Even though worldwide sales were down 16 percent, world-renowned jeweler Tiffany & Co., posted a solid, though diminished, profit for the July ended quarter. Quarterly revenues for the company were $612.5 million, and after-tax earnings were $56.8 million, above Wall Street forecasts. As Tiffany’s vice president of investor relations, Mark L. Aaron, said, “It appears to us that the tide may be slowly turning in our favor.”

 

In the Americas (mostly the U.S.), the sales news was even worse, but the company still generated a significant operating profit: total retail sales in the Americas dipped by 23 percent to $324.9 million, and operating profits were 17.2 percent of sales or $55.7 million. In the U.S., total retail sales dropped by 26 percent and same-store sales were down 27 percent. 

 

Here’s the significance of these numbers: despite a sharp decline in revenues, Tiffany posted a profit. How did they do it? They did a thousand things better – by just a few basis points – and it added up to a reasonable profit in a period when most jewelers are suffering some of the largest losses in their history.

 

Broadly, Tiffany has cut back on expansion to conserve cash, but it continues to create new jewelry collections to entice loyal customers into their stores. It has cut expenses. It has not gone into a “discounting” mode with prices. Its gross margin in the quarter was 55.1 percent, well above the typical specialty independent jeweler’s margin of 48.6 percent, according to the most recent Jewelers of America Cost of Doing Business Survey.

 

The table below summarizes Tiffany’s key financial data for the second fiscal quarter ended July 2009.

 

 

The following are highlights from Tiffany’s second fiscal quarter:

 

• Sales by geographic region are summarized on the table below. Demand for Tiffany merchandise was solid in Europe and the Asia-Pacific region outside of Japan, but weak in other regions.
  

  Source: Tiffany & Co.

Clearly, however, the weakest global region is the U.S. In New York, the company’s flagship store, which typically represents about 10 percent of corporate revenues, posted a 30 percent decline in sales. This was far less than the 42 percent drop in sales experienced by this store in the first quarter of the year. The company’s new Wall Street store also saw sales drop by 30 percent; this is an improvement from prior periods, and it reflects some improvement in the financial markets. In addition, the number of foreign tourists shopping in the New York Flagship store has declined, especially as the U.S. dollar rose in value earlier this year.

 

• Weak sales in the U.S. market were due to two factors: fewer transactions; and a drop in the average ticket. Each of these two factors had about the same impact on sales. 

• Tiffany’s price stratification analysis showed that demand across virtually all price points declined, though management noted that sales of goods priced above $50,000 were the weakest category. Management also noted that sales of goods at more accessible price points (we would define that as under $1,000) showed the least decline in the quarter.

• U.S. same-store sales were down 31 percent in May, dropped by 25 percent in June and declined by 24 percent in April. In short, sales declines diminished as the quarter progressed.

• By merchandise category, the best performing categories were fashion silver and gold jewelry, both smaller ticket items; sales were about equal to last year in dollars. Bridal jewelry remains a strong category, though bridal-related sales declined about in line with the company average. Statement jewelry posted the sharpest decline, while name designer jewelry sales were slightly below the average decline for the company.

• Tiffany’s e-commerce and catalog business posted a moderate sales decline of 8 percent due to fewer orders, but no material change in the average ticket. Management noted that these results were above plan.

• Tiffany’s sales in its “Other” segment – virtually all wholesale diamonds – were down 66 percent due to reduced diamond trading volume. The Iridesse stores, which are closing this year, are now shown as “discontinued operations” and their results are not included in “other” any longer.   

• Tiffany’s stores in Canada, Latin America and South America posted solid performance, according to management. Management specifically mentioned the strong initial results from its new store in Toronto, Canada, in the Yorkdale area; this store opened in the first quarter of this year.

• Tiffany’s stores in Europe posted solid sales gains, with same-store sales up 5 percent; this was above expectations, and was against a tough +11 percent gain last year. Despite difficult economic conditions in the U.K. and continental Europe, virtually all markets posted positive same-store sales comparisons, with the strongest percentage increase in Italy. 

• Tiffany’s gross margin was 55.1 percent in the second quarter, compared with 57.8 percent in the prior year. The decline was due to higher product costs.

• Selling, general and administrative expenses in the second quarter were 14 percent below the prior year. These savings were due to reduced staffing and marketing costs, as well as lower variable costs tied to the sales declines. In the quarter, the Company recovered $4.4 million related to a loan made to Tahera Diamond Corp. for which an impairment charge had been recorded in fiscal 2007; this debt recovery flowed through as a credit to operating costs. As a percentage of sales, operating costs were 40.5 percent this year, up from last year’s 39.8 percent.  

• Accounts receivable at July 31, 2009 were 23 percent below the prior year because of lower sales.

• Net inventories at July 31, 2009 were 2 percent above the prior year. However, consistent with management's objective, net inventories have declined 4 percent since the beginning of the fiscal year. Management continues to project a single-digit percentage decline for the full year.

• The company's balance sheet liquidity at July 31, 2009 included cash and cash equivalents of $333.6 million (versus $152.2 million a year ago) and total short-term borrowings and long-term debt of $751.7 million (versus $639.2 million a year ago). The increase in debt included $400 million of new long-term debt issued in the past year, a portion of which has been used to retire maturing debt.

• Because of hopeful signs, Tiffany’s management has a more positive outlook for the full fiscal year ending January 2010. Worldwide sales are now predicted to fall by 10 percent; previously, its forecast called for a sales decline of 11 percent or so. Further, it has told Wall Street analysts that earnings will be slightly stronger than previously expected. In the Americas, sales are expected to decline in the mid-teen range. Sales will likely be down by a low single-digit percentage in both Asia and Europe. In the “Other” category – wholesale diamonds – sales are forecasted to be down about 50 percent for the year, far larger than the prior forecast of a 20 percent decline. On an operating basis, Tiffany is expected to post a solid profit in 2009.