

Ralph Nicoletti:

Thanks, Dorothy for the question. The way we're thinking about it in a couple of ways. First not that long ago we got into manufacturing on a vertically integrated basis and so we have been building the capability and in time and over time we've been doing this, we've been finding more and more ways to be more efficient within the operations we have. So the one element to this is within the manufacturing footprint we have to continue to invest in capabilities to improve our efficiency.

Second is and I talk about as a little bit around systems, we have systems today that support our manufacturing and distribution network to our stores that was in place 20 years ago or more and when we were basically a smaller US Company and as we upgrade some of those systems capabilities, it's going to enable us to be much more nimble in terms of how we manage inventory much more efficient in the movement of our products and the accuracy of how we deploy and replenish ours.

So those kinds various all bring us a significant amount of cost inventory and service opportunity for us. Those are the couple of examples and then many be the last one I would add is just the area of procurement and this runs both in SG&A and then also in direct cost in particular that seat inside our gross margin. This year we really created a procurement a global procurement function and it's because, we weren't really leveraging our global scale and foot print and we put that in place, we've got a very good start with this year, we're going to see benefits in 2016 and it's going to build overtime and that's an areas and capabilities that we think there is a lot of run way at and that will help us manage cost as well.

Dorothy Lakner:

Great, thank you.

Operator:

We'll take our next question from Paul Swinand with Morningstar.

Paul Swinand: Morningstar:

Good morning and thanks for taking all the questions. Just wanted to ask a little bit about the long-term cash flow, I know you obviously improved cash flow despite the sales deleverage. In your other remarks I know it's a largely inventory but it looks like may be on the balance sheet other assets as well, can you comment on the long-term efficiency and ability to improve those cash flow buckets over many years.

Ralph Nicoletti:

Paul it is Ralph. A couple way to address your question. First I think an overall working capital our focus has you know in this past year and you can see from our results has been on inventory management and there I just want to frame a little bit that the way we think about it and I'd also say our inventory management process and the results that we have is really been an internal team effort here, you know it's a cross functional group of our merchandising marketing sales and finance team is really working hard at this and you could see the benefits.

But as we think about it, we are thinking about inventory management is a way to enable sales and improve cash flow both not one of the other but both

Paul Swinand:

Absolutely.

Ralph Nicoletti:

And so it's about getting more efficient on the low impacting material and diamond side link to having better deployment and accuracy on the product placement in our stores and getting improving turnover over there. So that's one clear aspect of it. We have lot of a runway for improvement there and but it cuts and why it spring it this way because it cuts in two directions, one there is an effort through this process to remove some of the excess that we have that inefficient and that work in force but as we better deploy our inventory will also going to improve the turnover and that's the other side of it so we can improve our turns as we get better in terms of how we - and how and when we replenish. So that's how we're thinking about we have a lot runway that's why I'm confidence that overtime we can manage our inventory growth lower rate of sales growth.

As it relates the other parts of the balance sheet, I think frankly I think we're in good shape on capital we're getting very sharper discipline around the cost side of capital we've always been disciplined on the location and strategy side but getting sharper principally through deployment--sorry, procurement on capital and then areas of payables and accounts receivable and what I will call cash conversion cycle are frankly we haven't put a lot of focus on that. I think we've been operating pretty well and that maybe an area in the future that we take a look at but I don't think that the opportunities there are as big as the areas I just spoke about.

Paul Swinand:

A real quick follow up, is it more on the diamond side or is it across collections for the opportunities on the inventory?

Ralph Nicoletti:

It's across the whole supply chain, from rough diamond sourcing to finished product.

Paul Swinand:

Okay. Thank you very much and best of luck.

Ralph Nicoletti:

Yeah, thank you.

Mark Aaron:

Operator, maybe one more question.

Operator:

And we have time for one more question and we'll take our last question from Kimberly Greenberger with Morgan Stanley.

Kimberly Greenberger: Morgan Stanley:

Great. Thank you good morning. I wanted to ask about regarding for the second half 2016, is the return to gross in earnings as a function of what are certainly easier comparisons or is there something else that you expect to drive that acceleration in the back of the year? And then Ralph, I know you've been looking at the efficiency of operations in aggregate. You've talked about some of these things on this call today, but also looking at and particularly the efficiency of the expenses with organization and how you can deliver the greatest impact for the expenses that you are incurring, can you give us just some sort of big picture takeaway's from the last years? You've been looking at that and where are the big buckets if there are or any even several small buckets of potential expense efficiencies that you could realize in the next one to three years? Thank you so much.

Ralph Nicoletti:

Thanks Kimberly. I'll address first the question you had on the phasing of our guidance throughout the year.

In the back half of the year, the improvement in the back half of the year is really driven by two things; one you're excited. We do have easier comparisons in the back half of the year but I think more importantly we are taking actions and we have been and we are taking actions to improve our self-growth performance and we are expecting some improvement on our sales growth trends and that's the principal driver of the improved earnings performance that we're projecting in the back half of the year. The combination of our marketing and new product initiatives really built over the course of the year and that's why we believe that will improve the earnings performance in the back half.

Kimberly Greenberger:

Okay.

Operator:

And that does conclude our question and answer session and I would now like to turn the call back over to Mr. Mark Aaron for any additional or closing remarks.

Mark Aaron:

Okay. Thank you. So in closing, we hope you've found today's conference call informative. We certainly also hope that you've enjoyed the addition of an annual Q&A period on our year end call. A replay of today's call is available on our website or by dialing 888-203-1112 in the U.S. or 719-457-0820 outside the U.S. and entering pass code 632-4380. Finally, please note on your calendars that we expect to report first quarter results on May 25.

Thanks for listening.

Operator:

That concludes today's conference. Thank you for your participation. You may now disconnect.