UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
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(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarter ended April 30, 2005. 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 .
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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, 143,688,544 shares outstanding at the close
of business on May 31, 2005.
TIFFANY & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED APRIL 30, 2005
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - April 30, 2005,
January 31, 2005 and April 30, 2004 (Unaudited) 3
Condensed Consolidated Statements of Earnings - for the
three months ended April 30, 2005 and 2004 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows - for the
three months ended April 30, 2005 and 2004 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-19
Item 4. Controls and Procedures 20
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(e) Issuer Purchases of Equity Securities 21
Item 6. Exhibits and Reports on Form 8-K 22
(a) Exhibits
(b) Reports on Form 8-K
2
PART I. Financial Information
Item 1. Financial Statements
TIFFANY & CO. AND SUBSIDIARIES
------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Unaudited)
-----------
(in thousands, except per share amounts)
April 30, January 31, April 30,
2005 2005 2004
-------------- -------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 213,708 $ 187,681 $ 190,793
Short-term investments - 139,200 -
Accounts receivable, less allowances
of $6,181 $7,491 and $5,053 120,713 133,545 115,512
Inventories, net 1,073,605 1,057,245 964,954
Deferred income taxes 69,385 64,790 48,624
Prepaid expenses and other current assets 41,119 25,428 40,410
---------------- ---------------- ----------------
Total current assets 1,518,530 1,607,889 1,360,293
Property, plant and equipment, net 917,415 917,853 879,105
Other assets, net 140,512 140,376 180,360
---------------- ---------------- ----------------
$ 2,576,457 $ 2,666,118 $ 2,419,758
=============== =============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 47,488 $ 42,957 $ 95,842
Current portion of long-term debt - - 49,973
Accounts payable and accrued liabilities 177,514 186,013 185,594
Income taxes payable 35,137 118,536 26,544
Merchandise and other customer credits 52,084 52,315 46,413
---------------- ---------------- ----------------
Total current liabilities 312,223 399,821 404,366
Long-term debt 392,178 397,606 382,883
Postretirement/employment benefit obligations 40,449 40,220 37,287
Deferred income taxes 21,666 33,175 18,516
Other long-term liabilities 99,409 94,136 79,756
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value; authorized 240,000 shares,
issued and outstanding 143,830, 144,548 and 146,845 1,438 1,445 1,468
Additional paid-in capital 439,235 426,308 407,575
Retained earnings 1,245,309 1,246,331 1,083,706
Accumulated other comprehensive gain (loss), net of tax:
Foreign currency translation adjustments 26,000 29,045 6,433
Deferred hedging losses (1,449) (2,118) (1,447)
Unrealized (losses) gains on marketable securities (1) 149 (785)
---------------- ---------------- ----------------
Total stockholders' equity 1,710,532 1,701,160 1,496,950
---------------- ---------------- ----------------
$ 2,576,457 $ 2,666,118 $ 2,419,758
================= ================= ================
See notes to condensed consolidated financial statements
3
TIFFANY & CO. AND SUBSIDIARIES
------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
---------------------------------------------
(Unaudited)
-----------
(in thousands, except per share amounts)
Three Months Ended
April 30,
-----------------------------
2005 2004
------------- ------------
Net sales $ 509,901 $ 456,960
Cost of sales 235,080 198,084
------------- ------------
Gross profit 274,821 258,876
Selling, general and administrative expenses 208,510 196,181
-------------- ------------
Earnings from operations 66,311 62,695
Other expenses, net 4,206 3,324
------------- ------------
Earnings before income taxes 62,105 59,371
Provision for income taxes 22,047 22,560
------------- ------------
Net earnings $ 40,058 $ 36,811
------------- ------------
Net earnings per share:
Basic $ 0.28 $ 0.25
------------- ------------
Diluted $ 0.27 $ 0.25
------------- ------------
Weighted average number of common shares:
Basic 144,248 146,815
Diluted 146,285 149,289
See notes to condensed consolidated financial statements.
4
TIFFANY & CO. AND SUBSIDIARIES
------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
----------
(in thousands)
Three Months Ended
April 30,
---------------------------------------
2005 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 40,058 $ 36,811
Adjustments to reconcile net earnings to net cash
(used in) provided by operating activities:
Depreciation and amortization 27,987 24,944
Gain on equity investments - (137)
Provision for uncollectible accounts 508 390
Provision for inventories 1,742 1,583
Deferred income taxes (14,869) (3,758)
Provision for postretirement/employment benefits 228 541
Stock compensation expense 6,173 5,641
Excess tax benefits from share-based payment arrangements (821) (892)
Deferred hedging losses transferred to earnings 768 772
Changes in assets and liabilities:
Accounts receivable 7,001 16,465
Inventories (22,963) (106,610)
Prepaid expenses and other current assets (15,541) (16,428)
Other assets, net (770) (1,626)
Accounts payable 3,185 3,506
Accrued liabilities (6,823) (25,767)
Income taxes payable (81,896) (17,033)
Merchandise and other customer credits (236) 932
Other long-term liabilities 10,524 5,731
----------------- ----------------
Net cash used in operating activities (45,745) (74,935)
----------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (31,879) (28,964)
Proceeds from sale of marketable securities and short-term investments 238,175 49,370
Purchases of marketable securities and short-term investments (99,168) (46,347)
Purchases of other investments (656) -
Proceeds from sale of other investments 252 -
----------------- ----------------
Net cash provided by (used in) investing activities 106,724 (25,941)
----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings, net 4,843 55,088
Excess tax benefits from share-based payment arrangements 821 892
Repurchase of Common Stock (33,978) (4,129)
Proceeds from exercise of stock options 2,632 2,606
Cash dividends on Common Stock (8,668) (7,346)
----------------- ----------------
Net cash (used in) provided by financing activities (34,350) 47,111
----------------- ----------------
Effect of exchange rate changes on
cash and cash equivalents (602) (4,107)
----------------- ----------------
Net increase (decrease) in cash and cash equivalents 26,027 (57,872)
Cash and cash equivalents at beginning of year 187,681 248,665
----------------- ----------------
Cash and cash equivalents at end of three months $ 213,708 $ 190,793
================= ================
See notes to condensed consolidated financial statements.
5
TIFFANY & CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed 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 April 30, 2005 and the results of its operations and
cash flows for the interim periods presented. The condensed
consolidated balance sheet data for January 31, 2005 is derived from
the audited financial statements, which are included in the Company's
report on Form 10-K and 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 months ended
April 30, 2005 and 2004 are not necessarily indicative of the results
of the entire fiscal year.
2. NEW ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123R,
"Share-Based Payment." This statement replaces SFAS No. 123,
"Accounting for Stock-Based Compensation" and supersedes Accounting
Principles Board "("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." SFAS No. 123R requires that new, modified and vested
share-based payment transactions with employees be measured at
fair-value and recognized as compensation expense over the vesting
period. The Company adopted SFAS No. 123R in the fourth quarter of
2004, retroactive to February 1, 2004, using the modified
retrospective method of transition which allowed for the restatement
of interim financial statements based on the amounts previously
calculated and reported in the pro forma footnote disclosures required
by SFAS No. 123. The results of the restatement for the three months
ended April 30, 2004 had the effect of reducing earnings from
operations by $5,641,000, reducing net earnings by $3,497,000 and
reducing basic and diluted earnings per share by $0.02. The balance
sheet and statement of cash flows as of and for the three months ended
April 30, 2004 were also restated accordingly.
6
NEW ACCOUNTING STANDARDS (continued)
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs-an
amendment of ARB No. 43, Chapter 4". SFAS No. 151 amends the guidance
in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, freight,
handling costs and wasted material (spoilage). This Statement requires
that those items be recognized as current period charges. In addition,
SFAS No. 151 requires that allocation of fixed production overheads to
the costs of conversion be based on the normal capacity of the
production facilities. SFAS No. 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. Management
is currently evaluating the effect that the adoption of this statement
will have on the Company's financial position, earnings or cash flows.
3. INVENTORIES
April 30, January 31, April 30,
(in thousands) 2005 2005 2004
------------------------------------------------------------------------------------
Finished goods $ 792,103 $771,192 $697,357
Raw materials 236,695 236,802 212,127
Work-in-process 49,460 53,988 60,152
--------------- -------------- ---------------
1,078,258 1,061,982 969,636
Reserves (4,653) (4,737) (4,682)
--------------- --------------- ---------------
Inventories, net $1,073,605 $1,057,245 $964,954
=============== =============== ===============
LIFO-based inventories at April 30, 2005, January 31, 2005 and April
30, 2004 represented 68%, 66% and 69% of inventories, net, with the
current cost exceeding the LIFO inventory value by $65,276,000,
$64,058,000 and $34,161,000 at the end of each period.
4. INCOME TAXES
The effective income tax rate for the three months ended April 30,
2005 and 2004 was 35.5% and 38.0%. The decrease from the prior year's
tax rate was primarily due to a tax benefit recognized in the first
quarter of 2005 related to the anticipated fiscal year 2005
repatriation of approximately $100,000,000 of accumulated foreign
earnings in the form of extraordinary dividends, provided for in the
American Jobs Creation Act of 2004 ("AJCA").
In May 2005, the Internal Revenue Service clarified certain provisions
of the AJCA related to the U.S. tax consequences of repatriation of
extraordinary dividends from foreign subsidiaries. As a result of this
clarification, it is anticipated that the Company will recognize an
additional benefit of approximately $6,500,000 in the second quarter
of 2005.
The AJCA also provides a deduction for income from qualified domestic
production activities ("manufacturing deduction"), which will be
phased in from 2005 through 2010. Pursuant to FASB Staff Position No.
109-1, "Application of SFAS No. 109 (Accounting for Income Taxes), to
the Tax Deduction on Qualified Production Activities provided by the
AJCA," the effect of this deduction is reported in the period in which
it is claimed on the Company's tax return. Although the Company
recorded a tax benefit for the manufacturing deduction, the amount of
the benefit is immaterial in the first quarter and is anticipated to
be immaterial for the year.
7
INCOME TAXES (continued)
In return for this manufacturing deduction, the AJCA provides for a
two-year transition from the existing ETI exclusion tax benefit for
foreign sales, which the World Trade Organization ("WTO") ruled was an
illegal export subsidy. The European Union believes that the AJCA
fails to adequately repeal illegal export subsidies because of these
transitional provisions and has asked the WTO to review whether these
transitional provisions are in compliance with the WTO's prior ruling.
Until the final resolution of this matter, management will be unable
to predict what impact, if any, this will have on future earnings.
5. 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 include the dilutive effect of the assumed
exercise of stock options and restricted stock units.
The following table summarizes the reconciliation of the numerators
and denominators for the basic and diluted earnings per share
("EPS")computations:
Three Months Ended
April 30,
---------------------------------------------
(in thousands) 2005 2004
------------------------------------------------------------------------------------------------
Net earnings for basic
and diluted EPS $40,058 $36,811
=================== ======================
Weighted average shares for basic
EPS 144,248 146,815
Incremental shares based upon the
assumed exercise of stock
options and restricted stock
units 2,037 2,474
------------------- ----------------------
Weighted average shares for
diluted EPS 146,285 149,289
=================== ======================
For the three months ended April 30, 2005 and 2004, there were
7,422,000 and 5,136,000 stock options excluded from the computations
of earnings per diluted share due to their antidilutive effect.
8
6. COMPREHENSIVE EARNINGS
The components of comprehensive earnings were:
Three Months Ended
April 30,
-------------------------------------
(in thousands) 2005 2004
-------------------------------------------------------------------------------------
Net earnings $40,058 $36,811
Other comprehensive gain (loss), net
of tax:
Deferred hedging gains 669 1,061
Foreign currency translation
adjustments (3,045) (9,423)
Unrealized losses on marketable
securities (150) (785)
------------------ ------------------
Comprehensive earnings $37,532 $27,664
------------------ ------------------
7. EMPLOYEE BENEFIT PLANS
The Company maintains several pension and retirement plans, as well as
providing certain health-care and life insurance benefits.
Net periodic pension and other postretirement benefit expense included
the following components:
Three Months Ended April 30,
--------------------------------------------------------
Other
Postretirement
Pension Benefits Benefits
------------------------------- ------------------------
(in thousands) 2005 2004 2005 2004
-------------------------------------------------- --------------- --------------- ------------ ----------
Service cost $3,181 $ 2,699 $ 342 $ 307
Interest cost 2,904 2,640 421 418
Expected return on plan assets (2,519) (2,079) - -
Amortization of prior service
cost 201 201 (298) (303)
Amortization of net loss 592 395 89 98
--------------- --------------- ------------ -----------
Net expense $4,359 $ 3,856 $ 554 $ 520
=============== =============== ============ ===========
8. SEGMENT INFORMATION
The Company's reportable segments are: U.S. Retail, International
Retail and Direct Marketing (see Management's Discussion and Analysis
of Financial Condition and Results of Operations for an overview of
the Company's business). These reportable segments represent channels
of distribution that offer similar merchandise and service and have
similar marketing and distribution strategies. Its Other channel of
distribution includes all non-reportable segments which consist of
worldwide sales and businesses operated under non-TIFFANY & CO.
trademarks or trade names, as well as sales associated with the
Company's diamond sourcing and manufacturing operations. 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.
9
SEGMENT INFORMATION (continued)
Reclassifications were made to the prior year's earnings (losses) from
operations by segment to conform to the current year presentation and
to reflect the revised manner in which management evaluates the
performance of segments. The reclassifications resulted in LIFO costs
being included in segment results, as opposed to unallocated corporate
expenses where it was previously included.
Certain information relating to the Company's segments is set forth
below:
Three Months Ended
April 30,
-----------------------------
(in thousands) 2005 2004
-----------------------------------------------------------------------------------
Net sales:
U.S. Retail $243,411 $213,662
International Retail 190,316 184,731
Direct Marketing 41,377 36,899
Other 34,797 21,668
--------------- ---------------
$509,901 $456,960
--------------- ---------------
Earnings(losses)from operations*:
U.S. Retail $ 47,954 $ 41,165
International Retail 43,675 49,292
Direct Marketing 7,380 4,724
Other (1,515) (1,336)
--------------- ---------------
$ 97,494 $ 93,845
=============== ===============
* Represents earnings from operations before unallocated corporate
expenses and other expenses, net.
The following table sets forth a reconciliation of the segment's
earnings from operations to the Company's consolidated earnings before
income taxes:
Three Months Ended
April 30,
-----------------------------
(in thousands) 2005 2004
-------------------------------------------------------------------------------------
Earning from operations for
segments $ 97,494 $ 93,845
Unallocated corporate expenses
(31,183) (31,150)
Other expenses, net (4,206) (3,324)
--------------- ---------------
Earnings before income taxes $ 62,105 $ 59,371
=============== ===============
Unallocated corporate expenses include costs related to the Company's
administrative support functions, such as information technology,
finance, legal and human resources, which the Company does not
allocate to its segments.
9. SUBSEQUENT EVENT
On May 19, 2005, the Company's Board of Directors declared an increase
in the quarterly dividend rate, increasing it by 33% from $0.06 per
share to $0.08 per share. This dividend will be paid on July 11, 2005
to stockholders of record on June 20, 2005.
10
PART I. Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW
- --------
Tiffany & Co. is a holding company that operates through its subsidiary
companies (the "Company"). The Company's principal subsidiary, Tiffany and
Company, is a jeweler and specialty retailer whose merchandise offerings include
an extensive selection of fine jewelry, as well as timepieces, sterling
silverware, china, crystal, stationery, fragrances and accessories. Through
Tiffany and Company and other subsidiaries, the Company is engaged in product
design, manufacturing and retailing activities.
The Company's channels of distribution are as follows:
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 a limited amount of
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 Other - worldwide sales of businesses operated under non-TIFFANY & CO.
trademarks or trade names ("specialty retail"), as well as sales of
diamonds associated with the Company's diamond sourcing and manufacturing
operations.
All references to years relate to the fiscal year that ends on January 31 of the
following calendar year.
A store's sales are included in "comparable store sales" when the store has been
open for more than 12 months. 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 12% to $509,901,000 in the three months ended April 30, 2005
("first quarter") led by strong U.S. comparable store sales growth. 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 (see Non-GAAP Measures section below), net
sales rose 11% and worldwide comparable store sales rose 4%.
Gross margin (gross profit as a percentage of net sales) declined primarily due
to changes in geographic and product sales mix and higher product costs.
Selling, general and administrative ("SG&A") expenses as a percentage of net
sales improved due to sales leverage on fixed costs. As a result, net earnings
in the first quarter increased 9% to $40,058,000, or $0.27 per diluted share,
versus $36,811,000, or $0.25 per diluted share, in the prior year.
NON-GAAP MEASURES
- -----------------
The Company reports information in accordance with U.S. Generally Accepted
Accounting Principles ("GAAP"). Internally, management monitors the sales
performance of its international stores and boutiques on a non-GAAP basis that
eliminates the positive or negative effects that result from translating
11
international sales 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 stores
and boutiques and provides better comparability between reporting periods.
The Company's management does not, 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 the Company's operating
results.
The following tables reconcile net sales percentage increases (decreases) for
the first quarter of 2005 versus the first quarter of 2004, as measured and
reported in accordance with GAAP to the non-GAAP constant-exchange-rate basis:
Net Sales Comparable Store Sales
-------------------------------------------- ------------------------------------------
Constant- Constant-
Trans- Exchange- Trans- Exchange-
GAAP lation Rate GAAP lation Rate
Reported Effect Basis Reported Effect Basis
-------------- ------------- --------------- -------------- ----------- ---------------
Worldwide 12% 1% 11% 5% 1% 4%
U.S. Retail 14% -% 14% 11% -% 11%
International
Retail 3% 2% 1% (3%) 3% (6%)
Japan (3%) 2% (5%) (8%) 2% (10%)
Other Asia-
Pacific 18% 4% 14% 9% 4% 5%
Europe 10% 4% 6% 2% 5% (3%)
RESULTS OF OPERATIONS
- ---------------------
Certain operating data as a percentage of net sales were as follows:
First Quarter
-------------
2005 2004
-------------------
Net sales 100.0% 100.0%
Cost of sales 46.1 43.3
-------------------
Gross profit 53.9 56.7
Selling, general
and administrative expenses 40.9 42.9
-------------------
Earnings from operations 13.0 13.8
Other expenses, net 0.8 0.8
-------------------
Earnings before income taxes 12.2 13.0
Provision for income taxes 4.3 4.9
-------------------
Net earnings 7.9% 8.1%
===================
12
Net Sales
- ---------
Net sales by channel of distribution were as follows:
First Quarter
-------------
(in thousands) 2005 2004
- -------------- --------------------
U.S. Retail $243,411 $213,662
International Retail 190,316 184,731
Direct Marketing 41,377 36,899
Other 34,797 21,668
---------------------
$509,901 $456,960
=====================
U.S. Retail sales increased 14% in the first quarter. Growth was primarily
generated by sales of higher-priced jewelry and, to a lesser extent, by an
increased number of transactions. Comparable store sales rose 11%, due to 11%
growth in the New York flagship store (primarily from increased spending by
tourists) and a geographically broad-based 11% increase in branch stores.
International Retail sales increased 3% in the first quarter. On a
constant-exchange-rate basis, International Retail sales increased 1%, but
comparable store sales declined 6%.
In Japan, on a constant-exchange-rate basis, total retail sales declined 5% in
the first quarter and comparable store sales declined 10%. Sales declined in
most product categories. Management believes that Japan sales have been affected
partly by generally weak consumer spending on jewelry, increased "luxury-goods"
competition and shifts in consumer demand, particularly for silver jewelry. In
addition, management has, in recent years, increased average price points and
introduced selections at higher price points in the silver jewelry category,
which adversely affected sales. Sales in the silver jewelry category (which
represented 23% of Japan's total retail sales in full year 2004) declined in the
first quarter. Management continues to focus on new product introductions,
publicity and targeted marketing initiatives, as well as enhancing the shopping
and customer service experience in its stores and boutiques.
In the Asia-Pacific region outside of Japan, comparable store sales on a
constant-exchange-rate basis increased 5% in the first quarter due to
particularly strong growth in Hong Kong and Australia. In Europe, comparable
store sales on a constant-exchange-rate basis declined 3% in the first quarter
primarily due to a decline in London's comparable store sales.
Direct Marketing sales rose 12% in the first quarter. Combined Internet/catalog
sales increased 14% in the first quarter due to growth in the number of orders
shipped and in the average amount spent per order. Sales in the Business Sales
division increased 9% in the first quarter due to growth in the number of orders
shipped and in the average order size.
Other sales increased 61% in the first quarter. Approximately two-thirds of the
increase resulted from wholesale sales of rough diamonds that the Company
determined, in the normal course of business, were not suitable for production;
such sales commenced in the third quarter of 2004 and will continue on a regular
basis. The increase was also due to growth in the Company's three specialty
retail businesses, including 18% sales growth in LITTLE SWITZERLAND stores.
Increased wholesale sales of TEMPLE ST. CLAIR jewelry and sales from the first
two IRIDESSE stores, which opened in fall 2004 and focus exclusively on the
pearl jewelry category, were positive but smaller factors.
13
Management's plan to open or close TIFFANY & CO. stores in 2005 are shown below
and would represent a 3% net increase in gross square footage:
Openings
Location (Closings) 2005 Expected Openings 2005
- -------- --------------- ----------------------
Mitsukoshi, Osaka, Japan (First Quarter)
Mitsukoshi, Yokohama, Japan (First Quarter)
Mitsukoshi, Kurashiki, Japan (First Quarter)
Mitsukoshi, Fukuoka, Japan (First Quarter)
Carmel, California Second Quarter
Pasadena, California Second Half
Naples, Florida Second Half
San Antonio, Texas Second Half
Brisbane, Australia Second Quarter
Paris, France Second Quarter
Japan (2) Second Half
Gross Margin
- ------------
Gross margin declined in the first quarter by 2.8 percentage points.
Approximately 1.8 points of the decline resulted from changes in geographic and
product sales mix away from Japan and silver jewelry and toward higher-priced,
lower-margin diamond jewelry, as well as higher product costs. The remaining
decline primarily related to wholesale sales of rough diamonds, which earn a
minimal or no gross margin.
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 product
manufacturing/sourcing efficiencies (including increased direct rough-diamond
sourcing and internal manufacturing), controlling costs and implementing
selective price adjustments in order to maintain the Company's gross margin at,
or above, prior year levels. Near the end of the first quarter, the Company
increased certain U.S. retail prices; these price increases were taken in
response to higher raw materials costs related to diamond and platinum jewelry.
However, management expects a modest year-over-year decline in gross margin in
2005 due to the continued effect from sales mix and other adverse factors.
Selling, General and Administrative Expenses
- --------------------------------------------
SG&A expenses increased 6% in the first quarter. Approximately half of the
increase was due to higher labor costs and the balance to growth in depreciation
and occupancy expenses. As a percentage of net sales, SG&A expenses improved in
the first quarter due to the strong sales growth. Management's objective is to
continue to improve the ratio of SG&A expenses to net sales by controlling
expenses so that anticipated sales growth will result in improved earnings.
Management expects a low-to-mid single-digit percentage increase in SG&A
expenses in 2005 and a corresponding improvement in the expense ratio versus the
prior year.
14
Earnings from Operations
First Quarter
---------------------------------------
(in thousands) 2005 2004
- ----------------------------------------------------------------------------------------------
Earnings (losses) from operations:
U.S. Retail $ 47,954 $ 41,165
International Retail 43,675 49,292
Direct Marketing 7,380 4,724
Other (1,515) (1,336)
---------------------------------------
Earnings from operations for reportable
segments 97,494 93,845
Unallocated corporate expenses (31,183) (31,150)
---------------------------------------
Earnings from operations $ 66,311 $ 62,695
=======================================
Earnings from operations rose 6% in the first 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 first quarter of 2005 and 2004 were as follows:
o U.S. Retail: 20% in 2005 versus 19% in 2004 (increase was primarily due to
increased sales, partly offset by lower gross margin from changes in sales
mix and higher product costs);
o International Retail: 23% in 2005 versus 27% in 2004 (decrease was
primarily due to lower gross margin resulting from changes in geographic
and product sales mix and insufficient sales growth to absorb the rate of
increase in fixed costs);
o Direct Marketing: 18% in 2005 versus 13% in 2004 (increase was primarily
due to increased sales and minimal increases in expenses); and
o Other:(4)% in 2005 versus (6)% in 2004 (improvement was primarily due to
increased sales and the leveraging of fixed expenses).
Unallocated corporate expenses include costs related to the Company's
administrative support functions such as information technology, finance, legal
and human resources.
Other Expenses, Net
- -------------------
Other expenses, net in the first quarter were higher than the prior year
primarily due to an increase in interest expense.
Provision for Income Taxes
- --------------------------
The effective income tax rate for the three months ended April 30, 2005 and 2004
was 35.5% and 38.0%. The decrease from the prior year's tax rate was primarily
due to a tax benefit recognized in the first quarter of 2005 related to the
anticipated fiscal year 2005 repatriation of approximately $100,000,000 of
accumulated foreign earnings in the form of extraordinary dividends, as provided
for in the American Jobs Creation Act of 2004 ("AJCA").
In May 2005, the Internal Revenue Service clarified certain provisions of the
AJCA related to the U.S. tax consequences of repatriation of extraordinary
dividends from foreign subsidiaries. As a result of this clarification, it is
anticipated that the Company will recognize an additional benefit of
approximately $6,500,000 in the second quarter of 2005.
The AJCA also provides a deduction for income from qualified domestic production
activities ("manufacturing deduction"), which will be phased in from 2005
through 2010. Pursuant to FASB Staff Position No. 109-1, "Application of SFAS
No. 109 (Accounting for Income Taxes), to the Tax Deduction on Qualified
Production Activities provided by the AJCA," the
15
effect of this deduction is reported in the period in which it is claimed on the
Company's tax return. Although the Company recorded a tax benefit for the
manufacturing deduction, the amount of the benefit is immaterial in the first
quarter and is anticipated to be immaterial for the year.
In return for this manufacturing deduction, the AJCA provides for a two-year
transition from the existing ETI exclusion tax benefit for foreign sales, which
the World Trade Organization ("WTO") ruled was an illegal export subsidy. The
European Union believes that the AJCA fails to adequately repeal illegal export
subsidies because of these transitional provisions and has asked the WTO to
review whether these transitional provisions are in compliance with the WTO's
prior ruling. Until the final resolution of this matter, management will be
unable to predict what impact, if any, it will have on future earnings.
New Accounting Standards
- ------------------------
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based
Payment." This statement replaces SFAS No. 123, "Accounting for Stock-Based
Compensation" and supersedes Accounting Principles Board "("APB") Opinion No.
25, "Accounting for Stock Issued to Employees." SFAS No. 123R requires that new,
modified and unvested share-based payment transactions with employees be
measured at fair value and recognized as compensation over the vesting period.
The Company adopted SFAS No. 123R in the fourth quarter of 2004, retroactive to
February 1, 2004, using the modified retrospective method of transition which
allows for the restatement of interim financial statements based on the amounts
previously calculated and reported in the pro forma footnote disclosures
required by SFAS No. 123. The results of the restatement for the first quarter
of 2004 had the effect of reducing earnings from operations by $5,641,000,
reducing net earnings by $3,497,000 and reducing basic and diluted earnings per
share by $0.02. The balance sheet and statement of cash flows as of and for the
first quarter of 2004 were also restated accordingly.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs-an amendment of
ARB No. 43, Chapter 4". SFAS No. 151 amends the guidance in ARB No. 43, Chapter
4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs and wasted material (spoilage). This
Statement requires that those items be recognized as current period charges. In
addition, SFAS No. 151 requires that allocation of fixed production overheads to
the costs of conversion be based on the normal capacity of the production
facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. Management is currently evaluating the
effect that the adoption of this statement will have 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. The Company had a net cash outflow from operating activities of
$45,745,000 in the first quarter, compared with an outflow of $74,935,000 in the
first quarter of 2004. The reduced outflow was due to smaller growth in
inventories partly offset by increased tax payments largely associated with a
gain recognized on the sale of its equity holdings in Aber Diamond Corporation
in the fourth quarter of 2004.
Working Capital
- ---------------
Working capital (current assets less current liabilities) and the corresponding
current ratio (current assets divided by current liabilities)
16
were $1,206,307,000 and 4.9 at April 30, 2005, compared with $1,208,068,000 and
4.0 at January 31, 2005 and $955,927,000 and 3.4 at April 30, 2004.
Accounts receivable, less allowances at April 30, 2005 were 10% lower than at
January 31, 2005 (which is typically a seasonal high point) and were 5% higher
than at April 30, 2004 due to sales growth.
Inventories, net at April 30, 2005 were 2% above January 31, 2005 and 11% above
April 30, 2004. Combined raw material and work-in-process inventories decreased
2% versus January 31, 2005 and increased 5% versus April 30, 2004. The increase
versus April 30, 2004 resulted from expanded direct rough-diamond sourcing and
increased costs of raw materials. Finished goods inventories increased 3% versus
January 31, 2005 and 14% versus April 30, 2004 largely due to new and
anticipated store openings, anticipated comparable store sales growth, product
introductions and merchandising investments. Changes in foreign currency
exchange rates had an insignificant effect on the changes in inventory balances
from January 31, 2005 and April 30, 2004. The Company continually strives to
manage its inventories by developing more effective systems and processes for
product development, assortment planning, sales forecasting, supply-chain
logistics, and store replenishment. Management expects that the overall
year-over-year rate of inventory growth will decelerate from 21% in 2004 to a
mid-single-digit percentage increase in 2005.
Capital Expenditures
- --------------------
Capital expenditures were $31,879,000 in the first quarter compared with
$28,964,000 in the first quarter of 2004. Management estimates that capital
expenditures will be approximately $175,000,000 in 2005 due to costs related to
the opening and renovation of stores and manufacturing facilities and to ongoing
investments in new systems. Management continues to expect that total capital
expenditures in 2005 and beyond 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 Company has spent
approximately $83,300,000 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 Purchases
- ---------------
In March 2005, the Board of Directors approved a new stock purchase program
("2005 Program") that authorized the purchase of up to $400,000,000 of the
Company's common stock through March 2007 through open market or private
transactions. The 2005 Program replaced and terminated an earlier program. The
timing of purchases and the actual number of shares to be purchased depend on a
variety of discretionary factors such as price and other market conditions. In
the first quarter, the Company purchased and retired 1,036,792 shares of Common
Stock at a cost of $33,978,000, or an average cost of $32.77 per share. At April
30, 2005, there remained $375,004,000 of authorization for future purchases
under the 2005 Program. Future purchases under the 2005 Program in excess of
$134,000,000 are currently subject to lender approval under the Company's
primary Credit Facility.
Borrowings
- ----------
The Company's sources of working capital are internally-generated cash flows and
funds available under multicurrency revolving credit facilities.
The ratio of total debt (short-term borrowings and long-term debt) to
stockholders' equity was 26% at April 30, 2005, 26% at January 31, 2005 and 35%
at April 30, 2004.
17
Based on the Company's financial position at April 30, 2005, management
anticipates that cash on hand, internally-generated cash flows and the funds
available under revolving credit facilities will be sufficient to support the
Company's planned worldwide business expansion, share repurchases, debt service
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 April
30, 2005 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, 2005.
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.
In Japan, the Company uses yen put options to minimize the impact of a
strengthening of the U.S. dollar on yen-denominated transactions. To a lesser
extent, the Company uses foreign-exchange forward contracts to protect against
weakening local currencies. Gains or losses on these instruments substantially
offset losses or gains on the assets, liabilities and transactions being hedged.
Management does not expect significant changes in foreign currency exposure in
the near future.
The Company uses interest rate swap contracts related to certain debt
arrangements to manage its net exposure to interest rate changes and to reduce
its overall borrowing costs. The interest rate swap contracts effectively
convert fixed-rate obligations to floating-rate instruments. Additionally, since
the fair value of the Company's fixed-rate long-term debt is sensitive to
interest rate changes, the interest rate swap contracts serve as a hedge to
changes in the fair value of these debt instruments.
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 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 and materials. 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
18
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 and retail market for high-quality rough and cut diamonds will provide
continuity of supply and pricing; (x) that the Company's rough diamond sourcing
initiative achieves its financial and strategic objectives; (xi) that the
Company's gross margins in Japan and for diamond products can be maintained in
the face of increased competition from traditional and e-commerce retailers;
(xii) that the Company is able to pass on higher costs of raw materials to
consumers through price increases; (xiii) that the sale of counterfeit products
does not significantly undermine the value of the Company's trademarks and
demand for the Company's products; (xiv) 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;
(xv) that the Company can achieve satisfactory results from any current and
future businesses into which it enters that are operated under non-TIFFANY & CO.
trademarks or trade names; and (xvi) 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.
19
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 April 30, 2005, 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.
20
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 first fiscal quarter of 2005:
______________________________________________________________________________________________________
(c)Total
Number of (d)Approximate
Shares Dollar Value
Purchased of Shares that
(a)Total Under all May Yet be
Number of (b)Average Publicly Purchased
Shares Price Paid Announced Under the
Period Purchased Per Share Programs* Programs*
______________________________________________________________________________________________________
February 1, 2005
through
February 28, 2005 - - - -
______________________________________________________________________________________________________
March 1, 2005
through
March 31, 2005 510,840 $32.14 510,840 $392,565,000
_____________________________________________________________________________________________________
April 1, 2005
through
April 30, 2005 525,952 $33.39 525,952 $375,004,000
______________________________________________________________________________________________________
Total 1,036,792 $32.77 1,036,792 $375,004,000
======================================================================================================
* During the quarter ended April 30, 2005, purchases were made pursuant to two
publicly announced programs. Under the program announced in November 2003 the
Issuer was authorized to expend up to $116,500,000 to purchase Issuer's
outstanding Common Stock. That program was scheduled to expire on November 30,
2006 but was early terminated on March 17, 2005 upon the adoption and
announcement of a new program. Under the program announced on March 17, 2005,
Issuer was authorized to expend up to $400,000,000 to purchase its Common Stock.
This program will expire on March 30, 2007. Purchases under this program in
excess of $134,000,000 are currently subject to lender approval under the
Company's multi-bank credit facility.
21
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
On February 28, 2005, Registrant issued a press release
announcing its unaudited earnings and results of operations for
the fourth quarter and fiscal year ended January 31, 2005.
On March 16, 2005, Registrant filed a Report on Form 8-K
reporting that the Compensation Committee of Registrant's Board
of Directors had made various changes to date in fiscal 2005.
Forms of changed awards, terms and agreements subject to such
changes made in fiscal 2005 were attached as exhibits and
incorporated by reference.
On March 18, 2005, Registrant issued a press release announcing
that the Board of Directors of Tiffany & Co. (NYSE-TIF) had
approved a new stock repurchase program.
On April 14, 2005, Registrant filed a Report on Form 8-K
reporting that subsequent to the Company's February 28, 2005
press release announcing unaudited fiscal 2004 fourth quarter and
annual results, certain expenses associated with the expensing of
share-based compensation were reclassified within the
consolidated statement of earnings.
22
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: June 1, 2005 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 of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.