IDEX Online Research: Tiffany’s October Quarter Financials Surprisingly Strong

The good news: Tiffany & Company, the world-renowned jeweler, posted a global sales gain of 10 percent for its third quarter ended October 2006. Virtually every division generated sales that were above plan. Profits also surged by nearly 23 percent in the quarter.

The better news: Tiffany’s U.S. same-store sales in November, the first month of the all-important holiday selling season, soared to low double digit levels, significantly above the company’s plan for high single-digit levels. International same-store sales gains are also exceeding the company’s plan of mid single-digit gains.

Tiffany appears to be on track for both a strong holiday selling season, which typically represents about 36 percent of its annual sales and more than half of the company’s annual profits.

 
The table below summarizes results for the third quarter.

The following are highlights of Tiffany’s third quarter’s performance.

• U.S. sales advanced by 9 percent – Tiffany’s same-store sales were up by 6 percent. Its New York Fifth Avenue Flagship store posted a dramatic 13 percent sales gain, driven entirely by more sales to local customers, rather than increased demand from tourists and other foreign visitors. U.S. retail sales were $270 million in the October quarter, or about 49 percent of total corporate sales.

• U.S. sales were driven by a number of factors, including the following:
• Price increases and mix helped boost sales.
• The number of transactions increased due to more stores.
• The average ticket rose; this accounted for the total same-store sales increase.
• Almost all geographic areas were strong, except stores in the Pacific (Hawaii and Guam).
• Sales of merchandise priced at $20,000 and higher were the strongest category. However, higher price-point goods carry a lower gross margin.
• Statement diamonds as well as fine jewelry collections of diamonds and colored stone jewelry were in demand. Engagement jewelry sales rose by double digit levels. Designer goods are also strong.
• Among new merchandise which appears promising, management mentioned sterling silver charms and the “Star” diamond collection.

• Direct marketing – primarily corporate catalog and online sales – were up by 11 percent; this was above plan. Direct marketing sales were about $30 million, or just under 6 percent of total corporate sales.
• There were more orders in the direct marketing division. In addition, the average ticket rose.
• Catalog circulation declined by about 10-15 percent, in line with management’s plan. Surging online sales replaced catalog-driven sales.
• The company began sending out e-mails suggesting holiday gifts earlier this year; this helped boost online sales.

• International sales rose by 9 percent. All markets except Japan were very strong. International sales were nearly $222 million, or about 41 percent of corporate revenues. All percentage gains in international markets are shown in constant currency terms. For aggregate worldwide sales, there was no significant currency adjustment in the quarter, though there were some modest currency adjustments for individual countries.
• In Japan, sales were down 3 percent, on a constant currency exchange basis. This was below the company’s plan. While Japan’s economy seems to be expanding, consumers aren’t yet willing to loosen their purse strings after more than a decade of economic weakness.
• Other Asia-Pacific stores were up 17 percent, with Hong Kong and Australia leading the way. The company’s four stores in China are doing well.
• European same-store sales were up a robust 21 percent, with all markets reporting strong gains.
• Stores in Canada and Latin America also posted solid sales gains.
• The company currently operates 101 owned stores in international markets.

• “Other” sales were up 23 percent. “Other” sales were just over $25 million, or nearly 5 percent of total corporate revenues.
• More than half of this gain came from the wholesale sales of diamonds, which the company sells at virtually no gross margin.
• Little Switzerland generated a 9 percent sales gain, though this was below plan.
• The Iridesse pearl jewelry stores posted a double digit sales gain, boosted by e-commerce sales in this division.

• The company’s financials were generally strong.
• The gross margin fell to 53.6 percent from last year’s 54.1 percent due to a higher sales mix of wholesale diamonds as well as a higher sales mix of high-priced diamonds, which carry an inherently lower gross margin. The LIFO charge doubled in the quarter to over $10 million.
• Operating costs fell as a percentage of sales, on a reported basis. However, if unusual charges are eliminated from last year’s results, Tiffany’s operating cost ratio would have risen very modestly.
• Other income/expense was a credit in the quarter due to two unusual gains: 1) the sale of businesses previously written-off produced a $5.2 million gain; and, 2) the sale of marketable securities produced a $1.6 million gain.
• The company’s tax rate was up 260 basis points.
• Tiffany’s accounts receivable were up 16 percent due to a higher mix of sales made on the company’s proprietary credit program. Its receivables are turning at an astounding 19 times annually.
• Inventories climbed by 19 percent, somewhat above plan due to two key factors: 1) last year, inventories were below plan, so the gain this year appears larger than it really is; and, 2) there were higher inventories of goods produced in-house related to new stores and new collections. In addition, higher precious metals costs ran up the inventory valuation.

• The company raised its profit forecast for the fourth quarter and full year.