Tiffany & Co. (NYSE: TIF), the New Yorked based jeweler and specialty retailer, today reported its Q3 2013 financial results for the period ending October 31, 2013. The company saw a very solid quarter with a healthy rate of worldwide sales growth of 7% and a faster earnings growth rate.
Gross margin was 57%, 2.6 points above last year and versus a 3.5-point decline in the same period last year. As was reported, the diminishing product cost pressures towards the end of 2012 turned into a tailwind in the second quarter of 2013 and are now contributing to the growth, which is expected to continue at least through year-end. But the product cost benefit in the quarter was offset in part due to the continuing shift in sales mix toward higher price point, lower gross margin products, including strong jewelry sales. All in all, the strong earnings growth in the third quarter led the company to forecast gross margin for the full year to be higher than last year’s 57%.
With regard to SG&A expense ratio, the company improved the ratio of SG&A expenses to sales by leveraging fixed costs and led the management to forecast an improved SG&A expense ratio for the full year. As a result of the improved gross margin and SG&A expense ratio, earnings from operations rose 31% in the quarter on a 7% sales increase.
So with virtually everything moving in a favorable direction led the company to increase its full year forecast. For the fiscal year ending January 31, 2014, the company is forecasting earnings per diluted share of $3.65 to $3.75, which does not include $0.05 per diluted share of expenses tied to specific cost-reduction initiatives that were recorded in the first quarter, compared to last year’s $3.25 per share. This forecast is based on the following assumptions: mid-single-digit worldwide sales growth in dollars or high single-digit growth in local currency; comp store sales growth in local currencies ranging from low-double digits in Asia-Pacific in Japan to mid-single digits in Europe and low-single digits in the Americas.
In terms of inventories, net inventories were $2.4 billion at October 31, 2013 which was 6% higher than a year ago. For the full year, inventory is forecast to increase by 5% in dollar terms.
Accounts receivable on October 31, 2013 were 3% above last year, largely attributable to worldwide sales growth and are turning at more than 20 times per year.
In terms of liquidity, the company had $521 million of cash and cash equivalents at October 31, 2013 versus $345 million a year ago. Total short-term and long-term debt increased $30 million from last year, however as a percentage of stockholders’ equity, declined to 36% from 40% a year ago.
All in all, the company is forecasting to achieve positive free cash flow of around $300 million for the full year 2013 versus $109 million in 2012.
Sales performance by region in Q3 2013
In the Americas region, sales rose 4%, which was largely attributable to a higher average price per jewelry unit sold. Comparable store sales rose 1% due to a solid growth in The New York flagship store, primarily resulting from higher sales to foreign tourists from China and Europe as well as a modest growth in domestic spending.
But brand store sales were mixed by market. There was softness along much of the East Coast, strength along the West Coast and there were substantial sales declines in Hawaii and Guam due to lower Japanese tourist sales probably tied to the weaker yen. Elsewhere, results were mixed in Canada, Mexico and Brazil.
The relocation of Bloor Street store in Toronto to a nearby site is providing an extraordinary shopping environment and experience for the customers. And the company is greatly pleased to be entering New Orleans by opening a store tomorrow at The Shops at Canal Place near the city’s historic French Quarter.
Looking now to the Asia-Pacific region, sales rose a 27% increase in the quarter, with comp store sales increases in Greater China and other markets in the region accounting for a broad-based double-digit increase which was primarily due to an equal growth in the average price per jewelry unit sold and in the higher jewelry unit sold in most categories.
During the quarter, the company opened its 24th store in Jinan, China. At quarter end, there were Tiffany 68 stores in the Asia-Pacific region. And the company plans to open two more stores in China in the fourth quarter and two stores in Taiwan, one of which was opened two weeks ago in the Shinkong Mitsukoshi Ximen store in Tainan.
The company operated a total of 54 stores in Japan, and they performed well in the quarter. In local currency, total sales in Japan increased 9%, primarily due to increases in the average price per jewelry unit sold, as well as unit growth in most jewelry categories, and comparable store sales rose 5%, which is above the 5% increase in the same period last year. However, the yen weakened more than 20% versus the U.S. dollar in the past year. Therefore the 9% sales growth in yen translated into a 13% sales decline in dollars.
Now turning to Europe, results were mixed in the third quarter. Total sales increased 7% due to increases in both average price per jewelry unit sold and in the number of jewelry units sold. Overall in the region, however, the softness in Continental Europe was offset by the sales growth in the UK, which reflected higher local customer and foreign tourist demand, but with no discernible pattern.
Tiffany opened its 7th store in Stuttgart in the Breuninger department store in Germany, now totaling 36 company-operated stores in Europe at quarter end. The company also completed a major renovation of its Frankfurt store and recently relocated its Florence store to a more spacious nearby site on Via Tornabuoni. It plans to open one more store in Italy before year-end.
Now turning to Middle East, comparable store sales increased 1%, representing the first quarter of comparability for its five stores in the United Arab Emirates, five in Dubai and two in Abu Dhabi, that were converted from wholesale distribution to company-operated locations in the middle of last year. The management is excited about the sales growth potential for Tiffany in the Middle East to enhance brand awareness and expand its store and customer base.