Event Brief of Q1 2009 Tiffany & Co. Earnings Conference Call – Final
Mark Aaron,tiffany & Co., VP of IR . Jim Fernandez, Tiffany & Co., EVP, CFO
OVERVIEW
TIF reported that 1Q09 sales declined 22% from 1Q08. 1Q09 net earnings were $24m or $0.20 per diluted share. Expects FY09 diluted EPS from continuing operations of $1.50-1.60.
FINANCIAL DATA
A. Key Data From Call 1. 1Q09 sales decline from 1Q08 = 22%. 2. 1Q09 net earnings = $24m. 3. 1Q09 diluted EPS = $0.20. 4. 1Q09 GM = 55.6%. 5. 1Q09 CapEx = $15m. 6. Cash and cash equivalents as of 04/30/2009 = $304m. 7. Short-term and long-term debt as of 04/30/2009 = $822m. 8. FY09 diluted EPS from continuing operations guidance = $1.50-1.60.
PRESENTATION SUMMARY
S1. 1Q09 Sales & Merchandising Review (M.A.) 1. Overview: 1. Results reflected macro challenges, but met expectations. 2. 1Q09 results are keeping Co. on track to achieve full-year plan. 2. Sales: 1. Worldwide sales down 22%; down 18% on constant exchange rate basis. 2. Americas down bracelets 31%. 3. US: 1. Total retail sales in US down 32%; as in 4Q08, more than half of the decline resulted from fewer transactions, with remainder due to decline in avg. spending per transaction. 1. Price stratification analysis indicated generally consistent results across most price strata except for a substantially greater decline in sales above $50,000. 2. Comparable US store sales dropped 34%, which were somewhat below expectation and compared with flat comps in 1Q08. 2. US comps down 34% in Feb., 39% in March, and 30% in April. 1. In 1Q08, US comps were unchanged in Feb., up 4% in March, and down 3% in April. 2. Two-year run rates do not indicate any meaningful change in trend. 3. US business is being affected by challenging economic conditions. 1. Facing a headwind from continued heavy and unprecedented levels of discounting by many competitors, including liquidation sales by some who will likely be closing their stores. 4. Comp store sales for US branch stores declined 32%, reflecting broad-based geographical softness; this compares with 4% decline in 1Q08 and was several percentage points less than expected. 1. No specific regions that particularly stood out for relative weakness or strength. 2. Sales in New York flagship store declined by greater-than-expected 42%, attributed to: 1. Weak spending, especially by customers tied to financial sector. 2. Decline in foreign shoppers. 3. New York store sales had increased 16% in 1Q08, when Co. was still benefiting from an abundance of foreign visitors to New York. 4. Sales in nine-store New York region declined 40%. 5. US sales decline reflected similar percentage declines in sales to local customers and to foreign visitors. 1. Decline in foreign customer spending was more pronounced in New York flagship store; enjoyed heavy European spending at this time last year. 2. European stores may be benefiting from this diminished travel flow. 6. Pleased with initial performance of US stores opened in the past year; all stores exceeded sales plans. 7. Glendale, California (new smaller concept store): 1. Pleased by customer response to open selling environment and operational efficiencies being realized. 2. Concept will continue to evolve in terms of store design and product offerings, including the likely addition of a representative engagement ring assortment. 3. Increases long-term potential number of US stores. 8. e-Commerce and Catalog Businesses: 1. Experienced cautious consumer spending. 2. Combined sales down 17%; slightly exceeded expectation, and was on top of 1% increase in 1Q08. 3. Sales decline continued to mostly reflect decline in number of orders; avg. order size down slightly. 4. Decreasing catalog mailings this year by reducing frequency of some mailings and relying more on e-mail marketing communications to drive customers to website and stores. 9. Stores in Canada and Latin and South America experienced modest comp store sales declines; still, better than expected. 10. Opened second store in Toronto in Yorkdale section and a store in (indiscernible) in Guadalajara. 4. Asia-Pacific: 1. Total sales down 7% on cufflinks constant exchange rate basis. 1. Comparable store sales declined 13% in Japan and 5% in rest of the region. 2. In Japan, 13% comp decline came in better than expectations, and was on top of 7% decline last year. 1. No meaningful difference in comp declines between Tokyo and elsewhere. 2. Closed a boutique in Ikebukuro; expects to reopen later this year in a different department store in that city. 3. Yen was stronger than the US dollar; averaged JPY96 vs. JPY104 in 1Q08, which is why 13% total sales decline in yen translated into 7% decline in dollars. 3. Comp decline of 5% outside Japan was on top of a 22% increase last year, and was also better than expected. 1. Solid growth in Korea and Australia; weaker results in Hong Kong and Taiwan. 2. Opened ninth store in Korea. 3. Business in China continues to develop nicely; opened another store on the mainland in Hangzhou. 1. Now nine stores there. 2. Goal of at least 25 locations in next five years. 4. Operates two successful stores in Macao. 5. Europe: 1. Total sales up 18% on constant exchange rate basis, due to: 1. Incremental sales from seven stores Co. added last year. 2. Success in capturing more market share. 2. Pound and euro have weakened substantially vs. dollar, from a year ago; this caused sales to decline 8% when translated into dollars. 1. Comp store sales, on constant exchange rate basis, rose by a better-than-expected 3%. 2. A narrow range of comp increases and declines by country; every country came in better than expected in local currencies. 3. Comp increase in London was in line with overall Europe; this came on top of a robust 12% increase in 1Q08. 4. Monthly European comp store sales trend improved as qtr. progressed. 6. Other Channel: 1. Sales down 43%. 1. Decline resulted from temporarily reducing quantity of rough diamonds Co. is purchasing in light of soft demand. 2. This has consequently contributed to reduction in wholesale sales of lower-quality diamonds back into market. 2. Sales in Iridesse stores increased. 1. Previously announced that Co. will be closing these stores when it reaches agreements with landlords and sells off their inventory. 2. Inventory liquidation sales led to the sales increase. 7. Merchandising Highlights: 1. Relatively best-performing product category was fashion silver and gold jewelry which benefits from: 1. More accessible price points. 2. A number of design introductions, like the new Keys Collection in a price range from $150 in sterling silver to $15,000 in platinum and diamond. 2. Keys Collection is enjoying a strong start. 3. Designer jewelry sales, primarily those of Elsa Peretti and Paloma Picasso, declined in line with the overall Co. 4. Engagement jewelry category performed relatively better than overall Co. and exceeded expectations, but still posting YoverY decline. 1. Now launching Tiffany Bezet collection. 5. High-end statement jewelry sales over $50,000 continued to post the greatest decline, although in line with expectations. 6. Watch sales were lower; expects this trend to improve when new designs begin to appear in stores later this year. 7. Hired highly regarded design team of Richard Lambertson and John Truex to explore development of leather accessories business.
S2. 1Q09 Financial Review (J.F.) 1. GM: 1. GM came in somewhat better than expected; declined to 55.6% from 57.1% last year. 2. Decline was largely due to higher product costs, partly offset by lower wholesale sales of diamonds, which Co. typically sells back in to market at cost. 3. Diamond prices reversed course in past six months; now, back to levels of one or two years ago. 4. Benefiting from lower purchasing cost, but GM benefit is probably not felt until next year, based on manufacturing lead times and assumed inventory turnover. 5. Some mines have recently cut back on production to adapt to reduced global consumer demand and to help stabilize rough diamond pricing. 2. Expenses: 1. SG&A expenses declined 15% from 1Q08; about 3% of decline was due to translation effect from strong US dollar. 1. Continues to expect about 10% reduction in SG&A expenses this year through initiatives already taken to reduce staffing and reduced marketing spending and realizing lower sales related variable costs, all of which occurred in 1Q09. 2. Interest and other expenses, net, were $12.4m vs. $1.5m last year, primarily due to higher interest expense tied to recent long-term debt issuances, as expected. 3. Expects interest and other expenses, net, to be approx. $50m for the year. 3. Tax Rate: 1. Effective tax rate was 42% vs. 36.7% last year; increase reflects differences in geographical mix of earnings; expects about 37% for full year. 4. Net Earnings: 1. $24m or $0.20 per diluted share vs. $64m or $0.50 per diluted share in 1Q08; met expectation. 2. Planned business this year to focus on cost containment and cash flow generation to maintain respectable profitability and a healthy balance sheet that can withstand currently challenging environment. 5. Balance Sheet (as of 04/30/2009): 1. $304m of cash and cash equivalents vs. $160m last year. 2. $822m of total short-term and long-term debt vs. $611m a year ago. 3. Completed plan to secure additional long-term financing by borrowing $300m; this followed issuing $100m of long-term debt last Dec. 1. Proceeds have been, or will be, used to redeem some maturing debt and to further strengthen liquidity position. 2. As a result, financially well positioned to support growth strategies. 4. Stockholders’ equity of $1.6b was lower than a year ago, reflecting substantial stock repurchase activity before suspending the program last Sept. 5. AR of $135m was 30% lower than a year ago due to sales decline. 1. Receivable turnover remained at 18 times per year; very high. 6. Plans to reduce inventory levels by money clips a single-digit percentage this year; progress was evident in 1Q09. 1. Finished 2008 with inventory levels 17% over prior year because of substantial sales shortfall in 4Q08. 2. Before year-end, had already taken steps to adjust internal manufacturing levels and to reduce outside vendor purchases. 3. Although net inventories at April 30 were 6% over a year ago, they declined 3% since Jan. 31. 4. Assuming that sales continue in line with expectations, expects to stay on track to achieve inventory reduction objective for the year. 7. CapEx was $15m vs. $26m last year; expects full-year CapEx of approx. $100m or about a third less than last year, due to: 1. Fewer store openings. 2. Cost containment in other areas. 8. Combining forecast for earnings with a forecasted decline in working capital and a smaller CapEx budget, Co. continues to plan to generate about $400m of free cash flow. 9. Board of Directors declared a regular quarterly dividend at an unchanged rate of $0.17 per share. 6. FY09 Outlook: 1. 1Q09 bottom line was consistent with expectations. 2. So far in May, rate of total sales decline is somewhat smaller than it was in 1Q09; as expected, it would be, with a slight improvement in Americas and greater improvement in other regions; however, too early to draw any conclusions. 3. Sees no need to revise full-year expectations that assume a continuation of soft economic conditions, although with sequentially smaller rates of decline each qtr. due to easier YoverY comparisons; expectation is based on: 1. 11% worldwide sales decline; greater decline in 1H09, as demonstrated by 1Q09 results. 2. Mid-teens percentage declines in Americas, factoring in a high-teens US comp decline that is expected to get smaller later in the year, simply due to much easier YoverY comparisons. 3. Mid-single digit percentage sales decline in Asia-Pacific region in dollars, which includes a high-single digit comp decline on constant exchange rate basis. 4. High-single digit percentage decline in Europe in dollars, but comps equal to last year on constant exchange rate basis. 5. 20% decline in Other sales. 4. Continues to look for about 3 point decline in operating margin, when adjusting for prior year, to exclude one-time items. 1. Expects decline to be divided between lower GM and higher SG&A expense ratio. 5. Net earnings from continuing operations of $1.50-1.60 per diluted share. 6. Longer-term goal is achieving at least 10% return on avg. assets and at least 15% return on avg. stockholders’ equity. 7. Summary: 1. Made some defensive moves to adjust to challenging environment; however, taking advantage of growth opportunities. 2. Selectively expanding store base this year by increasing number of retail locations by 5-6%. 3. Product development and marketing efforts remain active in creating excitement among a large number of potential customers.
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In the conference calls upon which Event Briefs are based, companies may make projections or other forward-looking statements regarding a variety of items. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. Actual results may differ materially from those stated in any pendants forward-looking statement based on a number of important factors and risks, which are more specifically identified in the companies’ most recent SEC filings. Although the companies may indicate and believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate or incorrect and, therefore, there can be no assurance that the results contemplated in the forward-looking statements will be realized.
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