UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
----------------
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 for the quarter ended July 31, 2004. OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 for the transition period from ________ to
_____________.
Commission file number: 1-9494
TIFFANY & CO.
(Exact name of registrant as specified in its charter)
Delaware 13-3228013
(State of incorporation) (I.R.S. Employer Identification No.)
727 Fifth Ave. New York, NY 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 755-8000
Former name, former address and former fiscal year, if changed since last report
_________.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X . No .
------- ------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X . No .
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock as of the latest practicable
date: Common Stock, $.01 par value, 146,123,248 shares outstanding at the close
of business on August 31, 2004.
TIFFANY & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JULY 31, 2004
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets - July 31, 2004,
January 31, 2004 and July 31, 2003 (Unaudited) 3
Consolidated Statements of Earnings - for the
three and six months ended July 31, 2004 and
2003 (Unaudited) 4
Consolidated Statements of Cash Flows - for the six
months ended July 31, 2004 and 2003 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-23
Item 4. Controls and Procedures 24
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(e) Issuer Purchases of Equity Securities 25
Item 4. Submission of Matters to a vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 27
(a) Exhibits
(b) Reports on Form 8-K
2
PART I. Financial Information
Item 1. Financial Statements
TIFFANY & CO. AND SUBSIDIARIES
------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
-----------
(in thousands, except per share amounts)
July 31, January 31, July 31,
2004 2004 2003
-------------- -------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 153,623 $ 276,115 $ 116,119
Accounts receivable, less allowances
of $5,979, $6,992 and $7,369 114,596 131,990 104,949
Inventories, net 1,034,404 871,251 814,406
Deferred income taxes 48,161 45,043 44,185
Prepaid expenses and other current assets 50,029 23,683 35,705
---------------- ---------------- ----------------
Total current assets 1,400,813 1,348,082 1,115,364
Property, plant and equipment, net 892,436 885,092 844,631
Deferred income taxes - - 7,895
Other assets, net 182,361 157,914 159,144
---------------- ---------------- ----------------
$ 2,475,610 $ 2,391,088 $ 2,127,034
================ ================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 157,941 $ 41,948 $ 186,157
Current portion of long-term debt 49,033 51,920 -
Accounts payable and accrued liabilities 173,635 209,842 172,383
Income taxes payable 21,699 45,922 22,011
Merchandise and other customer credits 47,776 45,527 43,457
---------------- ---------------- ----------------
Total current liabilities 450,084 395,159 424,008
Long-term debt 379,363 392,991 289,686
Postretirement/employment benefit obligations 37,917 36,746 35,574
Deferred income taxes 17,713 22,397 -
Other long-term liabilities 87,228 75,595 96,360
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value; authorized 240,000 shares,
issued and outstanding 146,371, 146,735 and 145,382 1,464 1,467 1,454
Additional paid-in capital 404,105 395,182 363,841
Retained earnings 1,094,666 1,058,203 934,337
Accumulated other comprehensive gain (loss), net of tax:
Foreign currency translation adjustments 4,545 15,856 (13,968)
Deferred hedging losses (736) (2,508) (1,611)
Unrealized losses on marketable securities (739) - -
Minimum pension liability adjustment - - (2,647)
---------------- ---------------- ----------------
Total stockholders' equity 1,503,305 1,468,200 1,281,406
---------------- ---------------- ----------------
$ 2,475,610 $ 2,391,088 $ 2,127,034
================ ================ ================
See notes to consolidated financial statements
3
TIFFANY & CO. AND SUBSIDIARIES
------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS
-----------------------------------
(Unaudited)
-----------
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
July 31, July 31,
----------------------------- -----------------------------
2004 2003 2004 2003
------------- ------------ ------------- ------------
Net sales $ 476,597 $ 442,495 $ 933,557 $ 838,334
Cost of sales 211,313 187,523 408,607 353,718
------------- ------------ ------------- ------------
Gross profit 265,284 254,972 524,950 484,616
Selling, general and administrative expenses 201,427 186,519 392,757 357,194
------------- ------------ ------------- ------------
Earnings from operations 63,857 68,453 132,193 127,422
Other expenses, net 4,798 3,450 8,122 5,763
------------- ------------ ------------- ------------
Earnings before income taxes 59,059 65,003 124,071 121,659
Provision for income taxes 22,443 23,856 47,147 44,649
------------- ------------ ------------- ------------
Net earnings $ 36,616 $ 41,147 $ 76,924 $ 77,010
============= ============ ============= ============
Net earnings per share:
Basic $ 0.25 $ 0.28 $ 0.52 $ 0.53
============= ============ ============= ============
Diluted $ 0.25 $ 0.28 $ 0.52 $ 0.52
============= ============ ============= ============
Weighted average number of common shares:
Basic 146,370 145,294 146,593 145,094
Diluted 148,669 148,163 149,081 147,744
See notes to consolidated financial statements.
4
TIFFANY & CO. AND SUBSIDIARIES
------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
-----------
(in thousands)
Six Months Ended
July 31,
-----------------------------------------
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 76,924 $ 77,010
Adjustments to reconcile net earnings to net cash
(used in) provided by operating activities:
Depreciation and amortization 52,741 42,706
(Gain) loss on equity investments (2) 368
Provision for uncollectible accounts 945 539
Provision for inventories 3,094 1,438
Deferred income taxes (3,478) (1,457)
Provision for postretirement/employment benefits 1,171 2,457
Deferred hedging losses transferred to earnings 1,447 1,439
Changes in assets and liabilities:
Accounts receivable 18,299 7,895
Inventories (181,447) (82,394)
Prepaid expenses and other current assets (26,139) (11,788)
Other assets, net (3,835) 6,697
Accounts payable (18,907) 5,813
Accrued liabilities (14,363) 3,381
Income taxes payable (20,793) (14,371)
Merchandise and other customer credits 2,283 707
Other long-term liabilities 10,101 11,696
------------------ ----------------
Net cash (used in) provided by operating activities (101,959) 52,136
------------------ ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (70,510) (210,513)
Purchases of marketable securities (24,607) -
Purchases of other investments (1,854) -
Proceeds from lease incentives 149 2,251
------------------ ----------------
Net cash used in investing activities (96,822) (208,262)
------------------ ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term borrowings, net - (4,000)
Proceeds from short-term borrowings, net 117,017 132,991
Repurchase of Common Stock (25,445) (4,610)
Proceeds from exercise of stock options 5,071 6,011
Cash dividends on Common Stock (16,127) (13,059)
------------------ ----------------
Net cash provided by financing activities 80,516 117,333
------------------ ----------------
Effect of exchange rate changes on
cash and cash equivalents (4,227) (1,285)
------------------ ----------------
Net decrease in cash and cash equivalents (122,492) (40,078)
Cash and cash equivalents at beginning of year 276,115 156,197
------------------ ----------------
Cash and cash equivalents at end of six months $ 153,623 $ 116,119
================== ================
See notes to consolidated financial statements.
5
TIFFANY & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements include the
accounts of Tiffany & Co. and all majority-owned domestic and foreign
subsidiaries ("Company"). Intercompany accounts, transactions and
profits have been eliminated in consolidation. The interim statements
are unaudited and, in the opinion of management, include all
adjustments (which include only normal recurring adjustments including
the adjustment necessary as a result of the use of the LIFO (last-in,
first-out) method of inventory valuation, which is based on
assumptions as to inflation rates and projected fiscal year-end
inventory levels) necessary to present fairly the Company's financial
position as of July 31, 2004 and the results of its operations and
cash flows for the interim periods presented. The consolidated balance
sheet data for January 31, 2004 is derived from the audited financial
statements which are included in the Company's report on Form 10-K,
which should be read in connection with these financial statements. In
accordance with the rules of the Securities and Exchange Commission,
these financial statements do not include all disclosures required by
generally accepted accounting principles.
Certain reclassifications were made to the prior year's financial
statement amounts and related note disclosures to conform with the
current year's presentation.
The Company's business is seasonal, with a higher proportion of sales
and earnings generated in the last quarter of the fiscal year and,
therefore, the results of its operations for the three and six months
ended July 31, 2004 and 2003 are not necessarily indicative of the
results of the entire fiscal year.
2. STOCK - BASED COMPENSATION
Employee stock options are accounted for using the intrinsic value
method in accordance with Accounting Principle Board Opinion No. 25
"Accounting for Stock Issued to Employees" and its related
interpretations. Compensation costs were not recorded in net earnings
for stock options, as all options granted had an exercise price equal
to the market value of the underlying common stock on the date of
grant.
6
STOCK - BASED COMPENSATION (continued)
Had compensation expense been determined and recorded based upon the
fair-value recognition provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation",
net earnings and earnings per share would have been reduced to pro
forma amounts as follows:
Three Months Ended Six Months Ended
July 31, July 31,
---------------------------------------------------------------
(in thousands, except per
share amounts) 2004 2003 2004 2003
--------------------------------------------------------------------------------------------------------------
Net earnings as reported $36,616 $41,147 $76,924 $77,010
Stock-based employee
compensation expense
determined under fair-
value-based method for all
awards, net of tax (3,526) (3,330) (7,023) (6,619)
---------------- --------------- ------------- ----------------
Pro forma net earnings $33,090 $37,817 $69,901 $70,391
===============================================================
Earnings per basic share:
As reported $ 0.25 $ 0.28 $ 0.52 $ 0.53
===============================================================
Pro forma $ 0.23 $ 0.26 $ 0.48 $ 0.49
===============================================================
Earnings per diluted share:
As reported $ 0.25 $ 0.28 $ 0.52 $ 0.52
===============================================================
Pro forma $ 0.22 $ 0.26 $ 0.47 $ 0.48
===============================================================
3. INCOME TAXES
The effective income tax rate for the three and six months ended July
31, 2004 and 2003 was 38.0% and 36.7%. The change in the tax rate from
the prior year was primarily due to a favorable reserve adjustment
recorded in the prior year relating to the elimination of certain tax
exposures. The effective tax rate for both years also includes a tax
benefit from the Extraterritorial Income Exclusion Act ("ETI") of
2000. The ETI provides for the exclusion from United States taxable
income of certain "extraterritorial" income earned from the sale or
license of qualified property.
The World Trade Organization ("WTO") has ruled in favor of a formal
complaint by the European Union that the ETI exclusion constitutes a
prohibited export subsidy under WTO rules. Legislative proposals have
been presented in the U.S. Congress to repeal the ETI. The legislative
proposals currently being evaluated by Congress provide transition
relief. However, it is uncertain what form the final legislation will
take and what effect, if any, it will have on the ETI benefit in the
future.
7
4. INVENTORIES
July 31, January 31, July 31,
(in thousands) 2004 2004 2003
-----------------------------------------------------------------------------------------------------
Finished goods $ 727,733 $659,558 $634,754
Raw materials 226,719 165,768 134,012
Work-in-process 84,770 50,517 49,923
--------------- --------------- ---------------
1,039,222 875,843 818,689
Reserves (4,818) (4,592) (4,283)
--------------- --------------- ---------------
Inventories, net $1,034,404 $871,251 $814,406
=============== =============== ===============
LIFO-based inventories at July 31, 2004, January 31, 2004 and July 31,
2003 represented 70%, 69% and 74% of inventories, net, with the
current cost exceeding the LIFO inventory value by $39,614,000,
$30,587,000 and $24,235,000 at the end of each period. The LIFO
valuation method had the effect of decreasing earnings per diluted
share by $0.02 and $0.01 for the three months ended July 31, 2004 and
2003 and by $0.04 and $0.02 for the six months ended July 31, 2004 and
2003.
5. NEW ACCOUNTING PRONOUNCEMENTS
In May 2004, the Financial Accounting Standards Board ("FASB") issued
FASB Staff Position No. 106-2, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003" ("FSP No. 106-2"). FSP No. 106-2, which
replaced the same titled FSP No. 106-1, provides guidance on the
accounting for the effects of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 ("Act") that was signed into
law in December 2003. Under FSP No. 106-1, the Company elected to
defer the accounting for the effects of the Act. FSP No. 106-2 is
effective for interim periods beginning after June 15, 2004. The
Company is evaluating the impact of the Act and FSP No. 106-2.
Accordingly, the Company's postretirement benefit obligation and net
postretirement health care costs included in the consolidated
financial statements do not reflect the effects of the Act.
In December 2003, the FASB issued Interpretation No. 46R,
"Consolidation of Variable Interest Entities" ("FIN 46R"). FIN 46R
replaces the same titled FIN 46 that was issued in January 2003. FIN
46R requires that variable interest entities be consolidated by its
primary beneficiary (if any) if the entity's equity investors at risk
do not have the characteristics of a controlling financial interest or
the equity investors do not have significant equity at risk for the
entity to finance its activities without additional financial support.
The provisions of FIN 46 were effective immediately for all entities
created after January 31, 2003 and FIN 46R is effective for those
entities in the first quarter of 2004. For those entities created
prior to February 1, 2003, the Company was required to adopt the
provisions of FIN 46R by the end of the first quarter of 2004. The
adoption of FIN 46R did not have an impact on the Company's financial
position, earnings or cash flows.
8
6. MARKETABLE SECURITIES
The Company's marketable securities are classified as available-for-
sale and are recorded at fair value in other assets, net, with
unrealized gains and losses reported as a separate component of
stockholders' equity. Realized gains and losses are recorded in other
expenses, net. The marketable securities are held for an indefinite
period of time, but might be sold in the future as changes in market
conditions or economic factors occur. The fair-value of the marketable
securities is determined based on prevailing market prices. The
Company did not have investments in marketable securities at January
31, 2004 or July 31, 2003. The following is a summary of the cost and
fair values of the Company's marketable securities at July 31, 2004:
Unrealized
(in thousands) Cost Fair Value Losses
----------------------------------------------------------------------
Mutual Fund $24,607 $23,868 $739
============================================
7. EARNINGS PER SHARE
Basic earnings per share is computed as net earnings divided by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share includes the dilutive effect of the assumed
exercise of stock options.
The following table summarizes the reconciliation of the numerators
and denominators for the basic and diluted earnings per share ("EPS")
computations:
Three Months Ended Six Months Ended
July 31, July 31,
-------------------------------------------------------------------
(in thousands) 2004 2003 2004 2003
----------------------------------------------------------------------------------------------------------
Net earnings for basic
and diluted EPS $36,616 $41,147 $76,924 $77,010
=============== =============== =============== ===============
Weighted average shares
for basic EPS 146,370 145,294 146,593 145,094
Incremental shares based
upon the assumed
exercise of stock 2,299 2,869 2,488 2,650
options --------------- ---------------- -------------- ---------------
Weighted average shares
for diluted EPS 148,669 148,163 149,081 147,744
=============== =============== =============== ===============
For the three months ended July 31, 2004 and 2003, there were
3,593,000 and 4,631,000 stock options excluded from the computations
of earnings per diluted share due to their antidilutive effect. For
the six months ended July 31, 2004 and 2003, there were 3,512,000 and
4,786,000 stock options excluded from the computations of earnings per
diluted share due to their antidilutive effect.
9
8. COMPREHENSIVE EARNINGS
The components of comprehensive earnings were:
Three Months Ended Six Months Ended
July 31, July 31,
------------------------------------------------------------------
(in thousands) 2004 2003 2004 2003
------------------------------------------------------------------------------------------------------------
Net earnings $36,616 $41,147 $76,924 $77,010
Other comprehensive gain
(loss), net of tax:
Deferred hedging gains 711 399 1,772 673
Foreign currency
translation adjustments (1,888) 1,828 (11,311) 593
Unrealized gains/(losses)
on marketable securities 46 - (739) -
------------- ------------ -------------- ------------
Comprehensive earnings $35,485 $43,374 $66,646 $78,276
============= ============ ============== ============
9. EMPLOYEE BENEFIT PLANS
The Company maintains a noncontributory defined benefit pension plan
("Pension Plan"), an unfunded Supplemental Retirement Income Plan and,
in January 2004, established a non-qualified unfunded retirement
income plan to recognize compensation in excess of the Internal
Revenue Service Code limits. The Company also provides certain
health-care and life insurance benefits ("Other Postretirement
Benefits") and maintains other retirement plans, profit sharing and
retirement savings plans.
Net periodic pension and other postretirement benefit expense included
the following components:
Three Months Ended July 31,
---------------------------------------------------------
Other
Postretirement
Pension Benefits Benefits
---------------------------------------------------------
(in thousands) 2004 2003 2004 2003
------------------------------------------------------------------------------------------------------
Service cost $2,699 $2,357 $ 307 $ 823
Interest cost 2,640 2,265 418 648
Expected return on plan assets (2,079) (1,599) - -
Amortization of prior service
cost 201 47 (303) (2)
Amortization of net loss 395 239 98 64
---------------------------------------------------------
Net expense $3,856 $3,309 $ 520 $1,533
=========================================================
10
EMPLOYEE BENEFIT PLANS (continued)
Six Months Ended July 31,
----------------------------------------------------------
Other
Postretirement
Pension Benefits Benefits
----------------------------------------------------------
(in thousands) 2004 2003 2004 2003
-------------------------------------------------------------------------------------------------------------
Service cost $5,398 $4,714 $ 614 $1,646
Interest cost 5,280 4,530 836 1,296
Expected return on plan assets (4,158) (3,198) - -
Amortization of prior service
cost 402 94 (606) (4)
Amortization of net loss 790 478 196 128
----------------------------------------------------------
Net expense $7,712 $6,618 $1,040 $3,066
==========================================================
The Company's funding policy for the Pension Plan is to contribute the
maximum tax deductible contribution in any given year. The Company
does not anticipate making any cash contributions to the Pension Plan
in 2004 based on its funding policy. However, this expectation is
subject to change if actual asset performance is significantly below
the assumed long-term rate of return on pension assets.
10. SEGMENT INFORMATION
The Company's reportable segments are: U.S. Retail, International
Retail, Direct Marketing and Specialty Retail (see Management's
Discussion and Analysis of Financial Condition and Results of
Operations for an overview of the Company's business). The Company's
reportable segments, excluding Specialty Retail, represent channels of
distribution that offer similar merchandise and service and have
similar marketing and distribution strategies. The Specialty Retail
segment includes the consolidated results of Little Switzerland, Inc.,
as well as the consolidated results of other ventures operated under
non-TIFFANY & CO. trademarks or trade names. In deciding how to
allocate resources and assess performance, the Company's Executive
Officers regularly evaluate the performance of its reportable segments
on the basis of net sales and earnings from operations, after the
elimination of inter-segment sales and transfers.
Certain information relating to the Company's reportable segments is
set forth below:
Three Months Ended Six Months Ended
July 31, July 31,
-----------------------------------------------------------------------
(in thousands) 2004 2003 2004 2003
-----------------------------------------------------------------------------------------------------------
Net sales:
U.S. Retail $236,770 $213,036 $450,432 $386,622
International Retail 180,948 168,987 365,679 334,511
Direct Marketing 40,274 43,943 77,173 81,226
Specialty Retail 18,605 16,529 40,273 35,975
-------------- ------------- -------------- --------------
$476,597 $442,495 $933,557 $838,334
============== ============= ============== ==============
Earnings(losses)from
operations*:
U.S. Retail $53,203 $49,130 $97,879 $81,023
International Retail 43,127 43,510 94,776 91,105
Direct Marketing 6,960 10,074 12,466 16,894
Specialty Retail (3,238) (2,410) (4,476) (3,073)
-------------- ------------- -------------- --------------
$100,052 $100,304 $200,645 $185,949
============== ============= ============== ==============
* Represents earnings from operations before unallocated corporate
expenses and other expenses, net.
11
SEGMENT INFORMATION (continued)
The following table sets forth a reconciliation of the reportable
segment's earnings from operations to the Company's consolidated
earnings before income taxes:
Three Months Ended Six Months Ended
July 31, July 31,
------------------------------------------------------------------------
(in thousands) 2004 2003 2004 2003
------------------------------------------------------------------------------------------------------------
Earnings from
operations for
reportable segments $100,052 $100,304 $200,645 $185,949
Unallocated corporate
expenses (36,195) (31,851) (68,452) (58,527)
Other expenses, net (4,798) (3,450) (8,122) (5,763)
--------------- --------------- -------------- ---------------
Earnings before income
taxes $59,059 $65,003 $124,071 $121,659
=============== =============== ============== ===============
Unallocated corporate expenses include costs related to the Company's
administrative support functions such as information technology,
finance, legal and human resources, as well as changes in the LIFO
inventory valuation reserve, which the Company does not allocate to
its reportable segments.
11. SUBSEQUENT EVENT
On August 19, 2004, the Company's Board of Directors declared a
quarterly dividend of $0.06 per share. This dividend will be paid on
October 11, 2004 to stockholders of record on September 20, 2004.
12
PART I. Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW
- --------
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. Through Tiffany and Company and other subsidiaries, the
Company is engaged in product design, manufacturing and retailing activities.
The Company operates four channels of distribution:
o U.S. Retail - sales in TIFFANY & CO. stores in the U.S.;
o International Retail - sales in TIFFANY & CO. stores and department store
boutiques outside the U.S. (also includes business-to-business sales,
Internet sales and wholesale sales of TIFFANY & CO. products outside the
U.S.);
o Direct Marketing - Internet, catalog and business-to-business sales of
TIFFANY & CO. products in the U.S.;
o Specialty Retail - primarily includes retail sales in LITTLE SWITZERLAND
stores on Caribbean islands, as well as in Florida and Alaska. It also
includes worldwide sales made under additional trademarks or trade names
other than TIFFANY & CO.
All references to years relate to the fiscal year that ends on January 31 of the
following calendar year.
In the discussion that follows, a store's sales are included in "comparable
store sales" when the store has been open more than 12 months. If a store is
opened in the first 15 days of a month it is considered open for a full month.
If a store closes in the first 15 days of a month, it will not be considered
comparable as of that month. The results of relocated stores remain in
comparable store sales if the relocation occurs within the same geographical
market. The results of a store in which the square footage has been expanded or
reduced remain in the comparable store base.
Net sales increased 8% to $476,597,000 in the three months ended July 31, 2004
("second quarter") and 11% to $933,557,000 in the six months ended July 31, 2004
("first half"). The Company's reported sales reflect either a
translation-related benefit from strengthening foreign currencies or a detriment
from a strengthening U.S dollar. On a constant-exchange-rate basis, net sales
rose 6% in the second quarter and 8% in the first half (see Non-GAAP Measures
section below). The sales increases resulted primarily from growth in worldwide
comparable store sales.
Net earnings in the second quarter declined 11% to $36,616,000, or $0.25 per
diluted share, versus $41,147,000 or $0.28 per diluted share, in the prior year.
Net earnings in the first half were $76,924,000, or $0.52 per diluted share,
versus $77,010,000, or $0.52 per diluted share, in the prior year. In both
periods, the increase in sales was insufficient to offset lower gross margins.
13
NON-GAAP MEASURES
- -----------------
The Company reports all required information in accordance with U.S. Generally
Accepted Accounting Principles ("GAAP"), but management believes that ongoing
operating results are more difficult to understand if only GAAP financial
measures are available to review. Internally, management monitors the sales
performance of its international subsidiaries on a non-GAAP basis that excludes,
from GAAP reported sales, the positive or negative effects that result from
translating sales of its international subsidiaries into U.S. dollars
(constant-exchange-rate basis). Management uses this constant-exchange-rate
measure because it believes it is a more representative assessment of the sales
performance of its international subsidiaries and provides for better
comparability between reporting periods.
The Company's management does not itself, 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 and analyze the
Company's operating results.
The following tables reconcile net sales percentage increases (decreases)
measured and reported in accordance with GAAP to the non-GAAP
constant-exchange-rate basis:
Three Months Ended Six Months Ended
July 31, 2004 July 31, 2004
----------------------------------------- --------------------------------------------
GAAP Constant GAAP Constant
Reported Trans- Exchange Reported Trans- Exchange
Net lation Rate Net lation Rate
Net Sales: Sales Impact Sales Sales Impact Sales
- ---------- ------------- ------------ -------------- ------------- ------------- --------------
Worldwide 8% 2% 6% 11% 3% 8%
International
Retail 7% 6% 1% 9% 8% 1%
Japan Retail (3%) 6% (9%) (1%) 8% (9%)
Asia-Pacific
Region,
excluding
Japan 28% 3% 25% 33% 4% 29%
Europe 19% 10% 9% 25% 13% 12%
14
Three Months Ended Six Months Ended
July 31, 2004 July 31, 2004
----------------------------------------- --------------------------------------------
GAAP Constant GAAP Constant
Reported Trans- Exchange Reported Trans- Exchange
Comparable Net lation Rate Net lation Rate
Sales: Sales Impact Sales Sales Impact Sales
- ---------- ------------- ------------ -------------- ------------- ------------- --------------
Worldwide 7% 2% 5% 10% 3% 7%
International
Retail 2% 6% (4%) 5% 8% (3%)
Japan Retail (4%) 6% (10%) (2%) 8% (10%)
Asia-Pacific
Region,
excluding
Japan 19% 3% 16% 26% 5% 21%
Europe 9% 9% - 15% 12% 3%
RESULTS OF OPERATIONS
- ---------------------
Certain operating data as a percentage of net sales were as follows:
Three Months Six Months
Ended July 31, Ended July 31,
------------------ ------------------
2004 2003 2004 2003
------------------ ------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 44.3 42.4 43.8 42.2
------------------ ------------------
Gross profit 55.7 57.6 56.2 57.8
Selling, general
and administrative expenses 42.3 42.2 42.1 42.6
------------------ ------------------
Earnings from operations 13.4 15.4 14.1 15.2
Other expenses, net 1.0 0.7 0.8 0.7
------------------ ------------------
Earnings before income taxes 12.4 14.7 13.3 14.5
Provision for income taxes 4.7 5.4 5.1 5.3
------------------ ------------------
Net earnings 7.7% 9.3% 8.2% 9.2%
================== ==================
Net Sales
- ---------
Net sales by channel of distribution were as follows:
Three Months Six Months
Ended July 31, Ended July 31,
--------------------- ---------------------
(in thousands) 2004 2003 2004 2003
- -------------- --------------------- ---------------------
U.S. Retail $236,770 $213,036 $450,432 $386,622
International Retail 180,948 168,987 365,679 334,511
Direct Marketing 40,274 43,943 77,173 81,226
Specialty Retail 18,605 16,529 40,273 35,975
--------------------- ---------------------
$476,597 $442,495 $933,557 $838,334
--------------------- ----------------------
U.S. Retail sales rose 11% in the second quarter and 17% in the first half,
largely due to 10% and 14% comparable store sales growth. Sales in the New York
flagship store rose 16% and 22% in those periods while comparable branch store
sales rose 9% and 13%. Comparable store sales growth resulted from increases in
the average sales amount per transaction, offset by a modest decline in the
number of transactions. Management attributes the increase to sales of higher
priced merchandise.
15
International Retail sales rose 7% in the second quarter and 9% in the first
half. On a constant-exchange-rate basis, International Retail sales increased 1%
for both periods, while comparable store sales decreased 4% in the second
quarter and 3% in the first half.
In Japan, sales were negatively affected by a decline of 13% in silver jewelry
in both the second quarter and first half (a product category that represented
26% of total Japan sales in 2003). On a constant-exchange-rate basis, net sales
decreased 9% in both periods and comparable store sales declined 10% in both
periods. Management believes that Japan sales have been affected by generally
weak consumer spending on jewelry and increased "luxury-goods" competition, as
well as by management's decision to increase price points in the silver jewelry
category by removing some lower-priced items from the selection. The Company
continues to focus on product assortment repositioning and new product
introductions and believes that incremental publicity and targeted marketing
initiatives, as well as the opening of two free-standing stores in the second
half, will enhance overall customer awareness and lead to gradually improving
sales and profitability.
In the Asia-Pacific region outside of Japan, comparable store sales on a
constant-exchange-rate basis increased 16% in the second quarter and 21% in the
first half due to growth in most markets.
In Europe, comparable store sales on a constant-exchange-rate basis remained
flat in the second quarter and rose 3% in the first half due to growth in all
markets except London.
Direct Marketing sales declined 8% in the second quarter and 5% in the first
half. Combined e-commerce/catalog sales rose 2% in the second quarter and 7% in
the first half entirely due to increases in the average order size. The number
of catalog orders decreased in the second quarter and first half, while the
number of e-commerce orders was approximately equal to the prior year.
Management attributes e-commerce sales growth to increased web site traffic, as
well as to shifts by consumers from catalog to e-commerce. In the Business Sales
division, management made a strategic decision to discontinue service award
program sales in November 2002. As a result of that decision, sales in the
Business Sales division declined 26% in the second quarter and 25% in the first
half. The Business Sales division continues to offer a range of business gifts,
event-related trophies and other awards and those sales increased 4% in the
second quarter and 7% in the first half.
Specialty Retail sales increased 13% in the second quarter and 12% in the first
half primarily due to sales growth in LITTLE SWITZERLAND stores.
16
Management expects that worldwide retail gross square footage of
Company-operated TIFFANY & CO. stores will increase by approximately 7% in 2004.
Actual/expected 2004 store openings (closings) are as follows:
Actual Openings
Location (Closings) 2004 Expected Openings 2004
- -------- --------------- ----------------------
Palm Beach Gardens, Florida Second Quarter
Edina, Minnesota Second Quarter
Kansas City, Missouri Third Quarter
Westport, Connecticut Fourth Quarter
Wakayama, Japan First Quarter
Nagano, Japan (First Quarter)
Marunouchi, Tokyo, Japan Third Quarter
Nishi-Umeda, Osaka, Japan Fourth Quarter
London, England First Quarter
Taipei, Taiwan Second Quarter
Gross Profit
- ------------
Gross profit as a percentage of net sales ("gross margin") declined in the
second quarter and first half by 1.9 and 1.6 percentage points. Almost half of
the declines resulted from LIFO and inventory-obsolescence charges totaling
$6,900,000 ($5,500,000 due to LIFO) in the second quarter and $12,000,000
($9,000,000 due to LIFO) in the first half (versus $2,950,000 and $5,500,000 a
year ago both primarily attributable to LIFO). Additional factors negatively
affecting gross margin included changes in sales mix, opening an additional
distribution center in third quarter of 2003, expansion of internal
manufacturing and expansion of rough diamond sourcing; none of the foregoing
additional factors were individually significant.
The Company's hedging program uses yen put options to stabilize product costs in
Japan over the short-term despite exchange rate fluctuations. The Company
adjusts its retail prices in Japan from time to time to address longer-term
changes in the yen/dollar relationship and local competitive pricing.
Management's long-term strategy and objectives include achieving further product
manufacturing/sourcing efficiencies (including increased internal manufacturing
and direct rough-diamond sourcing), controlling costs and implementing selective
price adjustments in order to maintain the Company's gross margin at, or above,
prior year levels. As a result, management expects a slight increase in gross
margin in the second half of the year due to anticipated continuing strong sales
growth in the U.S., improving sales results in Japan and a diminshed effect from
adverse factors affecting gross margin.
Selling, General and Administrative ("SG&A") Expenses
- -----------------------------------------------------
SG&A expenses rose 8% in the second quarter and 10% in the first half. The
majority of the increases were due to staffing (representing approximately 33%
of the increase in the second quarter and 41% in the first half) and
depreciation and occupancy expenses (representing approximately 24% of the
increase in the second quarter and 19% in the first half) related to the
Company's expansion. As a percentage of net sales, SG&A increased to 42.3% in
the second quarter and declined to 42.1% in the first half, versus 42.2% and
42.6% in the prior-year periods. Management's longer-term objective is to reduce
the ratio of SG&A expenses to net sales by controlling expenses so that
anticipated sales growth will result in improved earnings. Management expects
the full year ratio to improve modestly from the prior year.
17
Earnings from Operations
- ------------------------
Three months ended July 31,
-------------------------------------------
(in thousands) 2004 2003
- ------------------------------------------------------------------------------------------------
Earnings (losses) from operations:
U.S. Retail $ 53,203 $ 49,130
International Retail 43,127 43,510
Direct Marketing 6,960 10,074
Specialty Retail (3,238) (2,410)
-------------------------------------------
Earnings from operations for reportable
segments 100,052 100,304
Unallocated corporate expenses (36,195) (31,851)
-------------------------------------------
Earnings from operations $ 63,857 $ 68,453
===========================================
Six months ended July 31,
-------------------------------------------
(in thousands) 2004 2003
- ------------------------------------------------------------------------------------------------
Earnings (losses) from operations:
U.S. Retail $ 97,879 $ 81,023
International Retail 94,776 91,105
Direct Marketing 12,466 16,894
Specialty Retail (4,476) (3,073)
------------------------------------------
Earnings from operations for reportable
segments 200,645 185,949
Unallocated corporate expenses (68,452) (58,527)
------------------------------------------
Earnings from operations $ 132,193 $ 127,422
==========================================
Earnings from operations declined 7% in the second quarter. On a reportable
segment basis, the ratios of earnings (losses) from operations (before the
effect of unallocated corporate expenses and other expenses, net) to each
segment's net sales in the second quarter of 2004 and 2003 were as follows:
o U.S. Retail was 22% and 23% (impacted by a lower gross margin);
o International Retail was 24% and 26% (impacted by a lower gross margin and
increased SG&A expenses);
o Direct Marketing was 17% and 23% (decrease primarily due to incremental
expenses associated with the Customer Fulfillment Center ("CFC") which
opened in September 2003 and primarily supports the Company's Direct
Marketing segment); and
o Specialty Retail was (17)% and (15)% (primarily due to expenses associated
with the development of new retail concepts under additional trademarks or
trade names other than TIFFANY & CO., partly offset by decreases in Little
Switzerland losses).
Earnings from operations rose 4% in the first half. On a reportable segment
basis, the ratios of earnings (losses) from operations (before the effect of
unallocated corporate expenses and other expenses, net) to each segment's net
sales in the second quarter of 2004 and 2003 were as follows:
o U.S. Retail was 22% and 21% (increase primarily due to the leveraging of
fixed expenses);
o International Retail was 26% and 27%;
18
o Direct Marketing was 16% and 21% (decrease primarily due to incremental
expenses associated with the CFC which opened in September 2003 and
supports the Company's Direct Marketing segment); and
o Specialty Retail was (11)% and (9)% (primarily due to expenses associated
with the development of new retail concepts under additional trademarks or
trade names other than TIFFANY & CO., partly offset by decreases in Little
Switzerland losses).
Unallocated corporate expenses include costs related to the Company's
administrative support functions such as information technology, finance, legal
and human resources as well as changes in the LIFO inventory valuation reserve,
which the Company does not allocate to the operating segments. The increases of
14% and 17% in unallocated corporate expenses in the second quarter and first
half were primarily due to an increase in the LIFO inventory valuation reserve
(representing approximately one-half of the increase, primarily due to increases
in the price of precious metals and diamonds), information technology
infrastructure costs (approximately one-third of the increase) and increases in
other administrative support costs.
Other Expenses, Net
- -------------------
Other expenses, net in the second quarter and first half were higher than the
prior year primarily due to an increase in interest expense ($1,497,000 and
$3,274,000). Interest expense rose as a consequence of the Company's
yen-denominated long-term debt issuance in 2003, as well as from increased
borrowing for on-going operating needs under the Credit Facility (see
"Borrowings" below). The increases in interest expense were partially offset by
higher interest income in the second quarter and first half ($322,000 and
$579,000).
Provision for Income Taxes
- --------------------------
The effective income tax rate was 38.0% in the second quarter and first half,
compared with 36.7% in the prior-year periods. The changes in the tax rate from
the prior year were primarily due to a favorable reserve adjustment recorded in
the prior year relating to the elimination of certain tax exposures. The
effective income tax rate for both years also includes a tax benefit from the
Extraterritorial Income Exclusion Act ("ETI") of 2000. The ETI provides for the
exclusion from United States taxable income of certain "extraterritorial" income
earned from the sale or license of qualified property.
The World Trade Organization ("WTO") has ruled in favor of a formal complaint by
the European Union that the ETI exclusion constitutes a prohibited export
subsidy under WTO rules. Legislative proposals have been presented in the U.S.
Congress to repeal the ETI. The legislative proposals currently being evaluated
by Congress provide transition relief. However, it is uncertain what form the
final legislation will take and what effect, if any, it will have on the ETI
benefit in the future.
New Accounting Standards
- ------------------------
In May 2004, the Financial Accounting Standards Board ("FASB") issued FASB Staff
Position No. 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003" ("FSP No.
106-2"). FSP No. 106-2, which replaced the same titled FSP No. 106-1, provides
guidance on the accounting for the effects of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 ("Act") that was signed into law in
December 2003. Under FSP No. 106-1, the Company elected to defer the accounting
for the effects of the Act. FSP No. 106-2 is effective for interim periods
beginning after June 15, 2004. The Company is evaluating the impact of the Act
and FSP No. 106-2. Accordingly, the Company's postretirement benefit obligation
and net postretirement health care costs
19
included in the consolidated financial statements do not reflect the effects of
the Act.
In December 2003, the FASB issued Interpretation No. 46R, "Consolidation of
Variable Interest Entities" ("FIN 46R"). FIN 46R replaces the same titled FIN 46
that was issued in January 2003. FIN 46R requires that certain variable interest
entities be consolidated by its primary beneficiary (if any), if the entity's
equity investors at risk do not have the characteristics of a controlling
financial interest or the equity investors do not have significant equity at
risk for the entity to finance its activities without additional financial
support. The provisions of FIN 46 were effective immediately for all entities
created after January 31, 2003 and FIN 46R is effective for those entities in
the first quarter of 2004. For those entities created prior to February 1, 2003,
the Company was required to adopt the provisions of FIN 46R by the end of the
first quarter of 2004. The adoption of FIN 46R did not have an impact on the
Company's financial position, earnings or cash flows.
Liquidity and Capital Resources
- -------------------------------
The Company's liquidity needs have been, and are expected to remain, primarily a
function of its seasonal working capital requirements and capital expenditure
needs, which have increased due to the Company's expansion. The Company had a
net cash outflow from operating activities of $101,959,000 in the six months
ended July 31, 2004 primarily due to higher inventory purchases compared with an
inflow of $52,136,000 in the prior-year period.
Working Capital
- ---------------
Working capital (current assets less current liabilities) and the corresponding
current ratio (current assets divided by current liabilities) were $950,729,000
and 3.1:1 at July 31, 2004, compared with $952,923,000 and 3.4:1 at January 31,
2004 and $691,356,000 and 2.6:1 at July 31, 2003.
Accounts receivable, less allowances at July 31, 2004 were 13% lower than
January 31, 2004 (which is typically a seasonal high point) and were 9% higher
than July 31, 2003 due to sales growth.
Inventories, net at July 31, 2004 were 19% above January 31, 2004 and 27% above
July 31, 2003. Changes in foreign currency exchange rates decreased inventory by
2% compared to January 31, 2004 and increased inventory by 3% compared to July
31, 2003. Finished goods inventories ($727,733,000 at July 31, 2004) increased
10% and 15% versus January 31, 2004 and July 31, 2003 largely due to new and
anticipated store openings and expanded product offerings. Raw material and
work-in-process inventories ($311,489,000 at July 31, 2004) increased 44% and
69% versus January 31, 2004 and July 31, 2003 to support the expansion of
internal jewelry manufacturing activities and direct rough-diamond sourcing
operations. Management expects that inventory levels will increase in 2004 to
support anticipated comparable store sales growth, new stores, product
introductions, strategic merchandising investments and the Company's ongoing
expansion of its rough-diamond sourcing operations, although management expects
the rate of growth to decelerate from current levels. The Company continually
strives to better manage its inventory investment by developing more effective
systems and processes for product development, assortment planning, sales
forecasting, supply-chain logistics, and store replenishment.
Capital Expenditures
- --------------------
Capital expenditures were $70,510,000 in the six months ended July 31, 2004,
compared with $210,513,000 in the prior-year period which included the purchase
of the Company's Tokyo flagship store (for approximately
20
$140,000,000 at the prevailing exchange rate at that time). Based on current
plans, management estimates that capital expenditures will be approximately
$180,000,000 in 2004 due to costs related to the opening and renovation of
stores and ongoing investments in new systems. In order to meet substantially
increased customer demand for diamond and other gemstone jewelry, the Company
intends to increase its internal jewelry manufacturing operations in 2005 by
complementing its existing manufacturing facility in Pelham, New York with an
additional facility. Management continues to expect that total capital
expenditures in future years will approximate 7-8% of net sales.
In 2000, the Company began a multi-year project to renovate and reconfigure its
New York flagship store in order to increase the total sales area by
approximately 25%, and to provide additional space for customer service,
customer hospitality and special exhibitions. The increase in the sales area was
completed in 2001 when the renovated second floor opened to provide an expanded
presentation of engagement and other jewelry. The renovated sixth floor that now
houses the customer service department opened in 2002. The renovated fourth
floor that offers tableware merchandise opened in 2003. In conjunction with the
New York store project, the Company relocated its after-sales service functions
and several of its administrative functions. The Company has spent approximately
$78,000,000 to date for the New York store and related projects. Based on
current plans, the Company estimates that the overall cost of these projects
will be $110,000,000 when completed in 2007.
Share Repurchases
- -----------------
In November 2003, the Board of Directors extended and increased the Company's
stock repurchase program ("Program"). The Program, which was due to expire in
November 2003, was extended until November 30, 2006; the remaining authorization
was increased by $100,000,000, allowing the Company to repurchase up to
$116,500,000 of the Company's outstanding Common Stock in addition to those
which had already been purchased as of November 2003. The timing of purchases
and the actual number of shares to be repurchased under the Program depends on a
variety of discretionary factors such as price and other market conditions. In
the three months ended July 31, 2004, the Company repurchased and retired
625,000 shares of Common Stock at a cost of $21,316,000, or an average cost of
$34.11 per share. In the six months ended July 31, 2004, the Company repurchased
and retired 735,000 shares of Common Stock at a cost of $25,445,000, or an
average cost of $34.62 per share. At July 31, 2004, there remained $91,055,000
of authorization for future repurchases.
Borrowings
- ----------
The Company's sources of working capital are internally-generated cash flows,
borrowings available under a multicurrency revolving credit facility ("Credit
Facility") and Little Switzerland's revolving credit facility guaranteed by the
Company ("LS Facility").
In June 2003, the Company's purchase of the land and building housing the Tokyo
flagship store was financed with a short-term yen 11,000,000,000 bridge loan
("Bridge Loan") with a bank. The loan had an interest rate of 0.58% and matured
on September 30, 2003. The loan was paid in full upon maturity. In September
2003, the Company issued yen 15,000,000,000 of senior unsecured First Series Yen
denominated Bonds ("Bonds") due 2010 with principal due upon maturity and a
fixed coupon rate of 2.02% payable in semi-annual installments. The Bonds were
sold in a private transaction to qualified institutional investors in Japan. The
proceeds from the issuance were primarily used by the Company to repay the
Bridge Loan.
21
The Company intends to enter into a new short-term borrowing arrangement for yen
5,000,000,000, to be due in January 2005, concurrent with the scheduled
repayment of the yen 5,500,000,000 five-year loan due in October 2004. Based on
the Company's financial position at July 31, 2004, management anticipates that
internally-generated cash flows, the funds available under the Credit Facility
and the proposed yen 5,000,000,000 short-term borrowing will be sufficient to
support the Company's planned worldwide business expansion and seasonal working
capital increases that are typically required during the third and fourth
quarters of the year.
The Company's contractual cash obligations and commercial commitments at July
31, 2004 and the effects such obligations and commitments are expected to have
on the Company's liquidity and cash flows in future periods have not
significantly changed since January 31, 2004.
Market Risk
- -----------
The Company is exposed to market risk from fluctuations in foreign currency
exchange rates and interest rates, which could affect its consolidated financial
position, earnings and cash flows. The Company manages its exposure to market
risk through its regular operating and financing activities and, when deemed
appropriate, through the use of derivative financial instruments. The Company
uses derivative financial instruments as risk management tools and not for
trading or speculative purposes, and does not maintain such instruments that may
expose the Company to significant market risk.
The Company uses yen currency-purchased put options and, to a lesser extent,
foreign-exchange forward contracts, to minimize the impact of a strengthening of
the U.S. dollar on foreign currency-denominated transactions. Gains or losses on
these instruments substantially offset losses or gains on the assets,
liabilities and transactions being hedged. Management neither foresees nor
expects significant changes in foreign currency exposure in the near future.
The fair value of the Company's fixed-rate long-term debt, including the current
portion of long-term debt, is sensitive to interest rate changes. Interest rate
changes would result in gains (losses) in the market value of this debt due to
differences between market interest rates and rates at the inception of the debt
obligation. In order to manage the exposure to interest rate changes, the
Company entered into an interest-rate swap to reduce the amount of fixed-rate
debt exposed to interest rate movements. The Company also uses an interest-rate
swap to manage its yen-denominated floating-rate long-term debt in order to
reduce the impact of interest rate changes on earnings and cash flows.
Management neither foresees nor expects significant changes in exposure to
interest rate fluctuations, nor in market risk-management practices.
Seasonality
- -----------
As a jeweler and specialty retailer, the Company's business is seasonal in
nature, with the fourth quarter typically representing a proportionally greater
percentage of annual sales, earnings from operations and cash flow. Management
expects such seasonality to continue.
Risk Factors
- ------------
This document contains certain "forward-looking statements" concerning the
Company's objectives and expectations with respect to store openings, retail
prices, gross profit, expenses, inventory performance, capital expenditures
22
and cash flow. In addition, management makes other forward-looking statements
from time to time concerning objectives and expectations. As a jeweler and
specialty retailer, the Company's success in achieving its objectives and
expectations is partially dependent upon economic conditions, competitive
developments and consumer attitudes, including changes in consumer preferences
for certain jewelry styles. However, certain assumptions are specific to the
Company and/or the markets in which it operates. The following assumptions,
among others, are "risk factors" which could affect the likelihood that the
Company will achieve the objectives and expectations communicated by management:
(i) that low or negative growth in the economy or in the financial markets,
particularly in the U.S. and Japan, will not occur and reduce discretionary
spending on goods that are, or are perceived to be, "luxuries"; (ii) that
consumer spending does not decline substantially during the fourth quarter of
any year; (iii) that unsettled regional and/or global conflicts or crises do not
result in military, terrorist or other conditions creating disruptions or
disincentives to, or changes in the pattern, practice or frequency of tourist
travel to the various regions where the Company operates retail stores nor to
the Company's continuing ability to operate in those regions; (iv) that sales in
Japan will not decline substantially; (v) that there will not be a substantial
adverse change in the exchange relationship between the Japanese yen and the
U.S. dollar; (vi) that Mitsukoshi and other department store operators in Japan,
in the face of declining or stagnant department store sales, will not close or
consolidate stores which have TIFFANY & CO. retail locations; (vii) that
Mitsukoshi will continue as a leading department store operator in Japan; (viii)
that existing product supply arrangements, including license arrangements with
third-party designers Elsa Peretti and Paloma Picasso, will continue; (ix) that
the wholesale market for high-quality rough and cut diamonds will provide
continuity of supply and pricing; (x) that the investment in Aber achieves its
financial and strategic objectives; (xi) that new systems, particularly for
inventory management, can be successfully integrated into the Company's
operations; (xii) that distribution and manufacturing productivity and capacity
can be further improved to support the Company's expanding requirements; (xiii)
that new and existing stores and other sales locations can be leased, re-leased
or otherwise obtained on suitable terms in desired markets and that construction
can be completed on a timely basis; (xiv) that the Company can successfully
improve the results of Little Switzerland and achieve satisfactory results from
any future ventures into which it enters that are operated under non-TIFFANY &
CO. trademarks or trade names; and (xv) that the Company's expansion plans for
retail and direct selling operations and merchandise development, production and
management can continue to be executed without meaningfully diminishing the
distinctive appeal of the TIFFANY & CO. brand.
23
Part I. Financial Information
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures was carried out by the Company
under the supervision and with the participation of the Company's management,
including the Chief Executive Officer and Chief Financial Officer. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the date of their evaluation and as of July 31, 2004, the Company's
disclosure controls and procedures have been designed and are being operated in
a manner that provides reasonable assurance that the information required to be
disclosed by the Company in reports filed under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. The Company believes that a controls
system, no matter how well designed and operated, cannot provide absolute
assurance that the objectives of the controls system are met, and no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within a company have been detected.
(b) Changes in Internal Controls
Subsequent to the date of the most recent evaluation of the Company's
internal controls, there were no significant changes in the Company's internal
controls or in other factors that could significantly affect the internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
24
PART II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
This table provides information with respect to purchases by the Company of
shares of its Common Stock during the second fiscal quarter of 2004:
- ----------------------------------------------------------------------------------------------------------
Total Number Approximate
of Shares Dollar Value
Purchased as of Shares that
Total Average Part of a May Yet be
Number of Price Publicly Purchased
Shares Paid Per Announced Under the
Period Purchased Share Program* Program*
- ---------------------------------------------------------------------------------------------------------
May 1, 2004
through
May 31, 2004 500,000 $33.40 3,863,800 $95,671,000
- ---------------------------------------------------------------------------------------------------------
June 1, 2004
through
June 30, 2004 125,000 $36.95 3,988,800 $91,055,000
- ---------------------------------------------------------------------------------------------------------
July 1, 2004
through
July 31, 2004 - - 3,988,800 $91,055,000
- ---------------------------------------------------------------------------------------------------------
Total 625,000 $34.11 3,988,800 $91,055,000
- ---------------------------------------------------------------------------------------------------------
* In November 2003, the Board of Directors expanded the Company's stock
repurchase program, which was first announced on September 21, 2000 and
scheduled to expire in November 2003; the Board extended the program until
November 30, 2006 and increased the remaining authorization by $100,000,000,
allowing the Company to repurchase up to $116,500,000 of the Company's
outstanding Common Stock in addition to those which already had been purchased.
Under a prior program, which expired in 2000, the Company had purchased
4,484,400 shares.
25
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.
At Registrant's Annual Meeting of Stockholders held on May 20, 2004 each of
the nominees listed below was elected a director of Registrant to hold office
until the next annual meeting of the stockholders and until his or her
respective successor has been elected and qualified. Tabulated with the name of
each of the nominees elected is the number of Common shares cast for each
nominee and the number of Common shares withholding authority to vote for each
nominee. There were no broker non-votes or abstentions with respect to the
election of directors.
Nominee Voted For Withholding Authority
Michael J. Kowalski 128,279,382 2,765,964
Rose Marie Bravo 129,987,256 1,058,090
William R. Chaney 128,233,162 2,812,184
Samuel L. Hayes III 127,765,250 3,280,096
Abby F. Kohnstamm 104,091,524 26,953,822
Charles K. Marquis 127,355,781 3,689,565
J. Thomas Presby 128,894,948 2,150,398
James E. Quinn 128,684,307 2,361,039
William A. Shutzer 124,551,787 6,493,559
At such meeting, the stockholders approved the appointment of
PricewaterhouseCoopers LLP as independent auditors of the Company's fiscal
2004 financial statements. With respect to such appointment, 127,967,840
shares were voted to approve, 2,369,278 were voted against, and 708,228
shares abstained from voting. There were no broker non-votes with respect
to the approval of the appointment of PricewaterhouseCoopers LLP.
26
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
31.1 Certification by Michael J. Kowalski pursuant to
Section 302 of Sarbanes-Oxley Act of 2002.
31.2 Certification by James N. Fernandez pursuant to Section
302 of Sarbanes-Oxley Act of 2002.
32 Certification by Michael J. Kowalski and James N.
Fernandez pursuant to Section 906 of Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K:
On May 13, 2004, Registrant filed a Report on Form 8-K reporting
the issuance of a press release announcing its unaudited earnings
and results of operations for the first quarter ended April 30,
2004.
On May 18, 2004, Registrant filed a Report on Form 8-K reporting
the issuance of a press release announcing the appointment of
Robert L. Cepek as president of a new retail jewelry venture that
will operate under the trade name IRIDESSE.
On May 20, 2004, Registrant filed a Report on Form 8-K reporting
the issuance of a press release announcing an increase in its
quarterly dividend by 20%.
27
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TIFFANY & CO.
(Registrant)
Date: September 2, 2004 By: /s/ James N. Fernandez
----------------------------
James N. Fernandez
Executive Vice President and
Chief Financial Officer
(principal financial officer)
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NUMBER
31.1 Certification by Michael J. Kowalski pursuant to Section
302 of Sarbanes-Oxley Act of 2002.
31.2 Certification by James N. Fernandez pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
32 Joint certification by Michael J. Kowalski and James N. Fernandez
pursuant to Section 906 of Sarbanes-Oxley Act of 2002.