Tiffany & Co reports lackluster 2012 financial results, but says optimistic looking forward

Regarded as a bell-weather for what is happening in the American and global high-end jewelry sector, Tiffany & Co's 2012 financial results were widely watched by the markets. The results did not achieve the expectations the firm had set at the start of the year, however, with net sales up just 4 percent due to single-digit percentage growth in all regions, although below initial expectations in the Americas and Asia Pacific. "The conclusion to the year, with 4 percent sales growth and only a slight earnings increase in the fourth quarter, was also certainly not up to its normal performance standards," the firm said.

In the Americas, sales in the fourth quarter rose 2 percent, which was consistent with the increase it had reported for the November-December holiday season and reflected jewelry units equal to the prior year and a slight increase in the average price per unit sold. For the full year, total Americas sales also rose 2 percent, on top of a 15 percent increase in 2011 as an increase in the average price per units sold was partly offset by decline in jewelry units sold, primarily in silver jewelry. The Americas region accounted for 48 percent of worldwide sales in 2012 versus 50 percent in 2011. On a constant-exchange-rate basis, total sales rose 2 percent in both the quarter and year, while comparable store sales declined 2 percent in both the quarter and year.

Geographically, sales from the New York flagship store declined 3 percent in the fourth quarter, while a 3 percent drop on the year went up against a 20 percent increase in 2011. The New York flagship store accounted for 8 percent of worldwide sales in 2012.

For the quarter and year, there were minimal changes in sales to U.S. customers and foreign tourists. Foreign tourist spending represented about 45 percent of the New York store sales in 2012, and the largest spending came from Asia Pacific-based visitors, followed by customers from Europe. The firm estimates sales to foreign tourists, which in 2011 was estimated at almost a quarter of U.S. sales, will continue to be of growing importance in certain U.S. and Canadian stores.
Americas brand store comps declined 2 percent in the fourth quarter, and a 2 percent decline in the full year was up against an 11 percent comp increase in 2011. There were no significant deviations from the norm in terms of geographical performance within the U.S. in the quarter or full year.

Outside the U.S., total sales rose in Canada, but that reflected new stores, while there was a double-digit sales growth in Mexico, and business in Brazil continued to develop. It expanded its Americas store base by adding 13 locations in 2012. In the U.S., four stores were opened. In Canada, six stores were added and two in Mexico and a fourth one in Brazil. At the end of 2012, there were 115 stores in the Americas.

The Americas e-commerce and catalog sales in 2012 rose 6 percent in the fourth quarter and 4 percent for the year, driven by an increased average order size.
 
The Asia-Pacific region represented 21.4 percent of worldwide sales in 2012, up from 20.5 percent in 2011. Sales rose 13 percent in the fourth quarter, which was consistent with holiday period growth, and rose 8 percent for the full year. The quarterly increase was fueled by growth in jewelry units sold and in the average price per units sold, while the annual increase was almost entirely driven by higher jewelry unit volume. On a constant-exchange-rate basis, total Asia-Pacific sales rose 10 percent in the quarter and increased 8 percent in the full year. Comps rose 6 percent in the quarter, while a 2 percent comp increase for the year was on top of an enormous 27 percent comp increase in full year 2011.

In the quarter, there was broad-based growth throughout Greater China and other markets, and that was true to a lesser extent for the whole year. The largest portion of the Asia-Pacific region is Greater China, which represented a little more than half of the region's sales in 2012. Its highest volume store, by far, in the Asia-Pacific region in 2012 was the one on Canton Road in Hong Kong.

Tiffany's added eight stores in the region in 2012, and finished the year with 66 stores. This included opening six stores in China, a second store in Sydney, the sixth store in Australia, and a second store in Singapore's Changi Airport. Expanding Tiffany's store presence, especially in China, serves the dual purpose of generating local sales demand but also stimulating spending when Chinese customers travel to other regions.

Japan accounted for 17 percent of worldwide sales in 2012 and 2011. Total sales declined 6 percent in the fourth quarter due to a decline in jewelry units, mostly in entry-level price points, and increased 4 percent in the year due to an increase in the average price per jewelry units sold.
Looking at results on a constant-exchange-rate basis. Both total sales and comp store sales in the fourth quarter rose 2 percent, while for the full year, total sales rose 6 percent and comps rose 7 percent on top of a 4 percent comp increase in 2011. The store count in Japan was unchanged at 55 locations in 2012, with the flagship store in the Ginza generating 12 percent of total sales in Japan.
 
Europe accounted for 11.4 percent of worldwide sales in 2012 compared with 11.6 percent in 2011. Total sales rose 3 percent in the fourth quarter, slightly better than its holiday results, and rose 3 percent in the full year primarily due to increases in both periods in the average price per jewelry units sold. On a constant-exchange-rate basis, in the fourth quarter, total sales rose 3 percent and comparable store sales were equal to the prior year, while for the year, total sales increased 7 percent and comparable store sales rose 2 percent.

Sales in the United Kingdom accounted for 45 percent of total European sales in 2012, and its highest volume store in Europe is on Old Bond Street in London. In both the quarter and year, sales in overall Continental Europe, led by growth in Germany, modestly outpaced sales performance in the U.K. Its sales in Europe are benefiting from foreign tourist spending in some markets, especially in France and Spain. That foreign tourist spending, is estimated to account for about 25 percent of European sales, is more than offsetting softness in local demand in some markets that is likely tied to soft economic conditions.

Two European stores were added in 2012: one in Nice, the fourth store in France, and one in Prague, marking its entry into the Czech Republic. The company operates 34 stores in Europe, with further store expansion planned. In particular, a significant store on Paris' Champs Elysées will be opened in 2014.

Tiffany's other sales nearly doubled in the fourth quarter and rose 41 percent in the full year. Via a venture with Damas jewelers, the firm converted five Tiffany stores in the United Arab Emirates, three in Dubai and two in Abu Dhabi, from wholesale distribution to company-operated locations in the second quarter and began recording retail sales of those stores. "We're encouraged with initial results and excited about the prospects for substantial long-term growth in that important region."
 
Beyond stores, Tiffany now offers products on its websites in 13 countries. Those combined sales represented 6 percent of total worldwide sales or 8 percent of sales in the countries in which they are operated, which was consistent with the prior year. "The websites play an important role in its marketing communication to enhance brand and product awareness and drive store traffic."

The sales mix last year continued to evolve toward mid- to higher-priced products, reflecting the strategic initiative for a number of years to elevate the Tiffany & Co. brand. Most product categories performed relatively close to its 4 percent worldwide sales growth, but for a variety of reasons, the relatively weaker category was in silver jewelry especially at price points below $500. Engagement jewelry sales were generally in line with overall company sales growth in 2012. Designer jewelry sales rose in the year.

Patrick McGuiness Chief Financial officer and Senior Vice President said that in its holiday sales announcement, the firm indicated that sales growth this year would be conservative, and it done just that. "In addition, while year-over-year comparisons will be far less daunting compared to last year, there is still plenty of global economic uncertainty that leads us to maintain a cautious outlook at this time. We are planning worldwide sales to increase by 6 percent to 8 percent in dollars.

On a constant-exchange-rate basis, this will be a high-single-digit percentage increase with total sales growth in all regions. Sales growth ranges from a mid-teens percentage sales increase in Asia-Pacific to a low-single-digit percentage increase in Japan.

"I want to point out that we expect net earnings to decline approximately 15 percent to 20 percent in the first quarter due to some continued but diminishing gross margin pressure and higher marketing-related costs from a major event. However, absent those pressures in subsequent quarters, we expect net earnings growth in the second, third and fourth quarters. Despite the overall sales shortfall in 2012, we achieved most of its balance sheet objectives for the year and are planning for solid free cash flow generation in 2013.

"We initially planned for a 15 percent increase in net inventories in 2012. As the year progressed, we moderated inventory plans due to a lower-than-expected sales growth and projected a 10 percent inventory increase. Net inventories of $2.2 billion at year-end were up 8 percent for the full year. Finished goods inventory rose 13 percent in the year, primarily due to the addition of stores and new products which included a meaningful expansion of its statement jewelry assortment."
"At year-end, we had $505 million of cash and cash equivalents compared to $434 million at the previous year-end. We also returned cash to stockholders in 2012 in 2 ways … a 10 percent increase in the quarterly dividend rate, representing the 11th increase in the past 10 years. We also spent $54 million to repurchase 813,000 shares of common stock in the first half of the year."
 
Meanwhile, Mike Kowalski, Chairman and Chief Executive Officer, said: "Clearly, we were not pleased with Tiffany's financial results in 2012, which are not representative of how it should perform in a more normalized operating environment. We faced more difficult-than-expected comparisons to some very strong sales results in 2012. We dealt with economic conditions in 2012 that were more challenging in some regions. We saw a pronounced softness in sales of entry-level-priced silver jewelry. And overall sales weakness led to a timing lag in realizing the benefit from a moderation in commodity costs.
"At the same time, we remain as diligent and focused as ever on maintaining and enhancing the renown of the Tiffany & Co. brand through the strategic management of its product category mix, widening market communications and an expanded global presence through new stores, as well as renovations of select existing stores. And we are confident that investments in recent years in its product supply chain and infrastructure will ensure that we have the capacity to support its longer-term growth."

He said that strategic management of the firm's product mix has served and will continue to serve to elevate the brand toward mid to higher price points. As we began the celebration of Tiffany's 175th anniversary, its product developments in 2012 continued to focus on higher-price-point opportunities both in gemstone jewelry and its gold and silver jewelry collections.

There will be a range of excting new designs in 2013, including sterling silver with entry-level price points below $500. There will be new designs in silver, freshwater pearls and onyx, as well as higher-price-point fine jewelry in diamonds and platinum in The Great Gatsby collection.
We will build on the success of the Enchant collection, introduced last year; and its yellow diamonds that have enjoyed great success since being launched three years ago.

A selection of new design pieces will be available in April when a select group of Tiffany customers from around the world will be hosted at its annual Blue Book event in New York. That event will mark the pinnacle of Tiffany's 175th year anniversary celebrations.

"In 2012, we added 28 company-operated locations, which increased the global store base by 11 percent and its square footage by 6 percent. This included opening 19 new stores and converting 5 existing locations in the U.A.E. and 4 locations in Canada from wholesale distribution to company-operated stores. In the coming year, we will further expand its global presence when we open 15 new stores and close 1 in Japan, increasing its store base by 5 percent. We are also focused on renovating a number of existing stores.

"In the Americas, we plan to open 5 new stores, including 2 stores in the U.S., another store in Canada, a 10th store in Mexico, a fifth store in Brazil. We are planning 7 new stores in the Asia-Pacific region. We have 4 stores planned in China, which will take us to 26 stores in China. Three additional locations are slated for elsewhere in the region. We plan to add three additional stores in Continental Europe, which will bring us to 37 stores in that region by the end of the year."