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 quarterly period ended April 30, 2006.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---- EXCHANGE ACT OF 1934
For the transition period from ________ to _____________.
Commission file number: 1-9494
TIFFANY & CO.
(Exact name of registrant as specified in its charter)
Delaware 13-3228013
(State of incorporation) (I.R.S. Employer Identification No.)
727 Fifth Ave. New York, NY 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 755-8000
Former name, former address and former fiscal year, if changed since last report
_________.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No ____.
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
One).
Large Accelerated filer X Accelerated filer ___ Non-Accelerated filer ___
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes ____. No X .
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, 140,640,105 shares outstanding at the close
of business on May 31, 2006.
TIFFANY & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED APRIL 30, 2006
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - April 30, 2006,
January 31, 2006 and April 30, 2005 (Unaudited) 3
Condensed Consolidated Statements of Earnings - for the
three months ended April 30, 2006 and 2005 (Unaudited) 4
Condensed Consolidated Statements of Stockholders' Equity -
for the three months ended April 30, 2006 and
Comprehensive Earnings - for the three months ended
April 30, 2006 and 2005 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows - for the
three months ended April 30, 2006 and 2005 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements
(Unaudited) 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 19
PART II - OTHER INFORMATION
Item 1A. Risk Factors 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 6. Exhibits 22
(a) Exhibits
2
PART I. Financial Information
Item 1. Financial Statements
TIFFANY & CO. AND SUBSIDIARIES
------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Unaudited)
-----------
(in thousands, except per share amounts)
April 30, January 31, April 30,
2006 2006 2005
------------- ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 180,541 $ 393,609 $ 213,708
Short-term investments 46,175 - -
Accounts receivable, less allowances
of $6,197, $8,002 and $6,181 156,124 142,294 120,713
Inventories, net 1,140,829 1,060,164 1,073,605
Deferred income taxes 73,501 69,576 69,385
Prepaid expenses and other current assets 54,180 33,200 41,119
--------------- --------------- ---------------
Total current assets 1,651,350 1,698,843 1,518,530
Property, plant and equipment, net 888,221 866,004 917,415
Deferred income taxes 27,361 29,828 -
Other assets, net 184,919 182,597 140,512
--------------- --------------- ---------------
$ 2,751,851 $ 2,777,272 $ 2,576,457
--------------- --------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 47,726 $ 38,942 $ 47,488
Current portion of long-term debt 6,244 6,186 -
Accounts payable and accrued liabilities 210,215 202,646 177,514
Income taxes payable 38,040 60,364 35,137
Merchandise and other customer credits 55,614 56,472 52,084
--------------- --------------- ---------------
Total current liabilities 357,839 364,610 312,223
Long-term debt 428,450 426,548 392,178
Postretirement/employment benefit obligations 42,429 41,982 40,449
Deferred income taxes 797 - 21,666
Other long-term liabilities 118,588 113,219 99,409
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.01 par value; authorized 2,000 shares,
none issued and outstanding - - -
Common Stock, $0.01 par value; authorized 240,000 shares,
issued and outstanding 140,599, 142,509 and 143,830 1,406 1,425 1,438
Additional paid-in capital 499,595 488,960 439,235
Retained earnings 1,288,169 1,331,321 1,245,309
Accumulated other comprehensive gain (loss), net of tax:
Foreign currency translation adjustments 14,193 5,281 26,000
Deferred hedging (loss) gain (329) 3,247 (1,449)
Unrealized gain (loss) on marketable securities 714 679 (1)
--------------- --------------- ---------------
Total stockholders' equity 1,803,748 1,830,913 1,710,532
--------------- --------------- ---------------
$ 2,751,851 $ 2,777,272 $ 2,576,457
--------------- --------------- ---------------
See notes to condensed consolidated financial statements.
3
TIFFANY & CO. AND SUBSIDIARIES
------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
---------------------------------------------
(Unaudited)
-----------
(in thousands, except per share amounts)
Three Months Ended
April 30,
---------------------------------
2006 2005
-------------- --------------
Net sales $ 539,241 $ 509,901
Cost of sales 238,115 235,080
-------------- --------------
Gross profit 301,126 274,821
Selling, general and administrative expenses 226,879 208,510
-------------- --------------
Earnings from operations 74,247 66,311
Other expenses, net 3,975 4,206
-------------- --------------
Earnings before income taxes 70,272 62,105
Provision for income taxes 27,130 22,047
-------------- --------------
Net earnings $ 43,142 $ 40,058
-------------- --------------
Net earnings per share:
Basic $ 0.30 $ 0.28
-------------- --------------
Diluted $ 0.30 $ 0.27
-------------- --------------
Weighted average number of common shares:
Basic 141,941 144,248
Diluted 144,367 146,285
See notes to condensed consolidated financial statements.
4
TIFFANY & CO. AND SUBSIDIARIES
------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
---------------------------------------------------------
AND COMPREHENSIVE EARNINGS
--------------------------
(Unaudited)
-----------
(in thousands)
Accumulated
Total Other Additional
Stockholders' Retained Comprehensive Common Stock Paid-in
Equity Earnings Gain (Loss) Shares Amount Capital
------------------------------------------------------------------------------------------------------------------------------------
Balances, January 31, 2006 $ 1,830,913 $ 1,331,321 $ 9,207 142,509 $ 1,425 $ 488,960
Exercise of stock options and vesting
of restricted stock units 3,024 - - 148 1 3,023
Tax benefit from exercise of stock
options and vesting of restricted
stock units 642 - - - - 642
Share-based compensation expense 7,259 - - - - 7,259
Issuance of Common Stock
under the Employee Profit Sharing
and Retirement Savings Plan 4,550 - - 121 1 4,549
Purchase and retirement of Common
Stock (79,750) (74,891) - (2,179) (21) (4,838)
Cash dividends on Common Stock (11,403) (11,403) - - - -
Deferred hedging loss, net of tax (3,576) - (3,576) - - -
Unrealized gain on marketable
securities 35 - 35 - - -
Foreign currency translation
adjustments, net of tax 8,912 - 8,912 - - -
Net earnings 43,142 43,142 - - - -
----------------------------------------------------------------------------------------
Balances, April 30, 2006 $ 1,803,748 $ 1,288,169 $ 14,578 140,599 $ 1,406 $ 499,595
----------------------------------------------------------------------------------------
Three Months Ended
April 30,
------------------------
2006 2005
------------------------
Net earnings $ 43,142 $ 40,058
Other comprehensive gain (loss), net
of tax:
Deferred hedging (loss) gain (3,576) 669
Foreign currency translation
adjustments 8,912 (3,045)
Unrealized gain (loss) on
marketable securities 35 (150)
------------------------
Comprehensive earnings $ 48,513 $ 37,532
------------------------
See notes to condensed consolidated financial statements.
5
TIFFANY & CO. AND SUBSIDIARIES
------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
(in thousands)
Three Months Ended
April 30,
----------------------------------------
2006 2005
---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 43,142 $ 40,058
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 28,347 27,987
Excess tax benefits from share-based payment arrangements (660) (821)
Provision for inventories 2,644 1,742
Deferred income taxes (4,876) (14,869)
Provision for postretirement/employment benefits 447 228
Share-based compensation expense 7,109 6,173
Changes in assets and liabilities:
Accounts receivable (11,896) 7,509
Inventories (74,453) (22,963)
Prepaid expenses and other current assets (23,232) (14,773)
Other assets, net (2,359) (770)
Accounts payable and accrued liabilities 10,678 (3,638)
Income taxes payable (22,028) (81,896)
Merchandise and other customer credits (920) (236)
Other long-term liabilities 4,302 10,524
---------------- -----------------
Net cash used in operating activities (43,755) (45,745)
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities and short-term investments (46,396) (99,168)
Proceeds from sale of marketable securities and short-term investments - 238,175
Capital expenditures (43,928) (31,879)
Other, net (210) (404)
---------------- -----------------
Net cash (used in) provided by investing activities (90,534) 106,724
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings, net 8,023 4,843
Repayment of current portion of long-term debt (1,730) -
Repurchase of Common Stock (79,750) (33,978)
Proceeds from exercise of stock options 3,024 2,632
Excess tax benefits from share-based payment arrangements 660 821
Cash dividends on Common Stock (11,403) (8,668)
---------------- -----------------
Net cash used in financing activities (81,176) (34,350)
---------------- -----------------
Effect of exchange rate changes on
cash and cash equivalents 2,397 (602)
---------------- -----------------
Net (decrease) increase in cash and cash equivalents (213,068) 26,027
Cash and cash equivalents at beginning of year 393,609 187,681
---------------- -----------------
Cash and cash equivalents at end of three months $ 180,541 $ 213,708
---------------- -----------------
See notes to condensed consolidated financial statements.
6
TIFFANY & CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements include
the accounts of Tiffany & Co. and all majority-owned domestic and
foreign subsidiaries (the "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) necessary to present fairly the Company's financial
position as of April 30, 2006 and 2005 and the results of its
operations and cash flows for the interim periods presented. The
condensed consolidated balance sheet data for January 31, 2006 is
derived from the audited financial statements, which are included in
the Company's report on Form 10-K and should be read in connection
with these financial statements. In accordance with the rules of the
Securities and Exchange Commission, these financial statements do not
include all disclosures required by generally accepted accounting
principles.
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, 2006 and 2005 are not necessarily indicative of the results
of the entire fiscal year.
2. NEW ACCOUNTING STANDARDS
In October 2005, the Financial Accounting Standards Board ("FASB")
issued Staff Position ("FSP") No. FAS 13-1, "Accounting for Rental
Costs Incurred during a Construction Period" which requires that
rental costs associated with ground or building operating leases
incurred during a construction period be recognized as rental expense
and included in income from continuing operations. FSP No. FAS 13-1 is
effective for reporting periods beginning after December 15, 2005. The
adoption of FSP No. FAS 13-1 in the first quarter of 2006 had no
impact on the Company's financial position, earnings and cash flows.
In November 2004, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 151, "Inventory Costs - an amendment of ARB No.
43, Chapter 4." SFAS No. 151 amends the guidance in ARB No. 43,
Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs and wasted
material (spoilage). This Statement requires that those items be
recognized as current period charges. In addition, SFAS No. 151
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production
facilities. SFAS No. 151 is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. The adoption of
this Statement in the first quarter of 2006 had no impact on the
Company's financial position, earnings and cash flows.
7
3. INVENTORIES
April 30, January 31, April 30,
(in thousands) 2006 2006 2005
-------------------------------------------------------------------------------------------
Finished goods $ 816,661 $ 764,041 $ 787,905
Raw materials 263,024 244,400 236,240
Work-in-process 61,144 51,723 49,460
--------------------- ------------------- ---------------------
Inventories, net $ 1,140,829 $ 1,060,164 $ 1,073,605
--------------------- ------------------- ---------------------
LIFO-based inventories at April 30, 2006, January 31, 2006 and April
30, 2005 represented 70%, 69% and 68% of inventories, net, with the
current cost exceeding the LIFO inventory value by $76,990,000
$75,624,000 and $65,276,000 at the end of each period.
4. INCOME TAXES
The effective income tax rate for the three months ended April 30,
2006 was 38.6% versus 35.5% in the three months ended April 30, 2005.
The lower effective tax rate in the three months ended April 30, 2005
primarily reflected a $1,500,000 tax benefit associated with the
repatriation provisions of the American Jobs Creation Act of 2004.
5. EARNINGS PER SHARE
Basic earnings per share is computed as net earnings divided by the
weighted-average number of common shares outstanding for the period.
Diluted earnings per share includes the dilutive effect of the assumed
exercise of stock options and vesting of restricted stock units.
The following table summarizes the reconciliation of the numerators
and denominators for the basic and diluted earnings per share ("EPS")
computations:
Three Months Ended
April 30,
--------------------------------------------------
(in thousands) 2006 2005
---------------------------------------------------------------------------------------------------
Net earnings for basic and
diluted EPS $ 43,142 $ 40,058
----------------------- ----------------------
Weighted average shares for basic EPS 141,941 144,248
Incremental shares based upon the
assumed exercise of stock options
and restricted stock units 2,426 2,037
----------------------- ----------------------
Weighted average shares for
diluted EPS 144,367 146,285
----------------------- ----------------------
For the three months ended April 30, 2006 and 2005, there were
5,066,000 and 7,422,000 stock options and restricted stock units
excluded from the computations of earnings per diluted share due to
their antidilutive effect.
8
6. EMPLOYEE BENEFIT PLANS
The Company maintains several pension and retirement plans, as well as
provides certain health-care and life insurance benefits.
Net periodic pension and other postretirement benefit expense included
the following components:
Three Months Ended April 30,
-------------------------------------------------------------
Other
Postretirement
Pension Benefits Benefits
-------------------------------------------------------------
(in thousands) 2006 2005 2006 2005
---------------------------------------------------------------------------------------------------
Service cost $ 3,840 $ 3,181 $ 376 $ 342
Interest cost 3,502 2,904 429 421
Expected return on plan
assets (2,944) (2,519) - -
Amortization of prior
service cost 175 201 (293) (298)
Amortization of net loss 1,147 592 85 89
-------------------------------------------------------------
Net expense $ 5,720 $ 4,359 $ 597 $ 554
-------------------------------------------------------------
7. SEGMENT INFORMATION
The Company's reportable segments are: U.S. Retail, International
Retail and Direct Marketing. These reportable segments represent
channels of distribution that offer similar merchandise and service
and have similar marketing and distribution strategies. Its "Other"
channel of distribution includes all non-reportable segments which
consist of worldwide sales and businesses operated under trademarks
and tradenames other than TIFFANY & CO., as well as wholesale sales of
diamonds obtained through the Company's diamond sourcing program but
subsequently deemed not suitable for production by its manufacturing
operations. In deciding how to allocate resources and assess
performance, the Company's Executive Officers regularly evaluate the
performance of its reportable segments on the basis of net sales and
earnings from operations, after the elimination of inter-segment sales
and transfers.
Revisions were made to the prior year's segment amounts to conform to
the current year presentation and to reflect the revised manner in
which management evaluates the performance of segments. These
revisions were as follows:
o In the second quarter of 2005, the Company placed responsibility
for U.S. non-Internet business-to-business sales within the U.S.
Retail segment and, consequently, began reporting non-Internet
business-to-business sales in that segment. In the past, such
sales were reported in the Direct Marketing segment, which will
continue to report Internet business-to-business transactions.
o Effective with the current reporting period, the Company
allocates LIFO costs between its reportable segments based upon
sales of U.S. and foreign branches only, which value inventory
using the LIFO method.
9
SEGMENT INFORMATION (continued)
Certain information relating to the Company's segments is set forth
below:
Three Months Ended
April 30,
---------------------------------------------------
(in thousands) 2006 2005
-------------------------------------------------------------------------------------------
Net sales:
U.S. Retail $ 260,580 $ 255,852
International Retail 215,164 190,316
Direct Marketing 29,957 28,936
---------------------- -----------------------
Total reportable segments 505,701 475,104
Other 33,540 34,797
---------------------- -----------------------
$ 539,241 $ 509,901
---------------------- -----------------------
Earnings (losses) from operations:*
U.S. Retail $ 46,778 $ 46,261
International Retail 54,896 44,072
Direct Marketing 8,148 8,676
---------------------- -----------------------
Total reportable segments 109,822 99,009
Other (3,412) (1,515)
---------------------- -----------------------
$ 106,410 $ 97,494
---------------------- -----------------------
* Represents earnings from operations before unallocated corporate
expenses and other expenses, net.
The following table sets forth a reconciliation of the segments'
earnings from operations to the Company's consolidated earnings before
income taxes:
Three Months Ended
April 30,
----------------------------------------------------
(in thousands) 2006 2005
------------------------------------------------------------------------------------------------
Earnings from operations for
segments $ 106,410 $ 97,494
Unallocated corporate expenses (32,163) (31,183)
Other expenses, net (3,975) (4,206)
----------------------- -----------------------
Earnings before income taxes $ 70,272 $ 62,105
----------------------- -----------------------
Unallocated corporate expenses include certain costs related to
administrative support functions, such as information technology,
finance, legal and human resources, which the Company does not
allocate to its segments.
8. SUBSEQUENT EVENT
On May 18, 2006, the Company's Board of Directors declared a 25%
increase in the quarterly dividend rate on its Common Stock,
increasing it from $0.08 per share to $0.10 per share. This dividend
will be paid on July 10, 2006 to stockholders of record on June 20,
2006.
10
PART I. Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW
--------
Tiffany & Co. is a holding company that operates through its subsidiary
companies (the "Company"). The Company's principal subsidiary, Tiffany and
Company, is a jeweler and specialty retailer whose principal merchandise
offerings are an extensive selection of fine jewelry. It also sells timepieces,
sterling silverware, china, crystal, stationery, fragrances and accessories.
Through Tiffany and Company and other subsidiaries, the Company is engaged in
product design, manufacturing and retailing activities.
The Company's channels of distribution are as follows:
o U.S. Retail includes sales in TIFFANY & CO. stores in the U.S. and, to a
lesser extent, sales of TIFFANY & CO. products through business-to-business
sales personnel in the U.S.;
o International Retail includes sales in TIFFANY & CO. stores and department
store boutiques outside the U.S., as well as, to a lesser extent,
business-to-business, Internet and wholesale sales of TIFFANY & CO.
products outside the U.S.;
o Direct Marketing includes Internet and catalog sales of TIFFANY & CO.
products in the U.S.; and
o Other includes worldwide sales of businesses operated under trademarks or
tradenames other than TIFFANY & CO. ("specialty retail"), as well as
wholesale sales of diamonds obtained through the Company's diamond sourcing
program but subsequently deemed not suitable for production by its
manufacturing operations.
All references to years relate to fiscal years ended or ending on January 31 of
the following calendar year.
HIGHLIGHTS
o Net sales increased 6% in the three months ("first quarter") ended
April 30, 2006. On a constant-exchange-rate basis (see Non-GAAP
Measures section below), net sales rose 9% and worldwide comparable
store sales rose 5%.
o U.S. comparable store sales declined 1%, but Japan comparable retail
sales, on a constant-exchange-rate basis, increased 12%.
o Earnings from operations rose 12% and net earnings increased 8%.
o Three retail locations were opened - two in Japan and one in
Monterrey, Mexico.
o An informational website was launched in China.
o A jewelry collection designed by the renowned architect Frank Gehry
was launched.
o The Company repurchased and retired 2.2 million shares of its Common
Stock during the quarter.
o In May 2006, the Board of Directors increased the annual dividend rate
by 25%.
NON-GAAP MEASURES
-----------------
The Company's reported net sales reflect either a translation-related benefit
from strengthening foreign currencies or a detriment from a strengthening U.S.
dollar.
The Company reports information in accordance with U.S. Generally Accepted
Accounting Principles ("GAAP"). Internally, management monitors the sales
11
performance of its international stores and boutiques on a non-GAAP basis that
eliminates the positive or negative effects that result from translating
international sales into U.S. dollars ("constant-exchange-rate basis").
Management uses this constant-exchange-rate measure because it believes it is a
more representative assessment of the sales performance of its international
stores and boutiques and provides better comparability between reporting
periods.
The Company's management does not, nor does it suggest that investors should,
consider such non-GAAP financial measures in isolation from, or as a substitute
for, financial information prepared in accordance with GAAP. The Company
presents such non-GAAP financial measures in reporting its financial results to
provide investors with an additional tool to evaluate the Company's operating
results.
The following table reconciles net sales percentage increases (decreases), for
the first quarter of 2006 versus the first quarter of 2005, from the GAAP to the
non-GAAP basis:
Net Sales Comparable Store Sales
--------------------------------------------- ---------------------------------------------
Constant- Constant-
Trans- Exchange- Trans- Exchange-
GAAP lation Rate GAAP lation Rate
Reported Effect Basis Reported Effect Basis
----------------------------------------------------------------------------------------------
Worldwide 6% (3%) 9% 2% (3%) 5%
U.S. Retail 2% - 2% (1%) - (1%)
International
Retail 13% (8%) 21% 8% (8%) 16%
Japan Retail 4% (11%) 15% 1% (11%) 12%
Other Asia-
Pacific 19% (1%) 20% 20% - 20%
Europe 18% (9%) 27% 14% (10%) 24%
RESULTS OF OPERATIONS
---------------------
Certain operating data as a percentage of net sales were as follows:
Three Months Ended
April 30,
-------------------------------------
2006 2005
-------------------------------------
Net sales 100.0% 100.0%
Cost of sales 44.2 46.1
-------------------------------------
Gross profit 55.8 53.9
Selling, general and administrative 42.1 40.9
expenses -------------------------------------
Earnings from operations 13.7 13.0
Other expenses, net 0.7 0.8
-------------------------------------
Earnings before income taxes 13.0 12.2
Provision for income taxes 5.0 4.3
-------------------------------------
Net earnings 8.0% 7.9%
-------------------------------------
12
Net Sales
---------
Net sales by channel of distribution were as follows:
Three Months Ended
(in thousands) April 30,
-------------------------------------------------------------------------------------------------
Increase
2006 2005 (Decrease)
-------------------------------------------------------------------
U.S. Retail $ 260,580 $ 255,852 2%
International Retail 215,164 190,316 13%
Direct Marketing 29,957 28,936 4%
Other 33,540 34,797 (4%)
------------------------------------------------------------------
$ 539,241 $ 509,901 6%
------------------------------------------------------------------
A store's sales are included in "comparable store sales" when the store has been
open for more than 12 months. In markets other than Japan, sales for relocated
stores are included if the relocation occurs within the same geographical
market. In Japan, sales for a new store or boutique are not included if the
store was relocated from one department store to another or from a department
store to a free-standing location. The results of a store in which the square
footage has been expanded or reduced remain in the comparable store base in all
markets.
In the second quarter of 2005, the Company placed responsibility for U.S.
non-Internet business-to-business sales within the U.S. Retail channel and,
consequently, began reporting non-Internet business-to-business sales in that
channel. In the past, such sales were reported in the Direct Marketing channel,
which will continue to report Internet business-to-business transactions. The
prior year's amounts affected by the change have been revised to conform to the
current year presentation.
U.S. Retail sales increased 2% in the first quarter as a result of new store
openings in the past year. Comparable store sales declined 1%. Comparable branch
store sales were equal to the prior year and sales in the New York flagship
store declined 7%. Management expects a mid-single-digit percentage increase in
full year 2006 U.S. comparable store sales.
International Retail sales, on a constant-exchange-rate basis, increased 21% and
comparable store sales increased 16% in the first quarter.
In Japan (which represented 20% of net sales in fiscal year 2005), on a
constant-exchange-rate basis, total retail sales increased 15% in the first
quarter and comparable store sales increased 12%. Management's operational focus
in Japan is on new products, targeted publicity and marketing, and enhancing the
quality of selling locations and improving selling skills. Management believes
that the focus on these initiatives has contributed to the improved results.
Sales of engagement jewelry, fine jewelry and silver jewelry increased in the
first quarter. Management expects a mid-single-digit increase in full year 2006
Japan comparable store sales.
In the Asia-Pacific region outside Japan (which represented 8% of net sales in
fiscal year 2005), comparable store sales on a constant-exchange-rate basis
increased 20% in the first quarter due to growth in all markets.
In Europe (which represented 6% of net sales in fiscal year 2005), comparable
store sales on a constant-exchange-rate basis increased 24% in the first quarter
due to growth in London and most of Continental Europe.
Direct Marketing sales rose 4% in the first quarter due to growth both in the
number of orders shipped and the average order size.
13
Other sales decreased in the first quarter. In the specialty retail businesses,
sales in LITTLE SWITZERLAND stores decreased 3% in the first quarter. The
Company continues to invest in new IRIDESSE stores, which are devoted to the
sale of pearl jewelry, and there are now seven such stores.
Management's plan for openings and closings of TIFFANY & CO. stores in 2006 are
shown below and, in total, would represent a 6% net increase in gross square
footage:
Actual Openings Expected
Location (Closings) 2006 Openings 2006
-------- --------------- ---------------
Mito, Japan First Quarter
Yonago, Japan First Quarter
Busan, Korea (First Quarter)
Monterrey, Mexico First Quarter
Indianapolis, Indiana Second Quarter
Atlantic City, New Jersey Third Quarter
Tucson, Arizona Third Quarter
Nashville, Tennessee Third Quarter
Waikoloa, Hawaii Fourth Quarter
Beijing, China Second Quarter
Shanghai, China Third Quarter
Macau Third Quarter
Vienna, Austria Third Quarter
Vancouver, Canada Fourth Quarter
Gross Margin
------------
Gross margin improved in the first quarter by 1.9 percentage points primarily
driven by product sales mix, which more than offset higher precious metal
prices. Geographic sales mix, with particularly stronger sales in Japan, also
provided a benefit to a lesser extent. The Company is addressing, and as
necessary will continue to address, the effect of higher precious metal costs by
adjusting retail prices in various product categories.
Management's long-term strategy and objectives include achieving product
manufacturing/sourcing efficiencies (including increased direct rough-diamond
sourcing and internal manufacturing) and implementing selective price
adjustments in order to maintain the Company's gross margin at, or above, prior
year levels. Management expects gross margin in the full year 2006 to be
approximately equal to the prior year.
Selling, General and Administrative Expenses
--------------------------------------------
SG&A expenses increased 9% in the first quarter with almost half of the increase
resulting from increased marketing expense (largely due to the launch of the
Frank Gehry jewelry collection). There was also incremental growth in labor,
depreciation and occupancy expenses. As a percentage of net sales, SG&A expenses
increased in the first quarter because sales growth was insufficient to offset
increased marketing expenses and fixed costs. Management's objective is to
improve the ratio of SG&A expenses to net sales by controlling expenses so that
anticipated sales growth will result in improved earnings. Management continues
to expect a high-single-digit percentage increase in SG&A expenses in full year
2006 and, if sales expectations are achieved, an improvement in the expense
ratio.
14
Earnings from Operations
------------------------
Revisions were made to prior year's earnings (losses) from operations by segment
to conform to the current year presentation and to reflect the manner in which
management now evaluates the performance of segments. (See Note 7 to the
Condensed Consolidated Financial Statements for further information on the
revisions that were made).
First First
Quarter % of Quarter % of
(in thousands) 2006 Sales* 2005 Sales*
-------------------------------------------------------------------------------------------------
Earnings (losses) from
operations:
U.S. Retail $ 46,778 18% $ 46,261 18%
International Retail 54,896 26% 44,072 23%
Direct Marketing 8,148 27% 8,676 30%
Other (3,412) (10%) (1,515) (4%)
---------------------------------------------------------
106,410 97,494
Unallocated corporate expenses (32,163) (31,183)
---------------------------------------------------------
Earnings from operations $ 74,247 $ 66,311
---------------------------------------------------------
* Percentages represent earnings (losses) from operations as a percentage of
each segment's net sales.
Earnings from operations rose 12% in the first quarter. On a segment basis, the
ratio 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 2006 and 2005 was as follows:
o U.S. Retail was consistent with the prior year. An increase in gross margin
(due to a change in product sales mix) was offset by increased SG&A
expenses (particularly marketing expenses largely tied to the launch of the
Frank Gehry jewelry collection as well as higher labor, depreciation and
occupancy expenses);
o International Retail increased 3 percentage points primarily due to sales
growth more than offsetting increased operating expenses;
o Direct Marketing decreased 3 percentage points primarily because sales
growth was insufficient to absorb increased operating expenses; and
o Other decreased 6 percentage points primarily due to the continued
investment in the expansion of the specialty retail businesses.
Unallocated corporate expenses include certain costs related to administrative
support functions, such as information technology, finance, legal and human
resources, which the Company does not allocate to its segments.
Provision for Income Taxes
--------------------------
The effective income tax rate for the three months ended April 30, 2006 was
38.6% versus 35.5% in the three months ended April 30, 2005. The lower effective
tax rate in the first quarter of 2005 primarily reflected a $1,500,000 tax
benefit associated with the repatriation provisions of the American Jobs
Creation Act of 2004.
Management continues to expect the effective tax rate to be approximately 38%
for full year 2006.
New Accounting Standards
------------------------
See Note 2 to Condensed Consolidated Financial Statements.
15
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's liquidity needs are primarily a function of its requirements for
seasonal and expansion-related working capital and capital expenditures. The
Company had a net cash outflow from operating activities of $43,755,000 in the
first quarter of 2006, compared with an outflow of $45,745,000 in the first
quarter of 2005. Tax payments in 2006 were lower than 2005 when taxes on the
gain from the sale of the Company's equity investment in Aber Diamond
Corporation were paid. In addition, inventory purchases in the first quarter
were higher than in the first quarter of 2005, as discussed in the Working
Capital section below.
Working Capital
---------------
Working capital (current assets less current liabilities) and the corresponding
current ratio (current assets divided by current liabilities) were
$1,293,511,000 and 4.6 at April 30, 2006, compared with $1,334,233,000 and 4.7
at January 31, 2006 and $1,206,307,000 and 4.9 at April 30, 2005.
Accounts receivable, less allowances at April 30, 2006 were 10% higher than at
January 31, 2006 and was affected by the timing of certain end-of-month receipts
which were collected in May and were 29% higher than at April 30, 2005 partly
due to sales growth and also affected by the timing of receipts.
Inventories, net at April 30, 2006 were 8% above those at January 31, 2006 and
6% above those at April 30, 2005. Combined raw material and work-in-process
inventories increased 9% versus January 31, 2006 and 13% versus April 30, 2005
due to increased costs and quantities needed to support increased internal
jewelry manufacturing. Finished goods inventories increased 7% versus January
31, 2006, and 4% versus April 30, 2005, partly due to weaker-than-expected U.S.
sales growth as well as anticipated comparable store sales growth and store
openings. Changes in foreign currency exchange rates increased inventories, net
by 1% compared to January 31, 2006 and decreased inventories, net 1% compared to
April 30, 2005.
The Company continually strives to improve its inventory management by
developing more effective systems and processes for product development,
assortment planning, sales forecasting, supply-chain logistics and store
replenishment. Management continues to expect a mid-to-high single-digit
percentage increase in the overall year-over-year inventory growth rate in 2006.
Capital Expenditures
--------------------
Capital expenditures were $43,928,000 in the first quarter compared with
$31,879,000 in the first quarter of 2005. Management estimates that capital
expenditures will be approximately $170,000,000 in 2006 (compared with
approximately $157,000,000 in the prior year) due to costs related to the
opening and renovation of stores and to ongoing investments in new systems.
In 2000, the Company began a multi-year project to renovate and reconfigure its
New York flagship store in order to increase the total sales area by
approximately 25%, and to provide additional space for customer service,
customer hospitality and special exhibitions. The Company has spent
approximately $94,000,000 to-date for New York store related projects. Based on
current plans, the Company estimates that the overall cost of these projects
will be $110,000,000 when completed by the end of 2006.
Share Repurchases
-----------------
In March 2005, the Company's Board of Directors approved a stock repurchase
program ("2005 Program") that authorized the repurchase of up to $400,000,000 of
the Company's Common Stock through March 2007 by means of open market or private
transactions. The 2005 Program replaced and terminated an earlier program. The
timing of repurchases and the actual number of shares to be
16
repurchased depend on a variety of discretionary factors such as price and other
market conditions. In the first quarter, the Company repurchased and retired
2,179,272 shares of Common Stock at a total cost of $79,750,000, or an average
cost of $36.59 per share. At April 30, 2006, there remained $196,416,000 of
authorization for future repurchases under the 2005 Program.
Borrowings
----------
The Company's sources of working capital are internally-generated cash flows and
funds available under a revolving credit facility.
The ratio of total debt (short-term borrowings, current portion of long-term
debt and long-term debt) to stockholders' equity was 27% at April 30, 2006, 26%
at January 31, 2006 and 26% at April 30, 2005.
At April 30, 2006, the Company was in compliance with all loan covenants.
Based on the Company's financial position at April 30, 2006, management
anticipates that cash on hand, internally-generated cash flows and the funds
available under its revolving credit facility will be sufficient to support the
Company's planned worldwide business expansion, share repurchases, debt service
and seasonal working capital increases for the foreseeable future.
Contractual Obligations
-----------------------
The Company's contractual cash obligations and commercial commitments at April
30, 2006 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, 2006.
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.
Forward-Looking Statements
--------------------------
This document contains certain "forward-looking statements" concerning the
Company's objectives and expectations with respect to store openings, sales,
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. Statements
beginning with such words as "believes", "intends", "plans", and "expects"
include forward-looking statements that are based on management's expectations
given facts as currently known by management on the date this quarterly report
was filed with the Securities and Exchange Commission. All forward-looking
statements involve risks, uncertainties and assumptions that, if they never
materialize or prove incorrect, could cause actual results to differ materially
from those expressed or implied by such forward-looking statements.
The statements in this quarterly report are made as of the date this quarterly
report was filed with the Securities and Exchange Commission and the Company
undertakes no obligation to update any of the forward-looking information
included in this document, whether as a result of new information, future
events, changes in expectations or otherwise.
17
PART I. Financial Information
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
The Company is exposed to market risk from fluctuations in foreign currency
exchange rates and interest rates, which could affect its consolidated financial
position, earnings and cash flows. The Company manages its exposure to market
risk through its regular operating and financing activities and, when deemed
appropriate, through the use of derivative financial instruments. The Company
uses derivative financial instruments as risk management tools and not for
trading or speculative purposes, and does not maintain such instruments that may
expose the Company to significant market risk.
In Japan, the Company uses yen put options to minimize the effect of a weakening
yen on U.S. dollar-denominated transactions. To a lesser extent, the Company
uses foreign-exchange forward contracts to protect against weakening local
currencies. Gains or losses on these instruments substantially offset losses or
gains on the assets, liabilities and transactions being hedged. Management
neither foresees nor expects significant changes in foreign currency exposure in
the near future.
The Company uses interest-rate swap contracts related to certain debt
arrangements to manage its net exposure to interest rate changes. The
interest-rate swap contracts effectively convert fixed-rate obligations to
floating-rate instruments. Additionally, since the fair value of the Company's
fixed-rate long-term debt is sensitive to interest rate changes, the
interest-rate swap contracts serve as a hedge to changes in the fair value of
these debt instruments.
Management does not expect significant changes in exposure to interest rate
fluctuations, nor in market risk-management practices.
18
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Based on their evaluation of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934), Registrant's chief executive officer and chief financial officer
concluded that, as of the end of the period covered by this report, Registrant's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by Registrant in the reports that it files or submits
under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms and
(ii) accumulated and communicated to our management, including our chief
executive officer and chief financial officer, to allow timely decisions
regarding required disclosure.
In addition, Registrant's chief executive officer and chief financial
officer have determined that there have been no changes in Registrant's internal
control over financial reporting during the period covered by this report
identified in connection with the evaluation described in the above paragraph
that have materially affected, or are reasonably likely to materially affect,
Registrant's internal control over financial reporting.
Registrant's management, including its chief executive officer and chief
financial officer necessarily applied their judgment in assessing the costs and
benefits of such controls and procedures. By their nature, such controls and
procedures cannot provide absolute certainty, but can provide reasonable
assurance regarding management's control objectives. Our chief executive officer
and our chief financial officer have concluded that Registrant's disclosure
controls and procedures are (i) designed to provide such reasonable assurance
and (ii) are effective at that reasonable assurance level.
19
PART II. Other Information
Item 1A. Risk Factors
As a jeweler and specialty retailer, the Company's success in achieving its
objectives and expectations is partially dependent upon economic conditions,
competitive developments and consumer attitudes, including changes in consumer
preferences for certain jewelry styles and materials. However, certain
assumptions are specific to the Company and/or the markets in which it operates.
The following assumptions, among others, are "risk factors" which could affect
the likelihood that the Company will achieve the objectives and 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, will continue;
(ix) that the wholesale and retail market for high-quality rough and cut
diamonds will provide continuity of supply and pricing within the quality
grades, colors and sizes that customers demand;
(x) that the Company's diamond supply initiatives achieve their financial and
strategic objectives;
(xi) that the Company's gross margins in Japan and for diamond products can be
maintained in the face of increased competition from traditional and e-commerce
retailers;
(xii) that the Company is able to pass on higher costs of raw materials to
consumers through price increases;
20
(xiii) that the sale of counterfeit products does not significantly undermine
the value of the Company's trademarks and demand for the Company's products;
(xiv) that new and existing stores and other sales locations can be leased,
re-leased or otherwise obtained on suitable terms in desired markets and that
construction can be completed on a timely basis;
(xv) that the Company can achieve satisfactory results from any current and
future businesses into which it enters that are operated under trademarks or
tradenames other than TIFFANY & CO.; and
(xvi) that the Company's expansion plans for retail and direct selling
operations and merchandise development, production and management can continue
to be executed without meaningfully diminishing the distinctive appeal of the
TIFFANY & CO. brand.
PART II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
This table provides information with respect to purchases by the Company of
shares of its Common Stock during the first fiscal quarter of 2006:
--------------------------------------------------------------------------------------------------------------
(c)Total
Number of (d)Approximate
Shares Dollar Value
Purchased of Shares that
(a)Total Under all May Yet be
Number of (b)Average Publicly Purchased
Shares Price Paid Announced Under the
Period Purchased Per Share Programs* Programs*
--------------------------------------------------------------------------------------------------------------
February 1, 2006
through
February 28, 2006 - - - $276,166,000
--------------------------------------------------------------------------------------------------------------
March 1, 2006
through
March 31, 2006 264,000 $37.62 264,000 $266,234,000
--------------------------------------------------------------------------------------------------------------
April 1, 2006
through
April 30, 2006 1,915,272 $36.45 1,915,272 $196,416,000
--------------------------------------------------------------------------------------------------------------
Total 2,179,272 $36.59 2,179,272 $196,416,000
--------------------------------------------------------------------------------------------------------------
* The current stock repurchase program authorizes the Company to repurchase up
to $400,000,000 of its Common Stock through open market or private transactions.
The current program expires on March 30, 2007.
21
ITEM 6 Exhibits
(a) Exhibits:
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
22
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TIFFANY & CO.
(Registrant)
Date: June 2, 2006 By: /s/ James N. Fernandez
------------------------------------
James N. Fernandez
Executive Vice President and
Chief Financial Officer
(principal financial officer)
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NUMBER
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.