Operator: Good day, and welcome to the Tiffany & Company Fourth Quarter Conference Call. Today's call is being recorded.
Participating on today's call are Mr. Mike Kowalski, Tiffany's Chairman and CEO; Mr. Pat McGuiness, Tiffany's Chief Financial Officer; and Mr. Mark Aaron, Tiffany's Vice President of Investor Relations and.
At this time, I'd like to turn the conference over to Mr. Aaron. Please go ahead.
Mark L. Aaron - VP, IR: Thank you and welcome to this conference call. We issued our financial results earlier today and hope that by now you've had an opportunity to review the news release. On today's call Mike, Pat and I will provide our insights into the fourth quarter and full year results and comment on Tiffany's plans and outlook for the coming year.
Before continuing, please note Tiffany's Safe Harbor provision that statements made on this call that are not historical facts are forward-looking statements. Actual results might differ materially from the expectations projected in those forward-looking statements.
Additional information concerning risk factors that could cause actual results to differ materially is set forth in Tiffany's Form 10-K, 10-Q and 8-K reports filed with the Securities and Exchange Commission. The Company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances.
Now, we can proceed with a multi-faceted review of Tiffany's performance. Taking a big picture view, Tiffany's financial results in 2012 did not achieve the expectations we had established at the start of the year. Net sales rose 4% due to single-digit percentage growth in all regions, although below initial expectations in the Americas and Asia Pacific and gross margin continue to be pressured by product input costs and unfavorable sales mix. SG&A expense growth was contained, but in total, net earnings per diluted share of $3.25 was 4% below 2011 on a GAAP basis and declined 10% when excluding non-recurring items in 2011.
The conclusion to the year with 4% sales growth and only a slight earnings increase in the fourth quarter, results is certainly not up to our normal performance standards.
Let's first look at sales by region. In the Americas sales in fourth quarter rose 2%, which was consistent with the increase we had reported for the November-December holiday season and reflected jewelry units equal to the prior year and a slight increase in the average price per unit sold.
For the full year, total Americas sales also rose 2%, on top of the 15% increase in 2011, as an increase in the average price per units sold was partly offset by a decline in jewelry units sold, primarily in silver jewelry. The Americas region accounted for 48% of worldwide sales in 2012 versus 50% in 2011.
On a constant exchange rate basis, total sales rose 2% in both the quarter and year, while comparable store sales declined 2% in both the quarter and year. Geographically sales in the New York flagship store declined 3% in the fourth quarter, while a 3% decline in the year went up against a 20% increase in 2011.
The New York flagship store accounted for 8% of worldwide sales in 2012. For the quarter and year there were minimal changes in sales to U.S. customers and foreign tourists. Foreign tourists spending represented about 45% of the New York store sales in 2012, and the largest spending came from Asia Pacific based visitors, followed by customers from Europe.
While we can no longer report foreign tourist sales data for the U.S. in its entirety due to legal restrictions on the collection of customer data in several states, we believe that sales to foreign tourists, which in 2011 was estimated in almost one quarter of U.S. sales will continue to be a growing importance in certain U.S. and Canadian stores as we expand customer awareness of the Tiffany brand globally.
Americas brand store comps declined 2% in the fourth quarter and a 2% decline in the full year was up against an 11% comp increase in 2011. There were no significant deviations from the norm in terms of geographical performance within the U.S. in the quarter or full year. Outside the U.S., total sales rose in Canada, but that reflected new stores, while we saw double-digit sales growth in Mexico and our business in Brazil continues to develop nicely.
In addition to our New York flagship store, our next three largest stores by sales volume in the region in 2012 were in California and San Francisco and South Coast Plaza in Costa Mesa and on Michigan Avenue in Chicago.
We expanded our Americas store base by adding 13 locations in 2012. In the U.S., we opened four stores including one in Salt Lake City, two in California in the San Francisco Centre and in La Jolla, and our third store in Manhattan in SoHo.
In Canada, we added six locations, including one in Montreal's Ritz-Carlton Hotel, a third store in Toronto in their Sherway Gardens Mall, and the conversion of four department store boutiques and (whole rent-through) department stores in Calgary, Montreal, Ottawa, and Vancouver into Company-operated locations.
We also opened two stores in Mexico in Mexico City and AltaVista and a store in Rio de Janeiro's Village Mall, marking our fourth location in Brazil, and we finished 2012 with 115 stores we grew our Americas ecommerce and catalog sales in 2012 with a 6% combined sales increase in the fourth quarter and 4% growth in the year driven by increased average order size. We introduced a newly designed and more elegant catalog in the fourth quarter which in conjunction with our brand strategy offers a somewhat higher price point as compared to the traditional selections catalog that it replaced.
Let's now turn to the Asia-Pacific region, which represented 21.4% of worldwide sales in 2012, up from 20.5% in 2011. Sales rose 13% in the fourth quarter which was consistent with holiday period growth and rose 8% for the full year. The quarterly increase was fueled by growth in jewelry units sold and in the average price per unit sold while the annual increase was almost entirely driven by higher jewelry unit volume. On a constant exchange-rate basis, total Asia-Pacific sales rose 10% in the quarter and increased 8% in the full year. Comps rose 6% in the quarter, while a 2% comp increase for the year was on top of an enormous 27% comp increase in full year 2011.
In the quarter we experienced broad based growth throughout Greater China and other markets, and that was true to a lesser extent in the year. The largest portion of the Asia-Pacific region is Greater China, which represented a little more than half of the region's sales in 2012. Our highest volume store by far in the Asia-Pacific region in 2012 was the one on Canton Road in Hong Kong. We broadened Tiffany's presence in the region by adding eight stores in 2012 and finished the year with 66 stores. This included opening six stores in China in Harbin, Nanjing, Shanghai, Shenyang, Tianjin, and Wuhan. We also opened our second store in Sydney in Bondi Junction, which represents our sixth store in Australia and a second store in the Singapore's Changi Airport, which helps us accommodate an increasingly mobile customer base.
As we've said before expanding Tiffany store presence especially in China, there is a dual purpose of generating local sales demand, but also stimulating spending when Chinese customers travel to other regions.
Japan accounted for 17% of worldwide sales in 2012 and 2011. Total sales declined 6% in the fourth quarter due to decline in jewelry units, mostly in entry-level price points, and increased 4% in the year due to an increase in the average price per jewelry units sold. However, it's important to note the effect on translation from a recently weaker yen. In the fourth quarter, the yen was 8% weaker than the dollar even though it was only 2% weaker for the full year.
Looking at results on a constant exchange rate basis, both total sales and comp store sales in the fourth quarter rose 2%, while for the full year, total sales rose 6% and comps rose 7% on top of a 4% comp increase in 2011. As Pat will discuss in his comments, we have factored a negative translation effect into our plans for 2013.
The store count in Japan was unchanged at 55 locations in 2012, with our flagship store on the Ginza generating 12% of total sales in Japan. During the year, we relocated three locations to other department stores in Tokyo, Chiba, and Umeda, Osaka.
Now moving on to Europe, that region accounted for 11.4% of worldwide sales in 2012 compared with 11.6% in 2011. Total sales rose 3% in the fourth quarter, slightly better than our holiday results and rose 3% in the full-year, primarily due to increases in both periods in the average price per jewelry units sold. On a constant exchange-rate basis in the fourth quarter, total sales rose 3% and comparable store sales were equal to the prior year, while for the year, total sales increased 7% and comparable store sales rose 2%.
Sales in the United Kingdom accounted for 45% of total European sales in 2012 and our highest volume store in Europe is on Old Bond Street, in London. In both the quarter and year, sales in overall continental Europe led by growth in Germany modestly outpaced sales outperformance in the U.K. Our sales in Europe are benefiting from foreign tourist spending in some markets, especially in France and Spain. That foreign tourist spending, which we estimate accounts for about a quarter of European sales is more than offsetting softness in local demand in some markets that is likely tied to soft economic conditions there.
We added two European stores in 2012, one in Nice, representing our fourth store in France and one in Prague, marking our entry into the Czech Republic and we're very pleased with initial results. We now operate 34 stores in Europe with a long runway for further store expansions. I'd like to specifically remind everyone that we will open a significant store on Paris's renowned Champs-Elysee in 2014.
Tiffany's other sales nearly doubled in the fourth quarter and rose 41% in the full year. As most of you know through a venture with Damas Jewelers we converted five Tiffany stores in the United Arab Emirates, three in Dubai, and two in Abu Dhabi from wholesale distributions to Company-operated locations in the second quarter and began recording retail sales of those stores. We have fully renovated our major store in the Dubai mall to the latest Tiffany standards and designs and have increased inventory assortments and marketing activities. We're encouraged with initial results and excited about the prospects for substantial long-term growth in that important region.
Let's wrap up the regional sales review with sales productivity in Company-operated stores. With 4% worldwide sales growth and 6% square footage growth there were pretty insignificant changes in overall and regional productivity. On a worldwide basis, sales per gross square foot remained at approximately $3,000 in 2012. By region, productivity was highest in the Asia Pacific region at $4,500, but down from $4,700 in 2011, followed by Japan at $4,200 which was up from $4,100 in 2011, the Europe at $3,200 which was down from $3,400 in 2011 and then Americas region which was unchanged at $2,300.
Beyond stores Tiffany now offers products on its website in 13 countries. Those combined sales represented 6% of total worldwide sales or 8% of sales in the countries in which they are operated which was consistent with the prior year. We also have non-commerce informational sites inside additional countries. As we said repeatedly, our website play an important role in our marketing communication to enhance brand and product awareness and drive store traffic.
Turning to a few merchandising highlights for 2012, we saw our sales mix continue to evolve towards mid to higher price products, reflecting our strategic initiative for a number of years to elevate the Tiffany & Co. brand. Most product categories performed relatively close to our 4% worldwide sales growth, but for a variety of reasons, the relatively weaker category was in silver jewelry especially at price points below $500.
Looking at some specific examples, engagement jewelry sales were generally in line with overall company sales growth in 2012. We were encouraged with the successful albeit limited introduction of the harmony engagement collection in Japan, which is now being rolled out worldwide. We were also pleased with the continued success of our yellow diamond collection, the new Enchant diamond jewelry collection and our re-introduced 1837 collection with the new RUBEDO metal.
But as I just mentioned, the sterling silver jewelry category at entry level price points under $500, has lagged overall company sales growth. That is partly due to an ongoing brand strategy that's primarily focused our product development and marketing on mid-to-higher price categories and likely also reflects pressure on a more economically sensitive silver jewelry purchase. Mike will talk a bit more about plans for that category in his remark.
Designer jewelry sales rose in the year, reflecting the extraordinary designs at Elsa Peretti such as our beautifully classic Diamonds by the Yard collection and Paloma Picasso with her new Villa Paloma and Venezia collections.
For a quantitative look at product category sales mix by geography for 2012, please refer to the updated chart in our report on Form 10-K that will be available soon.
That concludes my comments. So, I'm now pleased to turn the call over to Pat McGuiness.
Patrick F. McGuiness - SVP and CFO: Thanks Mark for that comprehensive sales overview. Before I review the rest of the earnings statements and balance sheet, let's look at 2013 expectations starting with sales. In our holiday sales announcement which indicated that we would plan sales growth conservatively to 2013 and we think we have done just that. In addition, while year-over-year comparisons will be far less daunting compared to last year, there is still plenty of global economic uncertainty that leads us to maintain a cautious outlook at this time.
We are planning worldwide sales to increase by 6% to 8% in dollars. On a constant exchange rate basis, this will be a high single-digit percentage increase with total sales growth in all regions. Sales growth ranges from a mid-teens percentage sales increase in Asia-Pacific to a low-single-digit percentage increase in Japan. The only meaningful effect on sales that we expect from foreign currency translation in 2013 will be in Japan. We are projecting the yen to average 93 to the $1 for 2013 versus an average of 81 in 2012, leading to a 15% negative effect from translation.
While we hedge our transaction exposure to a weakening yen as it relates to a portion of inventory purchases made by Japan, we do not hedge any translation exposure. This will have a negative effect on sales and the earnings and has been appropriately factored into our guidance. Therefore, the low-single-digit planned sales growth in yen will equate to a low-teens decline when translated and reported in U.S. dollars.
Tiffany's gross margin underperformed our initial expectations in 2012, although we were encouraged that the margin in the fourth quarter began to show some improvement. In the fourth quarter, gross margin of 59.1% was 1.3 points lower than last year's 60.4%. The decline resulted from several factors, including the continuation of product sales mix skewed toward higher price point products which achieved lower gross margins, unfavorable but diminishing higher product input costs and reduced leverage on the fixed expenses. For the same reason to varying degrees the full year gross margin of 57% was below last year's 59%. The product input costs to which I am referring reflects a slow inventory flow-through of higher commodity costs incurred over the past one to two years which have since moderated and stabilized.
At the same time we've exhibited pricing restraint by not taking any meaningful increases in 2012 and as such did not fully mitigate commodity cost pressures. We have recently been taking price increases around the world to alleviate pressure on gross margin in 2013. We expect gross margin in 2013 to be modestly below 2012, as we expect to continue to experience a shift in product sales mix towards higher priced, lower margin categories. Selling, general and administrative expenses were well controlled throughout 2012. The majority of SG&A expenses continue to be fixed interest in nature. SG&A expense rose 2% in the full year but increased 5% when excluding $43 million of non-recurring costs in 2011 related to the relocation of our New York headquarters staff.
The 5% increase was due to store occupancy costs related to new and existing stores, increased marketing spending and higher labor costs that was partly offset by substantially lower incentive compensation. In the fourth quarter SG&A expenses rose only 2% resulting in seven-tenths of a point improvement in the expense ratio. We are planning mid-single-digit SG&A expense growth in 2013. This largely reflects costs related to the 15 new stores we plan to open this year and annualizing costs of the 28 locations added in 2012. Primarily due to the gross margin pressure experienced in 2012 Tiffany's operating margin declined to 18.4% for the full year compared with last year's 19.4% on a GAAP basis and 20.6% which excluded non-recurring costs in 2011.
The operating margin of 23.5% in the fourth quarter was down from last year's 24.1% margin. For 2013, we expect a modest decline in gross margin to be offset by an improvement in the expense ratio resulting in Tiffany's operating earnings growing in line with sales. We still believe that there is considerable opportunity to improve the operating margin over the longer term, returning to previous peak levels and beyond by leveraging stronger sales growth against a largely fixed expense base.
Other expenses net increased to $14 million in the fourth quarter and $54 million in the full year, from $13 million and $43 million in last year's fourth quarter and full year. This largely reflected increased interest expense tied to higher average long-term debt borrowings. During the year, we took advantage of favorable interest rates and borrowed $250 million of 30-year long-term debt with principal payments beginning in 10 years at an interest rate of 4.4%. We applied $60 million of the proceeds towards 6.56% maturing long-term debt and the remainder is for working capital and general corporate purposes.
We are estimating other expenses at approximately $58 million in 2013. Tiffany's effective tax rate were 35% in the fourth quarter versus 34.5% last year and 35.3% in the full year compared with 34% in the full year 2011. We are estimating an effective tax rate of approximately 35% in 2013.
Looking at the bottom line, when we reported holiday sales results in January, we projected that EPS would likely be at the low end of our previous guidance of $3.20 to $3.40 per diluted share. Consistent with that guidance net earnings in the full year were $3.25 per diluted share, this compared with $3.40 per diluted share in 2011 and $3.60 when excluding non-recurring costs related to the relocation of our New York headquarter staff in June 2011. In that holiday sales announcement, we also indicated that we were targeting earnings growth of 6% to 9% in 2013. Based on the 2013 assumptions that I mentioned, our finalized plan meets that target with EPS at $3.43 to $3.53 per diluted share from operations.
I want to point out that we expect net earnings to decline approximately 15% to 20% in the first quarter due to some continued, but diminishing gross margin pressure and higher marketing related cost from a major event. However, absent those pressures in subsequent quarters, we expect net earnings growth in the second, third, and fourth quarters. In addition, this forecast excludes $0.05 per diluted share of expected first quarter charges for staffing and occupancy adjustments. Despite the overall sales shortfall in 2012 we achieved most of our balance sheet objectives for the year and are planning for solid free cash flow generation in 2013. We initially planned for a 15% increase in net inventory in 2012. As the year progressed, we moderated our inventory plans due to a lower than expected sales growth and projected a 10% inventory increase. I'm pleased to say that net inventories of $2.2 billion at year-end were up 8% for the full year. Finished goods inventories rose 13% in the year primarily due to the addition of stores and new products which included a meaningful expansion of our statement jewelry assortment. Combined raw material and work-in-process inventories rose only 2% in the year. We are projecting net inventories to increase approximately 5% in 2013 due to similar rates of growth in all stages of inventories.
Accounts receivables declined 5% in the year despite the 4% sales increase, primarily due to the translation effect from the weakening Japanese yen in the latter part of 2012.
Capital expenditures of $220 million in 2012 represented 6% of sales which is indicative of our long-term CapEx run rate. This is a modest decrease from the $239 million we spend in 2011. Despite higher spending in 2012 for increased store expansion and renovation, the year-over-year decline reflected costs for relocating our New York headquarter staff in 2011. We are projecting approximately $230 million of CapEx in 2013.
Putting it all together, free cash flow, which we define as cash flow from operating activities minus CapEx, was an inflow of $109 million in 2012, compared with an outflow of $29 million in 2011. The improved cash flow was due to a lower rate of inventory growth. We are planning for positive free cash flow of approximately $300 million in 2013.
At year-end, we had $505 million of cash and cash equivalents, compared to $434 million at the previous yearend. Combined short-term and long-term debt of $959 million at January 31, 2013, was up from $712 million at the pervious yearend. As I mentioned earlier, we added $250 million of long-term debt during the year and paid off $60 million on maturing long-term debt.
Stockholders' equity rose to $2.6 billion from $2.3 billion a year ago. As a result, total debt was 37% of stockholders' equity versus 30% a year ago. We also returned cash to stockholders in 2012 in two ways. Our Board approved a 10% increase in the quarterly dividend rate, representing the 11th increase in the past 10 years. The annualized dividend rate of $1.28 per share would represent a 39% payout ratio on 2012 net earnings. We also spent $54 million to repurchase 813,000 shares of common stock in the first half of the year before temporarily suspending purchases to more effectively allocate resources consistent with our growth strategy. The Board recently extended the expiration date to January 2014 for the currently authorized programs which has $164 million available for future purchases.
Lastly, two additional measurements that are important to us and stockholders are return on average assets, which was 9% in 2012 and return on average stockholders' equity which was 17% in 2012. Our long-term financial objectives continue to call for achieving at least a 10% ROA and at least a 15% ROE. We believe that the sales and earnings growth plans that we have constructed for 2013 are achievable and the beginning of a turnaround from our disappointing 2012 results. However, we are not yet back to achieving our longer term objectives that continue to call for annual 10% to 12% sales growth, and at least 15% earnings growth.
I am now pleased to turn the call over to Mike Kowalski.
Michael J. Kowalski - Chairman and CEO: Thanks Pat and Mark for your comments, and good morning to everyone. Clearly, we were not pleased with Tiffany's financial results in 2012, which are not representative of how our Company should perform in a more normalized operating environment.
We faced more difficult and expected comparisons to some very strong sales results in 2011. We deal with economic conditions in 2012 that were more challenging in some regions. We saw pronounced softness in sales of entry-level price silver jewelry, and overall sales weakness led to a timing lag in realizing the benefit from a moderation and commodity costs.
At the same time, we remained diligent and focused as ever on maintaining and enhancing the renowned of the Tiffany Company brand to the strategic management of our product category mix, widening market communications, and an expanded global presence through new stores as well as renovations of select existing stores. And we are confident in investments in recent years in our product supply chain, and the infrastructure will ensure that we have the capacity to support our longer term growth.
Strategic management of our product mix has served and will continue to serve to elevate our brand towards mid to higher price points. As we began the celebration of Tiffany's 175th anniversary, our product developments in 2012 continue to focus on higher price point opportunities both in gemstone jewelry and in our gold and silver jewelry collections.
Of course we innovated with a beautiful new RUBEDO metal which is a luminescent alloy composed of copper, gold and silver. But maintaining the right strategic balance remains critical and you will see a range of exciting new designs in 2013, including silver, sterling silver with entry-level price points below $500. New designs in silver and gold are included in our dramatic reinterpretation of Tiffany's iconic Atlas collections debuting later in the year. As we prepare to celebrate Jazz Age Glamour on the occasion of the spring time premiere of the movie, The Great Gatsby, you will be see new designs in silver, freshwater pearls and onyx in our new Ziegfeld jewelry collection as well as higher price point fine jewelry in diamond and platinum in The Great Gatsby collection.
Finally, we will also expand Tiffany's already successful Jazz Collection. We are very excited about the worldwide rollout of Tiffany's Harmony engagement ring collection, which enjoyed a very successful exclusive launch in Japan last year. We will of course build on the success of our Enchant collection introduced last year and our yellow diamonds that have enjoyed great success since being launched three years ago. We have just introduced Paloma Picasso's new Olive Leaf jewelry collection inspired by the olive tree as a symbol of peace and prosperity. The collection is being offered in yellow and white gold as well as in silver with diamonds and a wide variety of (color) gemstones.
We were delighted to have reached an agreement with Elsa Peretti last December to ensure that her extraordinary jewelry and tabletop designs will continue to be available exclusively at Tiffany for at least the next two decades. We've spoken before about expanding our Statement Jewelry assortments and I'm excited to tell you that a selection of new truly extraordinary pieces will be available next month when we host a select group of Tiffany customers from around the world at our annual Blue Book event in New York. That event will mark the pinnacle of Tiffany's 175th year anniversary celebrations.
Beyond jewelry, we will of course be expanding our leather assortment in 2013 and we just recently introduced a beautiful spring collection of bags and accessories to our stores and website and we continue to be delighted with Tiffany's eyewear business through our arrangement with Luxottica. We will be expanding our successful collection with designs that are inspired by our most popular jewelry collections and of course, we remain absolutely committed to developing Tiffany's Watch business.
Our marketing in 2013 will support new and iconic designs in all of our product categories through advertising, events, catalog and our famous window displays and our engagement ring app, we have been and we'll continue to make it possible for our customers to engage with Tiffany around the world. We will get you a redesigned website in the second half of the year that will address overall changes in the digital landscape, including social media and the increased use of mobile devices.
In 2012, we added 28 Company operated locations, which increased our global store base by 11% and our square footage by 6%. This included opening 19 new stores and converting five existing locations in UAE and four locations in Canada from wholesale distribution to Company operated stores. In the coming year, we will further expand our global presence when we open 15 new stores and close one in Japan, increasing our store base by 5%. We are also focused on renovating a number of existing stores.
In the Americas, we plan to open five new stores including two stores in the U.S., in New Jersey's Garden State Plaza and in Cleveland's Eaton shopping center, another store in Canada in the West Edmonton Mall in Alberta, our tenth store in Mexico in Villahermosa, and our fifth store in Brazil in Curitiba. We are excited about the coming relocation this fall of our store on Bloor Street in Toronto to a site one block west that will offer a more elegant and refined environment with less gross square footage, but actually an increased amount of selling space.
We are planning seven new stores in the Asia Pacific region. We have four stores planned in China, including one in Jinan and one in Xi'an, which will take us to 26 stores in China. Three additional locations are slated for elsewhere in the region. We plan to add three additional stores in Continental Europe, which will bring us to 37 stores in that region by the end of the year.
Beyond new stores, we believe there are also incremental sales and brand enhancement opportunities to be derived from renovating existing stores. The objective of those renovations is to deliver the very best customer experience by creating retail environments that reflect the heritage of our brand and the evolving esthetic sensibilities. So our renovations are also excellent opportunities for us to ensure that store layouts are optimally planned and incorporate new sustainable technologies and materials.
We've entered 2013 with considerable enthusiasm. We know that the Tiffany & Co. brand remain strong and is increasingly admired and desired by customers in existing markets and in new markets we enter around the world. The universal desire among consumers for extraordinary product designs, craftsmanship, quality and shopping experience has not diminished, and we believe in fact will grow stronger. The Tiffany & Co. brand is very well-positioned to serve those growing needs.
That concludes my remarks and I'll turn the call back over to Mark.
Mark L. Aaron - VP, IR: Thanks Mike and Pat. That wraps up this conference call. You can listen to a replay on our website or by dialing 888-203-1112 in the U.S. or 719-457-0820 outside the U.S. and entering passcode 5483461. If you have any questions, please feel free to call me.
Please also note on your calendars that we expect to report first quarter results on Tuesday, May 28 before the Market opens. Thanks for listening.
Operator: This concludes today's conference call. You may disconnect your lines. Thank you.
Operator: The event is not accompanied by Q&A