(IDEX Online) – Tiffany & Co., the world-renowned luxury jeweler, surprised even itself with stronger-than-expected sales and profits for its second fiscal quarter ended July 2011. As a result, management was bold enough to boost its profit projection for the full year.

 

Here is how second quarter financials stacked up. All figures are “constant dollar” results that eliminate the impact of currency swings and more accurately reflects underlying operational performance.

 

·        Global sales rose by 24 percent, with global same-store sales up 22 percent.

 

·        Sales in the Americas, of which the U.S. represents roughly 90 percent of the results, were up by 24 percent, with same-store sales up 23 percent.

 

·        Tiffany’s flagship Fifth Avenue New York store posted a dramatic sales gain of 41 percent in the second quarter.

 

·        Same-store sales in branch stores in the Americas rose by 19 percent in the three-month period ended July 2011.

 

·        Tiffany’s gross profit rose, despite increased costs related to higher commodity prices such as diamonds and gold.

 

·        The company’s operating cost ratio fell, excluding unusual costs related to the move to a new corporate headquarters.

 

·        Inventories rose by an estimated 13 percent, after elimination of currency translation. This was well below sales growth, and shows that Tiffany’s inventories are well managed. Its annual inventory turn rose modestly.

 

·        The company is loaded with cash: at the end of the quarter, Tiffany held cash of $565 million (just over a half billion dollars), and it has paid down its total debt by nearly $100 million over the past year. Total debt to total capital is a low 23 percent of capitalization.

 

·        For the full year, the company is predicting that worldwide net sales will rise by a high-teen level, and profits will rise by an estimated 20-25 percent (our forecast). Management noted that earnings per share are expected to rise by 25-28 percent, but this number is mostly for Wall Street’s use and does not totally reflect underlying profit growth.

 

·        Tiffany’s sales through the first three weeks in August remain robust, exceeding management’s expectations.

 

The table below summarizes key financial data for Tiffany’s second fiscal three-month period ended July 2011.

 

 

Sales Driven By Luxury Goods Demand

Despite uncertainty in the financial markets, a dysfunctional U.S. Congress, high unemployment, and other global instabilities, consumers proved that they are still willing to buy luxury goods.

 

Here are some of the factors that drove Tiffany’s sales in the second fiscal period:

 

·        In the Americas (the U.S. represents about 90 percent of the sales in this region), the company’s total sales gain of 24 percent was driven by both a higher average price per unit as well as unit growth in most product categories.

 

·        Sales increased in all price strata above $250, with notable strength in sales over $20,000 and $50,000.

 

·        Same-store sales rose at double-digit levels during each of the three months – May, June and July – during the second fiscal quarter.

 

·        While Tiffany’s sales growth in the Americas was driven largely by demand in the U.S., management said that its stores in Latin America and Canada had good growth.

 

·        Sales in the company’s New York Flagship store were driven by increased demand from both foreign tourists as well as local shoppers.

 

·        Regionally in the U.S., sales were stronger in the western half of America, as well as in its six stores in Hawaii and Guam, due largely to increase spending by Japanese tourists as well as shoppers from China. Tourist spending was greatest in Tiffany’s New York Flagship stores and certain stores in Florida, Las Vegas and California.

 

·        E-commerce and catalog sales rose by 16 percent due to increases in both the number of orders and in the average size per order.

 

·        “Other” revenue rose by 46 percent, though it was only about 2 percent of total corporate revenues for the period. Other revenues rose because of increased wholesale sales of finished Tiffany goods to independent distributors in emerging markets, partially offset by fewer sales of rough diamonds.

 

·        The company’s global sales gain was driven by a double-digit sales gain in all jewelry categories.

 

o       High-end statement jewelry sales were robust in the quarter.

 

o       Engagement jewelry sales were very strong due to substantial increase in demand in the Americas, Asia-Pacific and Europe. Sales were driven by both increased unit sales and a higher average price.

 

o       Both fine and fashion jewelry sales were strong, driven by well-known designs life Tiffany’s Metro, Notes, Keys, and other collections, as well as Celebration Rings and the relatively new Yellow Diamond Collection.

 

o       Designer jewelry demand was solid, led by the designs of Elsa Peretti.

 

o       The following table summarizes sales gains by geopolitical region of the world.

It is notable that Tiffany’s sales in Japan rose by 8 percent in Yen, despite the tragic earthquake and tsunami in March.

Profit Contributors Show Significant Improvement

Tiffany’s gross margin and its operating cost ratio showed improvement during the quarter, excluding one-time costs related to moving to a new headquarters.

 

·        Tiffany’s gross margin in the quarter was 59.0 percent of sales, up from last year’s 57.8 percent, due entirely to sales leverage of fixed costs that are included in cost of sales.

 

·        While Tiffany implemented selective price increases in various product categories, its goal is simply to maintain merchandise margins. So far, it has been able to pass along these price increases without dampening consumer demand.

 

·        On a reported basis, Tiffany’s operating cost ratio rose to 42.9 percent of sales from last year’s 40.8 percent. However, excluding unusual costs, its operating cost ratio would have been 39.4 percent of sales, notably below last year’s levels. Aside from the costs to move the corporate headquarters in New York, there were other cost increases including higher store occupancy costs, higher staffing costs, increased marketing expenditures, and variable costs related to higher sales (mostly commissions). After reducing its marketing-to-sales spend during the recession, Tiffany has stepped it up to historic levels of between 6 percent and 7 percent of sales.

 

Sourcing Goods Is Key to Tiffany Profits

Like most large jewelers, Tiffany continues to refine and streamline its merchandise sourcing process.

 

·        Last year, Tiffany produced about 60 percent (by value) of the goods that it sold. Because of its size, Tiffany can efficiently manufacture goods as well as efficiently vertically integrate its operations.

 

·        In an effort to assure an adequate supply of diamonds, it has helped provide financing for the expansion of the Koidu mine in Sierra Leone. It has four production facilities in the U.S., and it just moved into an expanded facility in Kentucky. It has two major distribution facilities in New Jersey; these have the capacity to support the company’s planned expansion for many years.

 

·        Management noted that it has seen a 40 percent increase in the price of rough diamonds that ultimately end up in a piece of Tiffany jewelry. This is well above the overall price of polished diamonds, but reflects accurately the larger-than-average price increases for high quality diamonds.

 

Outlook: Strong Sales and Profit Gains, More Stores

Tiffany management provided the following outlook for its full fiscal year ending January 2012, with the caveat that changing conditions may necessitate revision of the forecast.

 

·        A high-teen percentage gain in worldwide net sales.

 

·        A high-teen sales gain in the Americas.

 

·        At least a 30 percent sales increase in the Asia-Pacific region.

 

·        At least a 20 percent sales increase in Europe.

 

·        A high single-digit sales gain in Japan.

 

·        “Other sales” (primarily rough diamonds and wholesale sales of Tiffany merchandise into emerging markets) are expected to increase by about 25 percent.

 

·        New stores in the Americas: six new units, including stores already opened in Calgary and Northbrook as well as the scheduled opening in Richmond VA in early September, with other openings in Las Vegas, Brasilia and Vancouver. A store planned for Montreal is now slated to open in early 2012. Relocations this year include one store in Boston.

 

·        In Europe, three new stores are planned, with openings in Zurich, Frankfurt and Milan.

 

·        In China, four stores are slated to open. One new unit is planned for Taiwan and three in Korea.