Operator: Good day, everyone, and welcome to this Tiffany & Company First Quarter Conference Call. Today's call is being recorded.
Participating on today's call are Mr. Pat McGuiness, Tiffany's Senior Vice President and Chief Financial Officer and Mr. Mark Aaron, Vice President of Investor Relations. At this time, I'd like to turn the call over to Mr. Aaron. Please go ahead, Sir.
Mark L. Aaron - VP, IR: Thank you. Thank you everyone for joining us on today's conference call. Pat and I will review first quarter results and also update you on our full year plans and outlook.
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 the review of Tiffany's performance. It's safe to say that we are pleased to begin the year with better than expected sales and earnings. Sales growth of 9% in dollars or 13% on a constant exchange rate basis was driven by solid performance in Japan, Asia Pacific and Europe, but sales in the Americas were somewhat softer than we expected.
Gross margin, although below last year due to product sales mix continue to benefit from diminishing product cost pressures as well as price increases that we implemented during the quarter, across all regions in product category.
SG&A expense growth was well contained in the quarter and net earnings were up 3% on a GAAP basis. However, if you exclude expenses in the quarter tied to cost reduction initiatives, a 10% increase in net earnings was quite a bit better than our initial expectation for decline of 15% to 20%. Please refer to our non-GAAP measures scheduled in today's news release.
We're encouraged with the start of the year, but caution you to not draw overly optimistic conclusions from the first quarter, which generates relatively small percentage of sales and earnings in comparison with annual results.
I'll now review sales by region. In our largest region, the Americas, total sales rose 6% in the quarter to $408 million, which was below our expectation. In fact, the 6% sales growth was entirely due to an increase in average price, while unit growth in higher-priced statement and fine jewelry was offset by unit declines at more moderate price point categories.
On a constant exchange rate basis, total sales also rose 6% and comparable store sales rose 3%. Sales growth in the New York flagship store was higher than the region's increase, as it particularly benefited from large purchases tied to our Blue Book event in April, as well as from foreign tourism, which represents almost half of that store's sales.
We are no longer quantifying specific sales performance for the New York store to be consistent with the way we report performance in our other regions and as it now represents only 8% of worldwide sales.
Elsewhere, there was mixed performance around the Americas region, but pronounced softness in the Hawaii and Guam stores that reflected less Japanese tourist spending, but I'll address our business in Japan in a moment.
Our sales in Canada rose in the quarter, partly due to higher statement jewelry sales and partly due to the conversion of four locations in the second half of last year from independently operated to Company-operated stores.
Latin American sales were roughly equal to the prior year and we did not open any new stores in the first quarter and finished the quarter with 115 stores in the Americas.
In addition, changes in e-commerce and catalog sales were not significant in the quarter, and as we have said repeatedly, those media are as much about the benefits derived from marketing as they are about generating sales.
Turning to the Asia Pacific region; total sales increased by better than expected 15% to $223 million, due to increases in average price, as well as unit growth across all jewelry categories. On a constant exchange rate basis, total Asia Pacific sales rose 14% and comp store sales rose 9%.
We saw healthy sales growth across the region, but led by particular strength in Hong Kong, Korea and Singapore. We opened a store in Xi'an, China in the quarter and closed one in Taichung, Taiwan, finishing the quarter operating 66 stores in that region.
As we continue to expand Tiffany store presence, especially in China, we're seeing the dual benefit of local sales demand, as well as increased brand awareness, which generates spending by Chinese customers when they travel to other region.
Without a doubt, Japan sales growth in the quarter exceeded expectations more than any other region. In local currency, total sales and comp store sales rose 20% and 21%, respectively, with considerable strength in engagement jewelry and other higher price point categories. This was better than we expected and reflected considerably stronger growth in the latter half of the quarter.
However, the yen was 18% weaker than the dollar in the quarter. Therefore, in dollars, sales rose 2% to $145 million due to an increase in average price, while unit performance was varied with solid increases in higher price jewelry categories.
The yen is quoted this morning at JPY102 to the $1. We initially planned it at JPY93 to the $1 for the year, but in light of the yen's recent movement we have now factored in a weaker yen for the rest of the year into our earnings forecast.
It's worth noting that we took a price increase in Japan on April 10th, which beyond addressing product cost pressures also included an adjustment for the yen's weakness. Based on the customary preannouncement of a price increase in Japan, it spurred purchasing in advance of the increase. However, we did not experience the typical and expected slowdown after that.
So while we believe a portion of the first quarter's sales growth certainly reflects the strength of our brand, we also attribute the unusual strength to recent reports of a surge in household spending in Japan likely tied to the Japanese government's efforts to stimulate their economy. The store count remained at 55 in Japan at the end of the quarter.
Our stores in Europe also delivered solid results in the quarter with total sales growing 6% to $93 million, due to higher average price and unit growth across most jewelry categories. On a constant exchange rate basis, total sales rose 8% and comparable store sales rose 6%.
We were pleased with sales growth across continental Europe, which more than offset some lingering softness in the U.K. Varying degrees of year-over-year performance in local demand is likely tied to economic conditions, but tourist sales have become an important factor too, which we estimate account for more than one-quarter of our European sales. We currently operate 34 stores in Europe.
Lastly, Tiffany's other sales tripled in the first quarter from the year ago. The magnitude of the increase largely reflects the change we made last July when we converted five existing Tiffany stores in the United Arab Emirates, three in Dubai and two in Abu Dhabi from wholesale distribution to Company-operated locations and began to record the retail sales of those stores.
For the UAE stores overall, we've increased inventory levels, improved assortments and expanded marketing activities, and we've renovated our major store in the Dubai Mall. We're pleased with initial results and believe there is substantial long-term growth potential for Tiffany in that important region.
We finished the quarter with 275 Company-operated stores. Our plan is to open 16 stores this year and close one store each in Japan and Taiwan, resulting in a net addition of 14 locations, and we are renovating a number of existing locations as well.
In the Americas, the six stores planned range from three in the U.S., including New Jersey's Garden State Plaza and Cleveland's Eaton Center to a store in the West Edmonton Mall in Alberta, Canada; our tenth store in Mexico in Villahermosa; and our fifth store in Brazil in Curitiba; and we are excited to be relocating our Bloor Street store in Toronto to a nearby location this fall.
Seven stores are currently planned to open in the Asia-Pacific region, including four in China. One of which opened in Xi'an in the first quarter, and there were three additional ones, which will take us to 26 stores in China by yearend. We're also working towards finalizing leases for three additional stores in the region.
Rounding out expansion this year are three stores that are planned in Europe, which will bring us to 37 European stores by year end.
Looking at merchandising highlights in the quarter, we continued to see diverging demand among product categories by price point, with diamond jewelry clearly outperforming silver jewelry. As I alluded to earlier, we had strong growth in statement jewelry sales in the quarter, which was partly tied to the Blue Book event and our customers' response to collection of extraordinary new jewelry pieces.
At the other extreme, we continue to experience softness in silver jewelry sales, but new introductions and some greater marketing emphasis are intended to reinvigorate that category. In other categories, we had a healthy increase in engagement jewelry sales and are very pleased with our new Harmony collection.
Fine and fashion jewelry collections were led by the continued strength of our beautiful yellow diamond jewelry, the success of our relatively new Enchant diamond jewelry, Victoria, the perennial favorite Tiffany Keys in diamonds and in gold and Tiffany's Metro design. We're also excited about the response to our growing assortment of colored diamonds. These trends well illustrate our brand strategy to move toward higher price point categories.
In terms of new products, we're enthusiastic about our prospects for the recently introduced Great Gatsby, Ziegfeld and Jazz collection that span a range of material and prices. We are looking forward to introducing our reinterpretation of our iconic Atlas collection later this year.
That concludes my comments, so I'll turn the call over to Pat.
Patrick F. McGuiness - SVP and CFO: Thanks, Mark. I will also begin my remarks by saying we were pleased with these first quarter results given the overall sales strength and improving gross margin trends. That said, we are reluctant to extrapolate a continuation of such sales trends into the second quarter and the full year, especially in light of the underlying softness in the Americas.
In addition, we have factored the impact of the further weakening of yen into our earnings guidance.
Let's now look at the rest of the earnings statement. Gross margin of 56.2% in the quarter was below last year's 57.3% but better than we expected as higher than expected sales growth gave us added leverage on fixed cost. We have been experiencing a shift in sales mix toward higher price point products consistent with our long-term brand strategy that achieve a lower gross margin and we expect that to continue. However, as we anticipated, this year-over-year decline was narrower than we've seen in a while due to diminishing product cost pressure.
As Mark mentioned, we took around the price increases during the first quarter after exhibiting pricing restraints in 2012 when we did not take any meaningful increases.
We are introducing new jewelry designs in sterling silver this year with more next year with the intent to stimulate that category, but we continue to anticipate that silver jewelry sales growth in 2013 will add growth in higher priced categories. As a result, gross margin in the full year will be slightly lower than last year.
Selling, general and administrative expenses increased 8% in the quarter. This included charges tied to cost reduction efforts of $9 million, or $0.05 per diluted share for recent staffing reductions and subleasing of certain office space.
Excluding those costs, SG&A expenses increased 6% due to new store related costs and substantial marketing costs for our Blue Book event in New York. Those of you in New York in mid-April may have seen the world's largest Tiffany Blue Box constructed over the skating rink in Rockefeller Center, where we hosted a party for a select group of Tiffany's customers, media and celebrities. You can see some photos by visiting the press section of tiffany.com.
We were very pleased with a number of significant sales generated from the event, but equally pleased with the overall customer enthusiasm and media attention. In addition, reported SG&A expense growth would have been 2 percentage points higher, if not for the favorable translation effect primarily from a weaker yen. Our full year plan continues to call for SG&A expense growth slightly less than the forecasted sales growth.
Earnings from operations rose 5%, but were up 12% when excluding the expenses tied to cost reduction efforts. Looking out to the full year, we continue to expect that operating earnings growth will be roughly in line with sales growth.
Beyond 2013, there remains ample opportunity to improve the operating margin by leveraging stronger sales growth against a relatively fixed expense base. Other expenses net rose to $13 million in the quarter from $11 million last year, largely reflecting increased interest expense tied to incremental long-term debt that we took on last July.
We expect other expenses to be about $58 million for the year. Tiffany's effective tax rate of 34.9% in the quarter met our expectation and compared with 34.5% last year. We continue to estimate a 35% effective tax rate for the year.
Adding it all up, net earnings rose 3%, but were 10% above last year when excluding the $9 million of expenses tied to cost reduction efforts. We had expected a 15% to 20% earnings decline due to product cost pressure on gross margin and the substantial marketing cost of our Blue Book event. However, the higher-than-expected sales growth occurred actually in the latter part of the quarter after we provided our guidance on March 22nd gave us greater sales leverage on fixed cost and accounted for the delta between our expected earnings decline and the earnings growth that we ultimately achieve.
We believe it is prudent at this time of year to slightly reduce our sales expectations for the second, third and fourth quarters in light of our assumption for the softer sales growth in Americas and our forecasting and even weaker yen than we had initially planned with Japan sales. Therefore, despite the better than expected first quarter results, we continue to expect a mid-single-digit worldwide sales increase for the year with earnings still in a range of $3.43 to $3.53 per diluted share versus last year's $3.25 per diluted shares. This forecast excludes the $0.05 per diluted share of expenses tied to the cost reduction efforts that we recorded in the first quarter.
I should add that we expect net earnings in the second quarter to be about equal to the prior year based on an expected mid-single-digit sales increase with stronger earnings growth coming in the second half of the year. Our return on average assets was 9% on a trailing basis and return on average stockholder's equity was 17%. Our longer term financial objectives continue to call for achieving at least a 10% ROA and at least a 15% ROE.
Let's look at some balance sheet highlights, net inventories of $2.3 billion at April 30th were only 4% above last year. Finished goods inventory was up 12% due to new stores and new products including an expansion of our statement jewelry assortment. Combined raw material and work-in-process inventories declined 5%. We continue to project about a 5% increase in net inventories for the year.
Accounts receivable at April 30th were equal to last year. Higher receivables tied to the sales growth was offset by a translation effect from the weaker Japanese yen. Receivables are turning at a rate of 21 times per year.
Capital expenditures were $35 million in the first quarter versus $44 million last year and we are continuing to project about $230 million of CapEx for the year versus $220 million last year.
We are planning for positive free cash flow of approximately $300 million in 2013 versus $109 million in 2012. At April 30th, we had $465 million of cash and cash equivalents versus $322 million a year ago. Short-term and long-term debt totaled $974 million at April 30th, up from $834 million a year ago, largely due to adding $250 million of long-term debt in last year's second quarter.
Total debt was 37% of stockholders' equity versus 35% a year ago. We remain committed to returning excess cash to stockholders'. In fact, two weeks ago our Board of Directors approved a 6% increase in the quarterly cash dividend rate, going from $0.32 per share to a new rate of $0.34 per share and representing the 12th increase in the past 11 years.
The new annualized rate of $1.36 would equate to a payout ratio on our current earnings forecast in the high 30s, and we will likely maintain a ratio in the 30s going forward. We did not repurchase any shares in the quarter. We have $164 million available for future purchases under the currently authorized program, which expires in January 2014.
To summarize, we are generally pleased with the start of 2013. We're introducing many exciting new product designs. We have a good lineup of new stores, our marketing programs, including a newly designed website later in the year, are well-suited to enhance customer awareness. Our infrastructure is effective and supporting our product supply needs and we have the balance sheet to support our expansion. Most important, we're focused on maintaining and enhancing the renown of the Tiffany & Company brand around the world.
I'll now turn the call back to Mark.
Mark L. Aaron - VP, IR: Thanks, Pat. That concludes today's conference call. A replay will be available on our website or by dialing 888-203-1112 in the U.S. or 719-457-0820 outside the U.S. and entering passcode 3267517. If you have any questions, please feel free to call me and note on your calendar, we expect to report second quarter results on Tuesday, August 27th before the market opens. Thanks for listening.
Operator: This concludes today's conference call. You may now disconnect your line. Thank you.
Operator: The event is not accompanied by Q&A