Tiffany Q1'16 Earnings Conference Call: Full Transcript

Operator:

Please standby. Good day everyone and welcome to the Tiffany & Co. TIF First Quarter Conference Call. Today's Call is being recorded. 

At this time I would like to turn it over to Mr. Mark Aaron, Vice President of Investor Relations. Mr. Aaron you may begin.

 

Mark Aaron: Vice President of Investor Relations:

Thank you, Kala. Good day to everyone and greetings from sunny New York City. Tiffany reported its first quarter results earlier today and I hope you've had a chance to review the news release. On today's call I will elaborate on the results as well as on Management's outlook for the full year. 

Before saying more, please note that statements made on this call that are not historical factors 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 report 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. 

Okay, so now let's review the results. Overall these first quarter results generally represented a continuation of the softness in sales trends that we experienced in the later part of 2015 and were largely what we expected. Our earnings forecast that we first provided in March assumed that we would begin the year with lower sales in most regions which combined with a higher gross margin and SG&A expense deleverage led us to anticipate a 15% to 20% decline in EPS in the first quarter and it actually did. The actual 15% EPS decline which included the tax benefit and a 21% decline excluding the benefit were generally in line with our expectations. Most relevant however, is that despite the persistence of well-known macroeconomic challenges we are continuing pursue a number of important strategic initiatives design to strengthen Tiffany's position as one of the world's most important luxury brands. 

So let's look at the quarter's results, starting with the top-line worldwide net sales declined 7% both as reported and on a constant exchange rate basis due to softness in most regions. There was no overall translation effect on sales as the recently strengthening yen offset any negative translation effect of the stronger US dollar against other currencies. Looking at sales performance by region, in the Americas total sales declined 9% and comparable store sales declined 10%. On a constant exchange rate basis, total sales declined 8% in the first quarter and comp store declined 9%. 

We attribute the overall lower sales to softness in domestic customer spending in many US markets as well as lower spending by foreign tourists of many nationalities in New York and other high tourism market. The total sales decline was due to unit related softness across most jewellery categories. Beyond the US results for mixed in our stores in Latin America and Canada. We didn't add any stores to the Americas store base in the first quarter nor we anticipate any growth in store locations in the Americas throughout the remainder of fiscal 2016. 

However, as part of our ongoing store optimization strategy we are in the mid of significant renovations of our stores in San Francisco, Beverly Hills and Vancouver, similar in scale to what we completed in Chicago last year. Moving to the Asia-Pacific region, total sales declined 8% and comp store sales declined 15% in the quarter. On a constant exchange rate basis however sales declined 5% in total and comp store sales were down 12% with softness across much of the region.

We achieved total sales growth in China fuelled by strong results in some significant newly opened stores, which we believe may have affected comp store sales in the near-term for few existing stores. We also saw solid sales growth in Korea. However, that growth in China and Korea was more than offset by a continued significant decline in Hong Kong as well as more moderate declines in some other markets. We continue to assume that results in Hong Kong will be pressured throughout the year.

As reported in U.S. dollars the total Asia-Pacific sales decline in the quarter was due to roughly equal declines in jewellery units and in changes in average price and product mix. Our Asia-Pacific store count was unchanged during the quarter, although we do expect to add stores later in the year in China, Australia, Korea and New Zealand, while also closing some older ones in a few countries.

I am pleased to say that we had a good quarter in Japan. Total sales from Japan rose 8% and comparable store sales rose 12% in the quarter. On a constant exchange rate basis, which excludes the recent dramatic strengthening of the yen, comp store sales rose 5%, which we attribute to increased spending by local customers, but that growth was mostly offset by lower wholesale sales, resulting in a total sales increase of 1%. And looking at comp store sales growth on a constant exchange rate basis, it is also important to note that comp store sales had declined 24% in last year's first quarter after surging 30% in the first quarter of 2014 when consumers accelerated their purchasing prior to an increase in Japan's consumption tax. 

So we are really looking at a modestly positive three year average annual run rate, as we would expect for Japan. Total sales in Japan increased largely from higher jewellery unit volume. During the quarter, we closed the department store location in Yonago and plan to relocate a few stores in Japan over the course of this year. 

Tiffany's business in Europe remained under pressure in the first quarter particularly on the continent, which continued the trend we experienced late last year following the tragedy in Paris and also affected by the more recent tragedy in Brussels. Total sales in Europe declined 9% and comp store sales declined 15% in the quarter. On a constant exchange-rate basis total European sales declined 7% in the quarter and comp store sales declined 14%. Although you should remember that was on top of a very strong 18% comp increase in last year's first quarter.

In addition to the difficult year-over-year comparison, we attributed the lower sales primarily to softness in foreign tourists spending across the continent. 

It's worth noting that our sales in the UK were relatively better than results from the continent and our business in Russia continued to perform very well. The total sales decline in Europe in the quarter was entirely due to lower jewellery unit volume.

During the first quarter we will pleased to add two stores in Italy, one on the fashionable via Condotti marking our third store in Rome and a new store in beautiful Venice. There is additional store activity plans for later in the year in Europe. 

Lastly, other sales were 30% lower in the first quarter primarily reflecting softness in our retail sales in the UAE as well as in the wholesale sales to other markets in the Middle-East. In an average to improve our performance around the world we continue to be focused on further enhancing the consumer experience through in-store training and systems to even more effectively engaged with our customers optimizing our store base with renovations and relocation and of course introducing new designs across all product categories and price points. The objective is to increase the frequency of customers visit to our stores and the conversion rate. 

Complementing Tiffany's company operated stores is our web presence around the world with e-commerce sales accounting for 6% of worldwide sales in 2015. I think it's worth noting that worldwide e-commerce sales rose slightly in the first quarter. We continue to believe that our dual focus on stores and online reinforces global brand and product awareness while enhancing customers overall experiences with Tiffany. And on a related note, we were pleased last month to launch Tiffany's relationship with Net-a-Porter which we view as another step towards building greater awareness among a worldwide group of fashion conches luxury shoppers. Touching on a few product category highlights in the quarter while the 7% decline in worldwide sales was reflected in varying degrees of softness across all product categories. 

It is worth noting that both the engagement jewellery and wedding band category and the fashion jewellery category performed relatively better than the statements find in solitaire jewellery category. Fashion jewellery sales continue to reflect the success of our Tiffany T and the Atlas collection and while we have seen lower overall unit volumes in fashion silver jewellery in certainly region. We are pleased with the initial reactions in to new silver jewellery pieces that have been added to the return to Tiffany and Infinity collections to address softness at price points under $500. Our goals in fashion jewellery are to sustain growth in gold jewellery and stabilize sales in silver jewellery and we plan to continue to pursue those objectives with new designs and advertising. 

We have spoken about some softness in the engagement jewellery and wedding band category in some regions over the past year and we are now focusing our marketing communications on more directly conveying the competitive strength of our engagement assortments. The add is not only celebrate the 130th anniversary of Tiffany introducing its extraordinarily beautiful six-prong diamond rings setting in 1886. But they also emphasize the exceptional quality and rarity of our diamonds. We believe that the compelling message to couple to plan to planned to marry. 

In the statement fine and solitaire jewellery category there are few key takeaways. At the highest end of our product offerings, we were pleased with results that our annual Blue Book event that we held in New York in April. While the year-over-years sales comparison was quite difficult due to a record setting results at last year's event. Customers nonetheless showed their enthusiasm for the unique collection of statement jewellery that was focused on the theme The Art of Transformation.

Rounding out that category, we saw continued success with our important and recently expanded Victoria collection, but this was offset by soft and mixed performance in other collections. Lastly, we continue to be pleased with our progress in building a larger and more significant watch business as we increase awareness of new design and Tiffany's heritage in that category.

So that covers the sales review. Let's now take a look at the rest of the earnings result. Gross margin rose 2.1 point to 61.2% in the first quarter due to a continuation of favorable product input costs, price increases taken over the past year and sales mix, partly offset by the effect of currency translation and a lack of sales leverage on fixed costs coming from the sales decline.

Our forecast continues to assume an increase in gross margin for the full-year, in fact more than we had initially expected. However, we continue to also expect the full-year increase to be more modest than we experienced in the first quarter as we anniversary some of the positive effect of favorable product input costs from last year as well as some of our pricing actions. Selling general and administrative expenses rose 3% in the quarter, the bulk of the modest increase was for labor occupancy and depreciation cost, much of which was store related. We continue to expect de leveraging of SG&A expenses for the full year. The effective tax rate declined to 29% in the quarter from 34.7% last year and the reduction reflected an unanticipated benefit related to the conclusion of the tax examination. 

For the full year our forecast continues to be based on assume rate slightly lower than in 2015. 

As a result EPS for the quarter up $0.69 with 15% lower than a year-ago and as I mentioned earlier would have declined 21% excluding the tax benefit. Either way results were generally in line with our expectation that called for a 15% to 20% decline in the first quarter. We believe our balance sheet places us in a strong position to support our growth initiatives, while also providing flexibility and opportunities to return cash to shareholders and generated attractive total shareholder return over the long-term. Cash and short-term investments totaled $790 million at April 30, compared with $715 million a year-ago. 

Short term and long term debt totaled $1.1 billion and it's a percentage of stockholders equity was unchanged versus a year-ago 37%. Net inventories at April 30 were 2% lower than a year-ago and the effect of foreign currency translation was negligible. Accounts receivable of $221 million was 15% higher than a year-ago partly reflecting the timing of collections at quarter end as well as in-house credit related to both statement jewellery and wholesale sales. The receivable turnover rate remained high at 20 times per year. 

Capital expenditures were $46 million in the first quarter versus $37 million in last year's first quarter. Beyond reinvesting some of our free cash flow in our business, our objective is to provide opportunities to return cash to shareholders through dividends and share repurchases. 

As a reminder, at the end of last year our Board terminated a previously existing $300 million repurchase program that had only about $59 million of authorization remaining and replaced it with a new authorization permitting the repurchase of up to $500 million of common stock. Under our stock repurchase plan in light of our share price, we maintained a healthy pace of repurchases in the first quarter spending $78 million to repurchase shares at an average cost of $66 per share. At April 30, approximately $416 million remained available for repurchases under the new program that expires in January 2019.

So, in terms of our outlook for the year we believe it is prudent that this point of the year to moderate our annual forecast and call for a mid single-digit decline in diluted EPS in 2016 versus last year's diluted EPS excluding charges. We do acknowledge some of the specific risks of the guidance for the remainder of the year primarily related to the difficulty in accessing the potential for a slower than expected improvement in US activity continued substantial softness in Europe and weakness in foreign tourist spending among the Chinese and other nationalities. 

Beyond this full year forecast, we are modifying our near term expectations and now forecast diluted EPS in the second quarter to decline by a percentage similar to what we just experienced in the first quarter. For the full year this assumes net worldwide sales declining by a low single-digit percentage. It also factors in a bit more upside to gross margin than we initially expected. I should add that our forecast also continues to assume a moderate strengthening of the US dollar over the balance of the year and about a 2% net increase in worldwide gross square footage. 

Our full year assumptions for inventories, CapEx and free cash flow are unchanged from the previous guidance. 

So that covers the outlook for this year we are all well aware of the near term external headwinds. However, we believe that the initiatives we are currently pursuing combined with an assumption that these headwinds will begin to abet at some point will eventually set the stage for Tiffany to achieve its longer term objectives that call for high single-digit net earnings growth driven by mid-single-digit worldwide net sales growth on a constant exchange rate basis and continued generation of strong free cash flow. We were pleased with the large attendance and interest at our recent Investor Day in New York and with the substantial webcast audience as well. 

As we emphasized in the Management presentations which are available on our investor website. We are focused on generating an attractive total shareholder return in the long term. As I noted before this focus revolves around our objective to strengthen Tiffany's position as one of the world's most important luxury brand. Strategically this is premise on initiatives to effectively communicate within serve our customers to optimize our store base, to delight customers with product designs and to improve our cost structure and enhance our supply chain. 

We believe we have strong balance sheet and the right management team to execute on those strategies and on a related note, we've begun to fill our recently vacated CFO position. 

So I hope you sound today's conference call to be informative, but feel free to call me if you have any questions. A replay of this 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 passcode 363-24-45. 

Please note on your calendars that we expect to report second quarter results on August 25. Thanks for listening and have great day. 

 

Operator:

That concludes today's conference, we thank you for your participation. You may now disconnect.

Posted In: EarningsNews
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