UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
----------------
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---- EXCHANGE ACT OF 1934 for the quarter ended April 30,2004. OR
---- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition from ________ to _____________.
Commission file number: 1-9494
TIFFANY & CO.
(Exact name of registrant as specified in its charter)
Delaware 13-3228013
(State of incorporation) (I.R.S. Employer Identification No.)
727 Fifth Ave. New York, NY 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 755-8000
Former name, former address and former fiscal year, if changed since last report
_________.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X . No .
------- ------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X . No .
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock as of the latest practicable
date: Common Stock, $.01 par value, 146,392,109 shares outstanding at the close
of business on May 31, 2004.
TIFFANY & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED APRIL 30, 2004
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets - April 30, 2004,
January 31, 2004 and April 30, 2003 (Unaudited) 3
Consolidated Statements of Earnings - for the
three months ended April 30, 2004 and
2003 (Unaudited) 4
Consolidated Statements of Cash Flows - for the three
months ended April 30, 2004 and 2003 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-21
Item 4. Controls and Procedures 22
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(e) Issuer Purchases of Equity Securities 23
Item 6. Exhibits and Reports on Form 8-K 24
(a) Exhibits
(b) Reports on Form 8-K
-2-
PART I. Financial Information
Item 1. Financial Statements
TIFFANY & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except per share amounts)
April 30, January 31, April 30,
2004 2004 2003
-------------- -------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 190,793 $ 276,115 $ 123,449
Accounts receivable, less allowances
of $5,053, $6,992 and $8,147 115,512 131,990 107,105
Inventories, net 964,954 871,251 765,780
Deferred income taxes 46,415 45,043 44,836
Prepaid expenses and other current assets 40,410 23,683 35,451
-------------- -------------- --------------
Total current assets 1,358,084 1,348,082 1,076,621
Property, plant and equipment, net 879,105 885,092 688,092
Deferred income taxes - - 7,208
Other assets, net 180,360 157,914 172,045
-------------- -------------- --------------
$ 2,417,549 $ 2,391,088 $ 1,943,966
============== ============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 95,842 $ 41,948 $ 57,346
Current portion of long-term debt 49,973 51,920 -
Accounts payable and accrued liabilities 185,594 209,842 156,829
Income taxes payable 26,480 45,922 27,639
Merchandise and other customer credits 46,413 45,527 42,939
-------------- -------------- --------------
Total current liabilities 404,302 395,159 284,753
Long-term debt 382,883 392,991 298,419
Postretirement/employment benefit obligations 37,287 36,746 34,345
Deferred income taxes 18,516 22,397 -
Other long-term liabilities 79,756 75,595 89,211
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value; authorized 240,000 shares,
issued and outstanding 146,845, 146,735 and 144,908 1,468 1,467 1,449
Additional paid-in capital 401,934 395,182 355,786
Retained earnings 1,087,202 1,058,203 900,456
Accumulated other comprehensive gain (loss), net of tax:
Foreign currency translation adjustments 6,433 15,856 (15,796)
Deferred hedging losses (1,447) (2,508) (2,010)
Unrealized losses on marketable securities (785) - -
Minimum pension liability adjustment - - (2,647)
-------------- -------------- --------------
Total stockholders' equity 1,494,805 1,468,200 1,237,238
-------------- -------------- --------------
$ 2,417,549 $ 2,391,088 $ 1,943,966
============== ============== =============
See notes to consolidated financial statements
-3-
TIFFANY & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended
April 30,
-----------------------------
2004 2003
------------- ------------
Net sales $ 456,960 $ 395,839
Cost of sales 197,294 166,195
------------- ------------
Gross profit 259,666 229,644
Selling, general and administrative expenses 191,330 170,675
------------- ------------
Earnings from operations 68,336 58,969
Other expenses, net 3,324 2,313
------------- ------------
Earnings before income taxes 65,012 56,656
Provision for income taxes 24,704 20,793
------------- ------------
Net earnings $ 40,308 $ 35,863
------------- ------------
Net earnings per share:
Basic $ 0.27 $ 0.25
============= =============
Diluted $ 0.27 $ 0.24
============= =============
Weighted average number of common shares:
Basic 146,815 144,894
Diluted 149,481 147,438
See notes to consolidated financial statements.
-4-
TIFFANY & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
April 30,
----------------------------------------
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 40,308 $ 35,863
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 24,944 21,367
Loss (gain) on equity investments (137) 4
Provision for uncollectible accounts 390 273
Provision for inventories 1,583 1,966
Deferred income taxes (1,549) (1,212)
Provision for postretirement/employment benefits 541 1,228
Deferred hedging losses transferred to earnings 772 673
Changes in assets and liabilities, excluding effects
of acquisitions:
Accounts receivable 16,465 7,230
Inventories (106,610) (35,853)
Prepaid expenses and other current assets (16,428) (11,249)
Other assets, net (1,626) (1,378)
Accounts payable 3,506 (172)
Accrued liabilities (25,767) (6,321)
Income taxes payable (17,098) (12,672)
Merchandise and other customer credits 932 219
Other long-term liabilities 5,731 3,847
----------------- ----------------
Net cash (used in) provided by operating activities (74,043) 3,813
----------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (28,964) (33,248)
Purchases of marketable securities (24,427) -
Proceeds from lease incentives - 1,436
----------------- ----------------
Net cash used in investing activities (53,391) (31,812)
----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings, net 55,088 4,184
Repurchase of Common Stock (4,129) (4,610)
Proceeds from exercise of stock options 2,606 1,929
Cash dividends on Common Stock (7,346) (5,793)
----------------- ----------------
Net cash provided by (used in) financing activities 46,219 (4,290)
----------------- ----------------
Effect of exchange rate changes on
cash and cash equivalents (4,107) (459)
----------------- ----------------
Net decrease in cash and cash equivalents (85,322) (32,748)
Cash and cash equivalents at beginning of year 276,115 156,197
----------------- ----------------
Cash and cash equivalents at end of three months $ 190,793 $ 123,449
================= ================
See notes to consolidated financial statements.
-5-
TIFFANY & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements include the
accounts of Tiffany & Co. and all majority-owned domestic and foreign
subsidiaries ("Company"). Intercompany accounts, transactions and
profits have been eliminated in consolidation. The interim statements
are unaudited and, in the opinion of management, include all
adjustments (which include only normal recurring adjustments including
the adjustment necessary as a result of the use of the LIFO (last-in,
first-out) method of inventory valuation, which is based on
assumptions as to inflation rates and projected fiscal year-end
inventory levels) necessary to present fairly the Company's financial
position as of April 30, 2004 and the results of its operations and
cash flows for the interim periods presented. The consolidated balance
sheet data for January 31, 2004 is derived from the audited financial
statements which are included in the Company's report on Form 10-K,
which should be read in connection with these financial statements. In
accordance with the rules of the Securities and Exchange Commission,
these financial statements do not include all disclosures required by
generally accepted accounting principles.
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, 2004 and 2003 are not necessarily indicative of the results
of the entire fiscal year.
2. STOCK - BASED COMPENSATION
Employee stock options are accounted for using the intrinsic value
method in accordance with Accounting Principle Board Opinion No. 25
"Accounting for Stock Issued to Employees" and its related
interpretations. Compensation costs were not recorded in net earnings
for stock options, as all options granted had an exercise price equal
to the market value of the underlying common stock on the date of
grant.
-6-
STOCK - BASED COMPENSATION (continued)
Had compensation expense been determined and recorded based upon the
fair-value recognition provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", net
earnings and earnings per share would have been reduced to pro forma
amounts as follows:
Three Months Ended April 30,
------------------------------------
(in thousands, except per share amounts) 2004 2003
------------------------------------------------------------------------------------------
Net earnings as reported $40,308 $35,863
Stock-based employee compensation expense
determined under fair-value-based
method for all awards, net of tax (3,497) (3,289)
-------------- --------------
Pro forma net earnings $36,811 $32,574
============== ==============
Earnings per basic share:
As reported $ 0.27 $ 0.25
============== ==============
Pro forma $ 0.25 $ 0.22
============== ==============
Earnings per diluted share:
As reported $ 0.27 $ 0.24
============== ==============
Pro forma $ 0.25 $ 0.22
============== ==============
3. INCOME TAXES
The effective income tax rate for the three months ended April 30, 2004 and
2003 was 38.0% and 36.7%. The change in the tax rate from the prior year
was primarily due to a favorable reserve adjustment recorded in the prior
year relating to the elimination of certain tax exposures. The effective
tax rate for both years also includes a tax benefit from the
Extraterritorial Income Exclusion Act ("ETI") of 2000. The ETI provides for
the exclusion from United States taxable income of certain
"extraterritorial" income earned from the sale or license of qualified
property.
The World Trade Organization ("WTO") has ruled in favor of a formal
complaint by the European Union that the ETI exclusion constitutes a
prohibited export subsidy under WTO rules. Legislative proposals have been
presented in the U.S. Congress to repeal the ETI. The legislative proposals
currently being evaluated by Congress provide transition relief. However,
it is uncertain what form the final legislation will take and what effect,
if any, it will have on the ETI benefit in the future.
4. INVENTORIES
April 30, January 31, April 30,
(in thousands) 2004 2004 2003
------------------------------------------------------------------------------------------------
Finished goods $697,357 $659,558 $626,313
Raw materials 212,127 165,768 107,091
Work-in-process 60,152 50,517 36,821
----------------- ----------------- -----------------
969,636 875,843 770,225
Reserves (4,682) (4,592) (4,445)
----------------- ----------------- -----------------
Inventories, net $964,954 $871,251 $765,780
================= ================= =================
-7-
INVENTORIES (continued)
LIFO-based inventories at April 30, 2004, January 31, 2003 and April 30,
2003 represented 69%, 69% and 74% of inventories, net, with the current
cost exceeding the LIFO inventory value by $34,161,000, $30,587,000 and
$20,735,000 at the end of each period. The LIFO valuation method had the
effect of decreasing earnings per diluted share by $0.01 for the three
months ended April 30, 2004 and had no effect on earnings per diluted share
for the three months ended April 30, 2003.
5. NEW ACCOUNTING PRONOUNCEMENTS
In May 2004, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position No. 106-2, "Accounting and Disclosure Requirements Related
to the Medicare Prescription Drug, Improvement and Modernization Act of
2003" ("FSP No. 106-2"). FSP No. 106-2, which replaced the same titled FSP
No. 106-1, provides guidance on the accounting for the effects of the
Medicare Prescription Drug, Improvement and Modernization Act of 2003
("Act") that was signed into law in December 2003. Under FSP No. 106-1, the
Company elected to defer the accounting for the effects of the Act. FSP No.
106-2 is effective for interim periods beginning after June 15, 2004. The
Company is evaluating the impact of the Act and FSP No. 106-2. Accordingly,
the Company's postretirement benefit obligation and net postretirement
health care costs included in the consolidated financial statements do not
reflect the effects of the Act.
In December 2003, the FASB issued Interpretation No. 46R, "Consolidation of
Variable Interest Entities" ("FIN 46R"). FIN 46R replaces the same titled
FIN 46 that was issued in January 2003. FIN 46R requires that variable
interest entities be consolidated by its primary beneficiary (if any) if
the entity's equity investors at risk do not have the characteristics of a
controlling financial interest or the equity investors do not have
significant equity at risk for the entity to finance its activities without
additional financial support. The provisions of FIN 46 were effective
immediately for all entities created after January 31, 2003 and FIN 46R is
effective for those entities in the first quarter of 2004. For those
entities created prior to February 1, 2003, the Company was required to
adopt the provisions of FIN 46R by the end of the first quarter of 2004.
The adoption of FIN 46R did not have an impact on the Company's financial
position, earnings or cash flows.
-8-
6. MARKETABLE SECURITIES
The Company's marketable securities are classified as available-for- sale
and are recorded at fair value in other assets, net, with unrealized gains
and losses, net of tax reported as a separate component of stockholders'
equity. Realized gains and losses are recorded in other expenses, net. The
marketable securities are held for an indefinite period of time, but might
be sold in the future as changes in market conditions or economic factors
occur. The fair-value of the marketable securities is determined based on
prevailing market prices. The Company did not have investments in
marketable securities at January 31, 2004 or April 30, 2003. The following
is a summary of the cost and fair values of the Company's marketable
securities at April 30, 2004:
Unrealized
(in thousands) Cost Fair Value Losses
---------------------------------------------------------------------------
Mutual Fund $24,427 $23,642 $785
================================================
7. EARNINGS PER SHARE
Basic earnings per share is computed as net earnings divided by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share includes the dilutive effect of the assumed
exercise of stock options.
The following table summarizes the reconciliation of the numerators and
denominators for the basic and diluted earnings per share ("EPS")
computations:
Three Months Ended April 30,
----------------------------------------
(in thousands) 2004 2003
-------------------------------------------------------------------------------------------
Net earnings for basic and diluted EPS $40,308 $35,863
============== ==============
Weighted average shares for basic EPS 146,815 144,894
Incremental shares based upon the
assumed exercise of stock options 2,666 2,544
-------------- --------------
149,481 147,438
Weighted average shares for diluted EPS ============== ==============
For the three months ended April 30, 2004 and 2003, there were 3,332,000
and 7,001,000 stock options excluded from the computations of earnings per
diluted share due to their antidilutive effect.
-9-
8. COMPREHENSIVE EARNINGS
The components of comprehensive earnings were:
Three Months Ended April 30,
------------------------------
(in thousands) 2004 2003
-------------------------------------------------------------------------------
Net earnings $40,308 $35,863
Other comprehensive gain (loss),
net of tax:
Deferred hedging gains 1,061 274
Foreign currency translation
adjustments (9,423) (1,235)
Unrealized losses on marketable
securities (785) -
------------- -------------
Comprehensive earnings $31,161 $34,902
============= =============
9. EMPLOYEE BENEFIT PLANS
The Company maintains a noncontributory defined benefit pension plan
("Pension Plan"), an unfunded Supplemental Retirement Income Plan and, in
January 2004, established a non-qualified unfunded retirement income plan
to recognize compensation expense in excess of the Internal Revenue Service
Code limits. The Company also provides certain health-care and life
insurance benefits ("Other Postretirement Benefits") and maintains other
retirement plans, profit sharing and retirement savings plans.
Net periodic pension and other postretirement benefit expense included the
following components:
Three Months Ended April 30,
---------------------------------------------------------
Other
Postretirement
Pension Benefits Benefits
------------------------------- -------------------------
(in thousands) 2004 2003 2004 2003
----------------------------------------------------------------------------------------------
Service cost $ 2,699 $ 2,357 $ 307 $ 823
Interest cost 2,640 2,265 418 648
Expected return on plan assets (2,079) (1,599) - -
Amortization of prior service
cost 201 47 (303) (2)
Amortization of net loss 395 239 98 64
---------------------------------------------------------
Net expense $ 3,856 $ 3,309 $ 520 $1,533
=========================================================
The Company's funding policy for the Pension Plan is to contribute the
maximum tax deductible contribution in any given year. The Company does not
anticipate making any cash contributions to the Pension Plan in 2004 based
on its funding policy. However, this expectation is subject to change if
actual asset performance is significantly below the assumed long-term rate
of return on pension assets.
-10-
10. SEGMENT INFORMATION
The Company's reportable segments are: U.S. Retail, International Retail,
Direct Marketing and Specialty Retail (see Management's Discussion and
Analysis of Financial Condition and Results of Operations for an overview
of the Company's business). The Company's reportable segments, excluding
Specialty Retail, represent channels of distribution that offer similar
merchandise and service and have similar marketing and distribution
strategies. The Specialty Retail segment includes the consolidated results
of Little Switzerland, Inc., as well as the consolidated results of other
ventures operated under non-TIFFANY & CO. trademarks or trade names. In
deciding how to allocate resources and assess performance, the Company's
Executive Officers regularly evaluate the performance of its reportable
segments on the basis of net sales and earnings from operations, after the
elimination of inter-segment sales and transfers.
Certain information relating to the Company's reportable segments is set
forth below:
Three Months Ended April 30,
---------------------------------------
(in thousands) 2004 2003
------------------------------------------------------------------------------------------
Net sales:
U.S. Retail $ 213,662 $ 173,586
International Retail 184,731 165,524
Direct Marketing 36,899 37,283
Specialty Retail 21,668 19,446
-------------- --------------
$ 456,960 $ 395,839
============== ==============
Earnings(losses)from operations*:
U.S. Retail $ 44,676 $ 31,721
International Retail 51,649 47,315
Direct Marketing 5,506 6,736
Specialty Retail (1,238) (606)
-------------- --------------
$ 100,593 $ 85,166
============== ==============
* Represents earnings from operations before unallocated corporate
expenses and other expenses, net.
The following table sets forth a reconciliation of the reportable segment's
earnings from operations to the Company's consolidated earnings before
income taxes:
Three Months Ended April 30,
------------------------------------------
(in thousands) 2004 2003
------------------------------------------------------------------------------------------------
Earnings from operations
for reportable segments $ 100,593 $ 85,166
Unallocated corporate expenses (32,257) (26,197)
Other expenses, net (3,324) (2,313)
-------------- --------------
Earnings before income taxes $ 65,012 $ 56,656
============== ==============
Unallocated corporate expenses include costs related to the Company's
administrative support functions such as information technology, finance,
legal and human resources as well as changes in the LIFO inventory
valuation reserve, which the Company does not allocate to the operating
segments.
-11-
11. SUBSEQUENT EVENTS
On May 20, 2004, the Company's Board of Directors declared an increase in
the quarterly dividend rate by 20% from $0.05 per share to $0.06 per share.
This dividend will be paid on July 12, 2004 to stockholders of record on
June 21, 2004.
-12-
PART I. Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW
--------
The Company is a holding company that operates through its subsidiary companies.
The Company's principal subsidiary, Tiffany and Company, is a jeweler and
specialty retailer. Through Tiffany and Company and other subsidiaries, the
Company is engaged in product design, manufacturing and retailing activities.
The Company operates four channels of distribution:
o U.S. Retail - sales in TIFFANY & CO. stores in the U.S.;
o International Retail - sales in TIFFANY & CO. stores and department store
boutiques outside the U.S. (also includes business-to-business sales,
Internet sales and wholesale sales of TIFFANY & CO. products outside the
U.S.);
o Direct Marketing - business-to-business, catalog and Internet sales of
TIFFANY & CO. products in the U.S.;
o Specialty Retail - primarily includes retail sales in LITTLE SWITZERLAND
stores on Caribbean islands, as well as in Florida and Alaska. It also
includes worldwide sales made under additional trademarks or trade names
other than TIFFANY & CO.
All references to years relate to the fiscal year that ends on January 31 of the
following calendar year.
In the discussion that follows, a store's sales are included in "comparable
store sales" when the store has been open more than 12 months. If a store is
opened in the first 15 days of a month it is considered open for a full month.
If a store closes in the first 15 days of a month, it will not be considered
comparable as of that month. The results of relocated stores remain in
comparable store sales if the relocation occurs within the same geographical
market and the store type remains the same (mall, freestanding, boutique). The
results of a store in which the square footage has been expanded or reduced
remain in the comparable store base.
Net sales increased 15% to $456,960,000 in the three months ended April 30, 2004
("first quarter") which included a 4% translation-related benefit due to a
weaker U.S. dollar. The sales increase resulted primarily from an increase in
worldwide comparable store sales. Net earnings in the first quarter rose 12% to
$40,308,000, or $0.27 per diluted share versus $0.24 in the prior year. Earnings
were affected by increased sales and the leveraging of fixed expenses partially
offset by lower gross margin as further explained below.
-13-
RESULTS OF OPERATIONS
---------------------
Certain operating data as a percentage of net sales were as follows:
Three Months
Ended April 30,
-------------------
2004 2003
-------------------
Net sales 100.0% 100.0%
Cost of sales 43.2 42.0
-------------------
Gross profit 56.8 58.0
Selling, general
and administrative expenses 41.9 43.1
-------------------
Earnings from operations 14.9 14.9
Other expenses, net 0.7 0.6
-------------------
Earnings before income taxes 14.2 14.3
Provision for income taxes 5.4 5.2
-------------------
Net earnings 8.8% 9.1%
===================
Net Sales
---------
Net sales by channel of distribution were as follows:
Three Months
Ended April 30,
-----------------------
(in thousands) 2004 2003
-------------- -----------------------
U.S. Retail $213,662 $173,586
International Retail 184,731 165,524
Direct Marketing 36,899 37,283
Specialty Retail 21,668 19,446
-----------------------
$456,960 $395,839
=======================
U.S. Retail sales increased 23% in the first quarter, largely due to 20%
comparable store sales growth. Sales in the New York flagship store rose 30% and
comparable branch store sales rose 17%. Comparable store traffic from
local-resident customers as well as domestic and foreign tourists increased in
the first quarter. Although store traffic rose in the first quarter management
believes the increase in comparable store sales resulted from an increase in the
amount spent per transaction due to a shift in purchases by customers to higher
priced items.
Total International Retail sales rose 12% and comparable store sales rose 8% in
the first quarter. Total International Retail sales and comparable store sales
both benefited by 10% from changes in foreign currency exchange rates.
In Japan, total retail sales increased 1% in the first quarter. The increase in
sales resulted from a translation-related benefit of 10%; sales were negatively
affected by a 13% sales decline in silver jewelry (a product category that
represented 26% of total Japan sales in 2003). Comparable store sales declined
1% in the first quarter, which included a translation-related benefit of 9%.
Management believes that Japan sales have been affected by generally weak
consumer spending on jewelry and increased "luxury-goods" competition. The
Company continues to focus on product assortment repositioning and new product
introductions and believes that incremental publicity and advertising
initiatives will enhance overall customer awareness and lead to gradually
improving sales and profitability.
In the Asia-Pacific region outside of Japan, comparable store sales increased
33% (including a 7% translation-related benefit) due to strong growth in all
markets. In Europe, comparable store sales rose 23% (including a 16%
translation-related benefit) due to growth in most stores.
-14-
Direct Marketing sales declined 1% in the first quarter. The Company made a
strategic decision to discontinue service award program sales during 2003. As a
result of that decision, there was a 24% decline in the Business Sales
division's sales. The Business Sales division continues to offer a range of
business gifts, event-related trophies and other awards and those sales
increased 11% in the first quarter. Combined e-commerce/catalog sales increased
15% in the first quarter primarily due to an increase in the average order size
and a higher number of e-commerce orders. Catalog orders decreased in the first
quarter as management continues to see a shift in consumer purchasing from
catalog to e-commerce. Management believes that e-commerce sales growth resulted
from increased web site traffic as well as the shift in purchasing by consumers
from catalog to e-commerce.
Specialty Retail sales increased 11% in the first quarter primarily due to sales
growth in LITTLE SWITZERLAND stores.
The Company expects that worldwide retail gross square footage of
Company-operated TIFFANY & CO. stores will increase by at least 5% in 2004.
Actual/expected 2004 store openings(closings) are as follows:
Actual Openings
---------------
Location (Closings) 2004 Expected Openings 2004
-------- --------------- ----------------------
Palm Beach Gardens, Florida Second Quarter
Edina, Minnesota Second Quarter
Westport, Connecticut Second Half
Kansas City, Missouri Third Quarter
Wakayama, Japan First Quarter
Nagano, Japan (First Quarter)
Marunouchi, Tokyo, Japan Third Quarter
Nishi-Umeda, Osaka, Japan Fourth Quarter
Taipei, Taiwan Second Quarter
London, England First Quarter
Gross Profit
------------
Gross profit as a percentage of net sales ("gross margin") declined in the first
quarter by 1.2 percentage points. This decline was expected by management due to
an increase in the LIFO inventory valuation reserve versus a year ago (0.7
percentage points) to reflect increased precious metal costs, and increased
distribution costs (0.4 percentage points) primarily related to the opening of
the Company's Customer Fulfillment Center ("CFC") in September 2003.
The Company's hedging program uses yen put options to stabilize product costs in
Japan over the short-term despite exchange rate fluctuations, and the Company
adjusts its retail prices in Japan from time to time to address longer-term
changes in the yen/dollar relationship and local competitive pricing.
Management's long-term strategy and objectives include achieving further product
manufacturing/sourcing efficiencies (including increased internal manufacturing
and direct rough-diamond sourcing), leveraging its fixed costs and implementing
selective price adjustments in order to maintain the Company's gross margin at,
or above, prior year levels. As a result, management expects a slight increase
in gross margin for the full fiscal year 2004 due to anticipated growth in the
second half.
-15-
Selling, General and Administrative Expenses ("SG&A")
-----------------------------------------------------
SG&A rose 12% in the first quarter, the majority of which was due to staffing
(representing approximately one-half of the increase) and depreciation and
occupancy expenses (representing approximately one-fifth of the increase)
related to the Company's expansion. As a percentage of net sales, SG&A improved
to 41.9%, versus 43.1% in the first quarter of 2003. Sales growth more than
absorbed the rate of increase in fixed expenses. Management's longer-term
objective is to reduce the ratio of SG&A to net sales by leveraging anticipated
rates of comparable store sales growth against the Company's fixed-expense base
and expects the full year ratio to improve slightly versus the prior year.
Earning from Operations
-----------------------
Three months ended April 30,
--------------------------------------
(in thousands) 2004 2003
------------------------------------------------------------------------------------
Earnings (losses) from operations:
U.S. Retail $ 44,676 $ 31,721
International Retail 51,649 47,315
Direct Marketing 5,506 6,736
Specialty Retail (1,238) (606)
--------------------------------------
Earnings from operations for reportable
segments 100,593 85,166
Unallocated corporate expenses (32,257) (26,197)
--------------------------------------
Earnings from operations $ 68,336 $ 58,969
======================================
Earnings from operations rose 16% 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 2004 and 2003 were as follows: U.S. Retail was 21%
and 18% (increase primarily due to the leveraging of fixed expenses);
International Retail was 28% and 29%; Direct Marketing was 15% and 18% (decrease
primarily due to incremental expenses associated with the CFC which opened in
September 2003 and supports the Company's Direct Marketing segment); and
Specialty Retail was (6)% and (3)%.
Unallocated corporate expenses include costs related to the Company's
administrative support functions such as information technology, finance, legal
and human resources as well as changes in the LIFO inventory valuation reserve,
which the Company does not allocate to the operating segments. The 23% increase
in unallocated corporate expenses in the first quarter of 2004 was primarily due
to an increase in the LIFO inventory valuation reserve (representing
approximately one-half of the increase), information technology infrastructure
costs (approximately one-third of the increase) and increases in other
administrative support costs.
Other Expenses, Net
-------------------
Other expenses, net in the first quarter were higher than the prior year
primarily due to an increase in interest expense from a new yen-denominated debt
issuance ($704,000) in 2003 and lower capitalized interest for capital
expenditures ($934,000) partially offset by increases in equity gains on the
Company's investment in Aber Diamond Corporation and higher interest income.
-16-
Provision for Income Taxes
--------------------------
The effective income tax rate for the three months ended April 30, 2004 and 2003
was 38.0% and 36.7%. The change in the tax rate from the prior year was
primarily due to a favorable reserve adjustment recorded in the prior year
relating to the elimination of certain tax exposures. The effective tax rate for
both years also includes a tax benefit from the Extraterritorial Income
Exclusion Act ("ETI") of 2000. The ETI provides for the exclusion from United
States taxable income of certain "extraterritorial" income earned from the sale
or license of qualified property.
The World Trade Organization ("WTO") has ruled in favor of a formal complaint by
the European Union that the ETI exclusion constitutes a prohibited export
subsidy under WTO rules. Legislative proposals have been presented in the U.S.
Congress to repeal the ETI. The legislative proposals currently being evaluated
by Congress provide transition relief. However, it is uncertain what form the
final legislation will take and what effect, if any, it will have on the ETI
benefit in the future.
New Accounting Standards
------------------------
In May 2004, the Financial Accounting Standards Board ("FASB") issued FASB Staff
Position No. 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003" ("FSP No.
106-2"). FSP No. 106-2, which replaced the same titled FSP No. 106-1, provides
guidance on the accounting for the effects of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 ("Act") that was signed into law in
December 2003. Under FSP No. 106-1, the Company elected to defer the accounting
for the effects of the Act. FSP No. 106-2 is effective for interim periods
beginning after June 15, 2004. The Company is evaluating the impact of the Act
and FSP No. 106-2. Accordingly, the Company's postretirement benefit obligation
and net postretirement health care costs included in the consolidated financial
statements do not reflect the effects of the Act.
In December 2003, the FASB issued Interpretation No. 46R, "Consolidation of
Variable Interest Entities" ("FIN 46R"). FIN 46R replaces the same titled FIN 46
that was issued in January 2003. FIN 46R requires that certain variable interest
entities be consolidated by its primary beneficiary (if any), if the entity's
equity investors at risk do not have the characteristics of a controlling
financial interest or the equity investors do not have significant equity at
risk for the entity to finance its activities without additional financial
support. The provisions of FIN 46 were effective immediately for all entities
created after January 31, 2003 and FIN 46R is effective for those entities in
the first quarter of 2004. For those entities created prior to February 1, 2003,
the Company was required to adopt the provisions of FIN 46R by the end of the
first quarter of 2004. The adoption of FIN 46R did not have an impact on the
Company's financial position, earnings or cash flows.
Liquidity and Capital Resources
-------------------------------
The Company's liquidity needs have been, and are expected to remain, primarily a
function of its seasonal working capital requirements and capital expenditure
needs, which have increased due to the Company's expansion.
The Company had a net cash outflow from operating activities of $74,043,000 in
the three months ended April 30, 2004 due to higher inventory purchases compared
with an inflow of $3,813,000 in the prior-year period.
Working Capital
---------------
Working capital (current assets less current liabilities) and the corresponding
current ratio (current assets divided by current liabilities) were $953,782,000
and 3.4:1 at April 30, 2004, compared with $952,923,000 and 3.4:1 at January 31,
2004 and $791,868,000 and 3.8:1 at April 30, 2003.
-17-
Accounts receivable, less allowances at April 30, 2004 were 12% lower than
January 31, 2004 (which is typically a seasonal high point) and were 8% higher
than April 30, 2003 due to sales growth.
Inventories, net at April 30, 2004 were 11% above January 31, 2004 and 26% above
April 30, 2003. Changes in foreign currency exchange rates decreased inventory
by 1% compared to January 31, 2004 and increased inventory by 3% compared to
April 30, 2003. Finished goods inventories ($697,357,000 at April 30, 2004)
increased 6% and 11% versus January 31, 2004 and April 30, 2003 largely due to
new store openings and expanded product offerings. Raw material and
work-in-process inventories ($272,279,000 at April 30, 2004) increased 26% and
89% versus January 31, 2004 and April 30, 2003 to support the expansion of
internal jewelry manufacturing activities and direct rough-diamond sourcing
operations. Management expects that inventory levels will increase in 2004 to
support anticipated comparable store sales growth, new stores, product
introductions, strategic merchandising investments and the Company's ongoing
expansion of its rough-diamond sourcing operations. The Company continually
strives to better manage its inventory investment by developing more effective
systems and processes for product development, assortment planning, sales
forecasting, supply-chain logistics, and store replenishment.
Capital Expenditures
--------------------
Capital expenditures were $28,964,000 in the three months ended April 30, 2004,
compared with $33,248,000 in the prior-year period. Based on current plans,
management estimates that capital expenditures will be approximately
$170,000,000 in 2004 due to costs related to the opening and renovation of
stores and ongoing investments in new systems. In order to meet substantially
increased customer demand for diamond and other gemstone jewelry, the Company
intends to expand its internal jewelry manufacturing operations by complementing
its existing New York facility with additional capacity later in 2004.
Management continues to expect that total capital expenditures in future years
will approximate 7-8% of net sales.
In 2000, the Company began a multi-year project to renovate and reconfigure its
New York flagship store in order to increase the total sales area by
approximately 25%, and to provide additional space for customer service,
customer hospitality and special exhibitions. The increase in the sales area was
completed in 2001 when the renovated second floor opened to provide an expanded
presentation of engagement and other jewelry. The renovated sixth floor that now
houses the customer service department opened in 2002. The renovated fourth
floor that offers tableware merchandise opened in 2003. In conjunction with the
New York store project, the Company relocated its after-sales service functions
and several of its administrative functions. The Company has spent $75,000,000
to date for the New York store and related projects. Based on current plans, the
Company estimates that the overall cost of these projects will be $110,000,000.
In 2002, the Company acquired the property housing its flagship store on Old
Bond Street in London and an adjacent building at a cost of $43,000,000 (U.S.
equivalent at date of acquisition), in order to proceed with a renovation and
reconfiguration of the retail selling space. Construction has commenced in 2004
and is expected to be completed in 2006.
-18-
Share Repurchases
-----------------
In November 2003, the Board of Directors extended and expanded the Company's
stock repurchase program, which was due to expire in November 2003, until
November 30, 2006 and increased the remaining authorization by $100,000,000,
allowing the Company to repurchase up to $116,500,000 of the Company's
outstanding Common Stock in addition to those which had already been purchased.
The timing of purchases and the actual number of shares to be repurchased
depends on a variety of factors such as price and other market conditions. In
the three months ended April 30, 2004, the Company repurchased and retired
110,000 shares of Common Stock at a cost of $4,129,000, or an average cost of
$37.54 per share.
Recent Borrowings
-----------------
The Company's sources of working capital are internally-generated cash flows,
borrowings available under a multicurrency revolving credit facility ("Credit
Facility") and Little Switzerland's revolving credit facility guaranteed by the
Company ("LS Facility").
In June 2003, the Company's purchase of the land and building housing the Tokyo
flagship store was financed with a short-term yen 11,000,000,000 bridge loan
("Bridge Loan") with a bank. The loan had an interest rate of 0.58% and matured
on September 30, 2003. The loan was paid in full upon maturity. In September
2003, the Company issued yen 15,000,000,000 of senior unsecured First Series Yen
denominated Bonds ("Bonds") due 2010 with principal due upon maturity and a
fixed coupon rate of 2.02% payable in semi-annual installments. The Bonds were
sold in a private transaction to qualified institutional investors in Japan. The
obligations under the Bonds are unconditionally and irrevocably guaranteed by
the Company. The proceeds from the issuance have been primarily used by the
Company to repay the Bridge Loan.
Based on the Company's financial position at April 30, 2004, management
anticipates that internally-generated cash flows and funds available under the
Credit Facility will be sufficient to support the Company's planned worldwide
business expansion and seasonal working capital increases that are typically
required during the third and fourth quarters of the year, as well as for the
scheduled repayment of a yen 5,500,000,000 five-year loan due in October 2004.
The Company's contractual cash obligations and commercial commitments at April
30, 2004 and the effects such obligations and commitments are expected to have
on the Company's liquidity and cash flows in future periods have not
significantly changed since January 31, 2004.
Market Risk
-----------
The Company is exposed to market risk from fluctuations in foreign currency
exchange rates and interest rates, which could affect its consolidated financial
position, earnings and cash flows. The Company manages its exposure to market
risk through its regular operating and financing activities and, when deemed
appropriate, through the use of derivative financial instruments. The Company
uses derivative financial instruments as risk management tools and not for
trading or speculative purposes, and does not maintain such instruments that may
expose the Company to significant market risk.
The Company uses yen currency-purchased put options and, to a lesser extent,
foreign-exchange forward contracts, to minimize the impact of a strengthening of
the U.S. dollar on foreign currency-denominated transactions. Gains or losses on
these instruments substantially offset losses or gains on the assets,
liabilities and transactions being hedged. Management neither foresees nor
expects significant changes in foreign currency exposure in the near future.
-19-
The fair value of the Company's fixed-rate long-term debt, including the current
portion of long-term debt, is sensitive to interest rate changes. Interest rate
changes would result in gains (losses) in the market value of this debt due to
differences between market interest rates and rates at the inception of the debt
obligation. In order to manage the exposure to interest rate changes, the
Company entered into an interest-rate swap to reduce the amount of fixed-rate
debt exposed to interest rate movements.
The Company also uses an interest-rate swap to manage its yen-denominated
floating-rate long-term debt in order to reduce the impact of interest rate
changes on earnings and cash flows.
Management neither foresees nor expects significant changes in exposure to
interest rate fluctuations, nor in market risk-management practices.
Seasonality
-----------
As a jeweler and specialty retailer, the Company's business is seasonal in
nature, with the fourth quarter typically representing a proportionally greater
percentage of annual sales, earnings from operations and cash flow. Management
expects such seasonality to continue.
Risk Factors
------------
This document contains certain "forward-looking statements" concerning the
Company's objectives and expectations with respect to store openings, retail
prices, gross profit, expenses, inventory performance, capital expenditures 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. However, certain assumptions are specific to the Company
and/or the markets in which it operates. The following assumptions, among
others, are "risk factors" which could affect the likelihood that the Company
will achieve the objectives and expectations communicated by management: (i)
that low or negative growth in the economy or in the financial markets,
particularly in the U.S. and Japan, will not occur and reduce discretionary
spending on goods that are, or are perceived to be, "luxuries"; (ii) that
consumer spending does not decline substantially during the fourth quarter of
any year; (iii) that unsettled regional and/or global conflicts or crises do not
result in military, terrorist or other conditions creating disruptions or
disincentives to, or changes in the pattern, practice or frequency of tourist
travel to the various regions where the Company operates retail stores nor to
the Company's continuing ability to operate in those regions; (iv) that sales in
Japan will not decline substantially; (v) that there will not be a substantial
adverse change in the exchange relationship between the Japanese yen and the
U.S. dollar; (vi) that Mitsukoshi and other department store operators in Japan,
in the face of declining or stagnant department store sales, will not close or
consolidate stores which have TIFFANY & CO. retail locations; (vii) that
Mitsukoshi will continue as a leading department store operator in Japan; (viii)
that existing product supply arrangements, including license arrangements with
third-party designers Elsa Peretti and Paloma Picasso, will continue; (ix) that
the wholesale market for high-quality rough and cut diamonds will provide
continuity of supply and pricing; (x) that the investment in Aber achieves its
financial and strategic objectives; (xi) that new systems, particularly for
inventory management, can be successfully integrated into the Company's
operations; (xii) that distribution and manufacturing productivity and capacity
can be further improved to support the Company's expanding requirements; (xiii)
that new and existing stores and other sales locations can be leased, re-leased
or otherwise obtained on suitable terms in desired markets and that construction
can be completed on a timely basis; (xiv) that the Company can successfully
improve the results of Little Switzerland and achieve satisfactory results from
any future ventures into which it enters that are operated under non-TIFFANY &
-20-
CO. trademarks or trade names; and (xv) that the Company's expansion plans for
retail and direct selling operations and merchandise development, production and
management can continue to be executed without meaningfully diminishing the
distinctive appeal of the TIFFANY & CO. brand.
-21-
Part I. Financial Information
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Within 90 days before filing this report, 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, 2004, the Company's disclosure controls and
procedures have been designed and are being operated in a manner that provides
reasonable assurance that the information required to be disclosed by the
Company in reports filed under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. The Company believes that a controls system, no matter
how well designed and operated, cannot provide absolute assurance that the
objectives of the controls system are met, and no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within a company have been detected.
(b) Changes in Internal Controls
Subsequent to the date of the most recent evaluation of the Company's
internal controls, there were no significant changes in the Company's internal
controls or in other factors that could significantly affect the internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
-22-
PART II. Other Information
Item 2. Changes in 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 2004:
--------------------------------------------------------------------------------------------
Total Number Approximate
of Shares Dollar Value
Purchased as of Shares that
Total Average Part of a May Yet be
Number of Price Publicly Purchased
Shares Paid Per Announced Under the
Period Purchased Share Program* Program*
--------------------------------------------------------------------------------------------
February 1, 2004
through
February 29, 2004 - - 3,253,800 $116,500,000
--------------------------------------------------------------------------------------------
March 1, 2004
through
March 31, 2004 110,000 $37.54 3,363,800 $112,371,000
--------------------------------------------------------------------------------------------
April 1, 2004
through
April 30, 2004 - - 3,363,800 $112,371,000
--------------------------------------------------------------------------------------------
Total 110,000 $37.54 3,363,800 $112,371,000
--------------------------------------------------------------------------------------------
* In November 2003, the Board of Directors expanded the Company's stock
repurchase program, which was first announced on September 21, 2000 and
scheduled to expire in November 2003; the Board extended the program until
November 30, 2006 and increased the remaining authorization by $100,000,000,
allowing the Company to repurchase shares of the Company's outstanding Common
Stock at an aggregate price of up to $116,500,000 in addition to those shares
which already had been purchased under the program. Under a prior program, which
expired in 2000, the Company had purchased 4,484,400 shares.
-23-
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
31.1 Certification by Michael J. Kowalski pursuant to Section 302
of Sarbanes-Oxley Act of 2002.
31.2 Certification by James N. Fernandez pursuant to Section 302
of Sarbanes-Oxley Act of 2002.
32 Certification by Michael J. Kowalski and James N. Fernandez
pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
On February 25, 2004, Registrant filed a Report on Form 8-K
reporting the issuance of a press release announcing its
unaudited earnings and results of operations for the three months
and year ended January 31, 2004.
-24-
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 4, 2004 By: /s/ James N. Fernandez
------------------------------------
James N. Fernandez
Executive Vice President and
Chief Financial Officer
(principal financial officer)
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NUMBER
31.1 Certification by Michael J. Kowalski pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
31.2 Certification by James N. Fernandez pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
32 Joint certification by Michael J. Kowalski and James N. Fernandez
pursuant to Section 906 of Sarbanes-Oxley Act of 2002.