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, 2008.
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, 125,973,765 shares outstanding at the close
of business on May 30, 2008.
TIFFANY & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED APRIL 30, 2008
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - April 30, 2008,
January 31, 2008 and April 30, 2007 (Unaudited) 3
Condensed Consolidated Statements of Earnings - for the
three months ended April 30, 2008 and 2007 (Unaudited) 4
Condensed Consolidated Statements of Stockholders' Equity -
for the three months ended April 30, 2008 and
Comprehensive Earnings - for the three months
ended April 30, 2008 and 2007 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows - for the
three months ended April 30, 2008 and 2007 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements
(Unaudited) 7-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 23
PART II - OTHER INFORMATION
Item 1A. Risk Factors 24-25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 6. Exhibits 27
(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,
2008 2008 2007
----------------- ----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 159,625 $ 246,654 $ 115,782
Short-term investments - - 10,000
Accounts receivable, less allowances of $8,225,
$9,712 and $6,261 193,154 193,974 159,648
Inventories, net 1,466,166 1,372,397 1,335,729
Deferred income taxes 27,388 20,218 25,070
Prepaid expenses and other current assets 86,784 89,072 72,663
Assets held for sale - - 74,783
----------------- ----------------- ----------------
Total current assets 1,933,117 1,922,315 1,793,675
Property, plant and equipment, net 742,116 748,210 918,873
Deferred income taxes 164,847 158,579 50,231
Other assets, net 169,771 171,800 166,781
Assets held for sale - noncurrent - - 32,551
----------------- ----------------- -----------------
$ 3,009,851 $ 3,000,904 $ 2,962,111
================= ================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 199,421 $ 44,032 $ 115,811
Current portion of long-term debt 65,728 65,640 5,451
Accounts payable and accrued liabilities 175,777 203,622 163,047
Income taxes payable 49,979 203,611 36,345
Merchandise and other customer credits 68,573 67,956 62,332
Liabilities held for sale - - 14,975
----------------- ----------------- -----------------
Total current liabilities 559,478 584,861 397,961
Long-term debt 346,010 343,465 401,716
Pension/postretirement benefit obligations 81,836 79,254 89,937
Deferred gains on sale-leasebacks 144,577 145,599 4,878
Other long-term liabilities 134,422 131,610 129,396
Liabilities held for sale - noncurrent - - 4,440
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 126,281, 126,753 and 136,635 1,263 1,268 1,367
Additional paid-in capital 656,704 632,671 584,607
Retained earnings 1,032,173 1,037,663 1,341,380
Accumulated other comprehensive gain (loss), net of tax:
Foreign currency translation adjustments 48,607 42,117 21,361
Deferred hedging gain 3,116 889 942
Unrealized (loss) gain on marketable securities (529) (621) 438
Net unrealized gain (loss) on benefit plans 2,194 2,128 (16,312)
----------------- ----------------- ----------------
Total stockholders' equity 1,743,528 1,716,115 1,933,783
----------------- ----------------- -----------------
$ 3,009,851 $ 3,000,904 $ 2,962,111
================= ================= =================
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,
-----------------------------------------------
2008 2007
---------------------- --------------------
Net sales $ 668,149 $ 595,729
Cost of sales 286,895 261,771
---------------------- ---------------------
Gross profit 381,254 333,958
Selling, general and administrative expenses 277,945 246,041
---------------------- ---------------------
Earnings from continuing operations 103,309 87,917
Other expenses, net 1,508 3,085
---------------------- ---------------------
Earnings from continuing operations before income taxes 101,801 84,832
Provision for income taxes 37,411 31,005
---------------------- ---------------------
Net earnings from continuing operations 64,390 53,827
Earnings from discontinued operations, net of tax - 254
---------------------- ---------------------
Net earnings $ 64,390 $ 54,081
====================== =====================
Earnings per share:
Basic
Net earnings from continuing operations $ 0.51 $ 0.39
Net earnings from discontinued operations - 0.01
---------------------- ---------------------
Net earnings $ 0.51 $ 0.40
====================== =====================
Diluted
Net earnings from continuing operations $ 0.50 $ 0.39
Net earnings from discontinued operations - -
---------------------- ---------------------
Net earnings $ 0.50 $ 0.39
====================== =====================
Weighted-average number of common shares:
Basic 126,458 136,488
Diluted 128,773 139,724
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 Common Stock Additional
Stockholders' Retained Comprehensive ------------ Paid-In
Equity Earnings Gain (Loss) Shares Amount Capital
----------------------------------------------------------------------------------------------------------------------
Balances, January 31, 2008 $ 1,716,115 $ 1,037,663 $ 44,513 126,753 $ 1,268 $ 632,671
Exercise of stock options and vesting of
restricted stock units ("RSUs") 7,248 - - 787 8 7,240
Tax benefit from exercise of stock options
and vesting of RSUs 4,041 - - - - 4,041
Share-based compensation expense 11,833 - - - - 11,833
Issuance of Common Stock under
Employee Profit Sharing and Retirement
Savings Plan 4,750 - - 124 1 4,749
Purchase and retirement of Common Stock (54,837) (50,993) - (1,383) (14) (3,830)
Cash dividends on Common Stock (18,887) (18,887) - - - -
Deferred hedging gain, net of tax 2,227 - 2,227 - - -
Unrealized gain on marketable securities,
net of tax 92 - 92 - - -
Foreign currency translation adjustments,
net of tax 6,490 - 6,490 - - -
Net unrealized gain on benefit plans,
net of tax 66 - 66 - - -
Net earnings 64,390 64,390 - - - -
-------------------------------------------------------------------------
Balances, April 30, 2008 $ 1,743,528 $ 1,032,173 $ 53,388 126,281 $ 1,263 $ 656,704
=========================================================================
Three Months Ended
April 30,
------------------------------------------
2008 2007
------------------------------------------
Comprehensive earnings are as follows:
Net earnings $ 64,390 $ 54,081
Other comprehensive gain (loss), net of tax:
Deferred hedging gain (loss) 2,227 (1,104)
Foreign currency translation adjustments 6,490 9,515
Unrealized gain on marketable securities 92 260
Net unrealized gain on benefit plans 66 348
------------------------------------------
Comprehensive earnings $ 73,265 $ 63,100
==========================================
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,
--------------------------------------------------
2008 2007
------------------------ ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 64,390 $ 54,081
Earnings from discontinued operations, net of tax - (254)
------------------------ ----------------------
Net earnings from continuing operations 64,390 53,827
Adjustments to reconcile net earnings from continuing operations to
net cash provided by (used in) operating activities:
Depreciation and amortization 30,908 30,707
Excess tax benefits from share-based payment arrangements (4,854) (4,988)
Provision for inventories 4,451 3,320
Deferred income taxes (13,516) 2,585
Provision for pension/postretirement benefits 6,224 6,582
Share-based compensation expense 11,661 8,727
Changes in assets and liabilities:
Accounts receivable 4,187 9,567
Inventories (86,942) (81,029)
Prepaid expenses and other current assets 6,504 (13,565)
Accounts payable and accrued liabilities (25,487) (16,182)
Income taxes payable (152,496) (24,482)
Merchandise and other customer credits 534 666
Other, net (129) (4,881)
------------------------ ----------------------
Net cash used in operating activities (154,565) (29,146)
------------------------ ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities and short-term investments (209) (134,181)
Proceeds from sales of marketable securities and short-term
investments - 139,419
Capital expenditures (26,208) (31,548)
Notes receivable funded - (2,172)
Other (838) 1,540
------------------------ ----------------------
Net cash used in investing activities (27,255) (26,942)
------------------------ ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (1,433) (8,716)
Proceeds from short-term borrowings, net 154,729 4,582
Repurchase of Common Stock (54,837) (24,997)
Proceeds from exercise of stock options 7,248 34,881
Excess tax benefits from share-based payment arrangements 4,854 4,988
Cash dividends on Common Stock (18,887) (13,626)
------------------------ ----------------------
Net cash provided by (used in) financing activities 91,674 (2,888)
------------------------ ----------------------
Effect of exchange rate changes on cash and cash equivalents 3,117 2,692
------------------------ ----------------------
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Operating activities - (2,591)
Investing activities - (359)
------------------------ ----------------------
Net cash used in discontinued operations - (2,950)
------------------------ ----------------------
Net decrease in cash and cash equivalents (87,029) (59,234)
Cash and cash equivalents at beginning of year 246,654 175,008
Decrease in cash and cash equivalents of discontinued operations - 8
------------------------ ----------------------
Cash and cash equivalents at end of three months $ 159,625 $ 115,782
======================== ======================
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, 2008 and 2007 and the results of its
operations and cash flows for the interim periods presented. The
condensed consolidated balance sheet data for January 31, 2008 is
derived from the audited financial statements (except as noted in Note
2), 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 in nature, with the fourth quarter
typically representing at least one-third of annual net sales and
approximately one-half of annual net earnings. Therefore, the results
of its operations for the three months ended April 30, 2008 and 2007
are not necessarily indicative of the results of the entire fiscal
year.
2. CHANGE IN ACCOUNTING FOR INVENTORIES
In March 2008, the Company's Board of Directors approved a plan to
change the Company's method of accounting for inventories held by its
U.S. subsidiaries and foreign branches from the last-in, first-out
("LIFO") method to the average cost method. The Company has
traditionally used the average cost method to value inventories held
by its Japan subsidiary and its other foreign subsidiaries. The
Company believes that the average cost method is preferable on the
basis that it conforms to the manner in which the Company
operationally manages its inventories and evaluates retail pricing and
it makes the Company's inventory reporting consistent with many peer
retailers. This change is effective in the first fiscal quarter of
2008 and prior periods have been revised. Accounts affected by this
change are: cost of sales; provision for income taxes; inventories,
net; deferred income taxes; and retained earnings.
Components of the Company's condensed consolidated statements of
earnings adjusted for the effect of changing from LIFO to average cost
are as follows:
Three Months Ended April 30, 2007
-------------------------------------------------------------
(in thousands, except per share data) As Reported Adjustment As Adjusted
-----------------------------------------------------------------------------------------------------------
Cost of sales $ 268,401 $ (6,630) $ 261,771
Provision for income taxes 28,797 2,208 31,005
Net earnings from continuing operations 49,405 4,422 53,827
Net earnings 49,659 4,422 54,081
Net earnings from continuing operations per share:
Basic $ 0.36 $ 0.03 $ 0.39
------------------------------------------------------------
Diluted $ 0.35 $ 0.03 $ 0.39
============================================================
Net earnings per share:
Basic $ 0.36 $ 0.03 $ 0.40
------------------------------------------------------------
Diluted $ 0.36 $ 0.03 $ 0.39
============================================================
7
Components of the Company's condensed consolidated balance sheets
adjusted for the effect of changing from LIFO to average cost are as
follows:
January 31, 2008
-------------------------------------------------------------
(in thousands) As Reported Adjustment As Adjusted
-----------------------------------------------------------------------------------------------------------
Assets:
Inventories, net $ 1,242,465 $ 129,932 $ 1,372,397
Deferred income taxes - current 71,402 (51,184) 20,218
Total Assets 2,922,156 78,748 3,000,904
Liabilities and Stockholders' Equity
Retained Earnings 958,915 78,748 1,037,663
Total Liabilities and Stockholders' Equity 2,922,156 78,748 3,000,904
April 30, 2007
-------------------------------------------------------------
(in thousands) As Reported Adjustment As Adjusted
-----------------------------------------------------------------------------------------------------------
Assets:
Inventories, net $ 1,226,160 $ 109,569 $ 1,335,729
Deferred income taxes - current 71,174 (46,104) 25,070
Total Assets 2,898,646 63,465 2,962,111
Liabilities and Stockholders' Equity
Retained Earnings 1,277,916 63,465 1,341,380
Total Liabilities and Stockholders' Equity 2,898,646 63,465 2,962,111
Components of the Company's condensed consolidated statement of cash flow adjusted for the effect of
changing from LIFO to average cost are as follows:
Three Months Ended April 30, 2007
-------------------------------------------------------------
(in thousands) As Reported Adjustment As Adjusted
-----------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net earnings $ 49,659 $ 4,422 $ 54,081
Provision for inventories 3,061 259 3,320
Deferred income taxes 377 2,208 2,585
Inventories (74,140) (6,889) (81,029)
Net cash used in operating activities (29,146) - (29,146)
The cumulative effect on retained earnings at January 31, 2007 is an
increase of $59,042,000.
3. NEW ACCOUNTING STANDARDS
In September 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 157,
"Fair Value Measurements" which establishes a framework for measuring
fair value of assets and liabilities and expands disclosures about
fair value measurements. The changes to current practice resulting
from the application of SFAS No. 157 relate to the definition of fair
value, the methods used to measure fair value, and the expanded
disclosures about fair value measurements. SFAS No. 157 is effective
for fiscal years beginning after November 15, 2007. In February 2008,
the FASB deferred the implementation of the provisions of SFAS No. 157
relating to nonfinancial assets and liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually) to fiscal years beginning after
November 15, 2008. The adoption of SFAS No. 157 for financial assets
that are recognized at fair value on a recurring basis in the first
quarter of 2008 did not have a material impact on the Company's
financial position or earnings (see Note 8). Management anticipates
adopting the remaining provisions of SFAS No. 157 on February 1, 2009.
This adoption will impact the way in which the Company calculates fair
value for its annual impairment review of goodwill and when conditions
exist that require the Company to calculate the fair value of
long-lived assets; however, management expects that this will not have
a material effect on the Company's financial position or earnings.
Effective with the first quarter of 2008, the Company changed the
measurement date for its U.S. employee
8
benefit plans from December 31 to January 31 in accordance with the
measurement date provisions of SFAS No. 158, "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans - an
amendment of FASB Statements No. 87, 88, 106 and 132(R)." The Company
has elected to use a "13-month" approach to proportionally allocate
the transition adjustment required under SFAS No. 158. The Company
anticipates recording a charge of approximately $2,000,000 to retained
earnings in the fourth quarter of fiscal year 2008.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling
Interests in Consolidated Financial Statements." SFAS No. 160 requires
a company to clearly identify and present ownership interests in
subsidiaries held by parties other than the company in the
consolidated financial statements within the equity section but
separate from the company's equity. It also requires the amount of
consolidated net earnings attributable to the parent and to the
noncontrolling interest be clearly identified and presented on the
face of the consolidated statement of earnings; changes in ownership
interest to be accounted for similarly, as equity transactions; and,
when a subsidiary is deconsolidated, that any retained noncontrolling
equity investment in the former subsidiary and the gain or loss on the
deconsolidation of the subsidiary be measured at fair value. SFAS No.
160 is effective for financial statements issued for fiscal years
beginning after December 15, 2008. Management has evaluated the
provisions of SFAS No. 160 and determined that its adoption will not
have a material effect on the Company's financial position or
earnings.
4. DISCONTINUED OPERATIONS
Management concluded that Little Switzerland, Inc.'s ("Little
Switzerland") operations did not demonstrate the potential to generate
a return on investment consistent with management's objectives and,
therefore, during the second quarter of 2007 the Company's Board of
Directors authorized the sale of Little Switzerland. On July 31, 2007,
the Company entered into an agreement with NXP Corporation ("NXP") by
which NXP would purchase 100% of the stock of Little Switzerland. The
transaction closed on September 18, 2007 for net proceeds of
$32,870,000 which excludes payments for existing trade payables owed
to the Company by Little Switzerland. The purchase price remains
subject to customary post-closing adjustments. The Company has agreed
to continue to distribute TIFFANY & CO. merchandise through TIFFANY &
CO. boutiques maintained in certain LITTLE SWITZERLAND stores
post-closing. In addition, the Company has agreed to provide
warehousing services to Little Switzerland for a transition period.
The Company determined that the continuing cash flows from Little
Switzerland operations were not significant. Therefore, the results of
Little Switzerland are presented as a discontinued operation in the
condensed consolidated financial statements for all periods presented.
Prior to the reclassification, Little Switzerland's results had been
included within the non-reportable segment Other.
Summarized statement of earnings data for Little Switzerland is as
follows:
Three Months Ended
(in thousands) April 30, 2007
----------------------------------------------------------------------------------------------------------
Net revenues $ 25,146
=======================
Earnings from operations 36
Income tax benefit 218
-----------------------
Earnings from discontinued operations $ 254
=======================
9
Summarized balance sheet data for Little Switzerland is as follows:
April 30,
(in thousands) 2007
-----------------------------------------------------------------------------------------------------------
Assets held for sale
Inventories, net $ 68,990
Other current assets 5,793
Property, plant and equipment, net 19,728
Other assets 12,823
-------------------------
Total assets held for sale $ 107,334
=========================
Liabilities held for sale
Current liabilities $ 14,975
Other liabilities 4,440
-------------------------
Total liabilities held for sale $ 19,415
=========================
5. INVENTORIES
April 30, January 31, April 30,
(in thousands) 2008 2008 2007
------------------------------------------------------------------------------------------------------------
Finished goods $ 987,383 $ 942,860 $ 932,158
Raw materials 374,721 352,211 331,712
Work-in-process 104,062 77,326 71,859
-------------------------------------------------------------------
Inventories, net $ 1,466,166 $ 1,372,397 $ 1,335,729
===================================================================
6. INCOME TAXES
The Company files income tax returns in the U.S. federal jurisdiction
as well as various state and foreign locations. As a matter of course,
various taxing authorities regularly audit the Company. The Company's
tax filings are currently being examined by tax authorities in
jurisdictions where its subsidiaries have a material presence,
including Japan (tax years 2003-2005) and New York City (tax year
2002). Tax years from 2005-present are open to examination in the U.S.
and tax years 2003-present are open to examination in various other
state and foreign taxing jurisdictions. The Company believes that its
tax positions comply with applicable tax laws and that it has
adequately provided for these matters. However, the audits may result
in proposed assessments where the ultimate resolution may result in
the Company owing additional taxes. Ongoing audits are in various
stages of completion and while the Company does not anticipate any
material changes in unrecognized income tax benefits over the next 12
months, future developments in the audit process may result in a
change in management's assessment.
7. 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) 2008 2007
------------------------------------------------------------------------------------------------------------
Net earnings for basic and diluted EPS $ 64,390 $ 54,081
=========================================
Weighted average shares for basic EPS 126,458 136,488
Incremental shares based upon the assumed exercise of stock
options and restricted stock units 2,315 3,236
-----------------------------------------
Weighted average shares for diluted EPS 128,773 139,724
=========================================
10
For the three months ended April 30, 2008 and 2007, there were
1,805,000 and 704,000 stock options and restricted stock units
excluded from the computations of earnings per diluted share due to
their antidilutive effect.
8. FAIR VALUE MEASUREMENTS
The Company adopted SFAS No. 157, "Fair Value Measurements," effective
February 1, 2008, with respect to fair value measurements of financial
assets and liabilities that are recognized or disclosed at fair value
in the Company's financial statements on a recurring basis (at least
annually).
SFAS No. 157 defines fair value as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the
measurement date. SFAS No. 157 also establishes a fair value hierarchy
which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. The
standard describes three levels of inputs that may be used to measure
fair value:
Level 1 - Quoted prices in active markets for identical assets or
liabilities.
Level 2 - Observable market-based inputs or unobservable inputs that
are corroborated by market data.
Level 3 - Unobservable inputs reflecting the reporting entity's own
assumptions.
The Company uses the market approach to measure fair value for its
mutual funds, yen put options and collars and the income approach to
value its interest-rate swap agreements. The following table provides
information by level for assets that are measured at fair value on a
recurring basis:
Fair Value Measurements
Using Inputs Considered as
Fair Value at -----------------------------------------------------
(in thousands) April 30, 2008 Level 1 Level 2 Level 3
------------------------------------------------------------------------------------------------------------
Mutual funds $ 28,480 $ 28,480 $ - $ -
Yen put options 1,849 - 1,849 -
Collars 4,514 - 4,514 -
Interest-rate swap agreements 4,029 - 4,029 -
In Japan, the Company uses yen put options to minimize the potential
effect of a weakening yen on U.S. dollar-denominated transactions over
a maximum term of 12 months. 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. The Company uses a combination of call and put option
contracts in a net-zero cost collar arrangement ("collars") as hedges
of a portion of forecasted purchases of platinum and silver for
internal manufacturing.
11
9. 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
Pension Benefits Postretirement Benefits
------------------------------------------------------------------
(in thousands) 2008 2007 2008 2007
-----------------------------------------------------------------------------------------------------------
Service cost $ 4,570 $ 4,547 $ 417 $ 318
Interest cost 4,397 3,928 478 470
Expected return on plan assets (3,914) (3,429) - -
Amortization of prior service cost 321 321 (198) (223)
Amortization of net loss 153 640 - 10
------------------------------------------------------------------
Net expense $ 5,527 $ 6,007 $ 697 $ 575
==================================================================
10. SEGMENT INFORMATION
Effective with this first quarter, management has changed segment
reporting to reflect operating results for the following regions: the
Americas, Asia-Pacific and Europe. Prior year results have been
revised to reflect this change. The Company has expanded its global
reach and management has determined to assess performance on a
region-by-region basis, rather than on a channel of distribution
basis.
The Company's reportable segments are as follows:
o "Americas" includes sales in TIFFANY & CO. stores in the
U.S., Canada and Latin/South America, as well as sales in
those markets of TIFFANY & CO. products through
business-to-business, Internet, catalog and wholesale
operations.
o "Asia-Pacific" includes sales in TIFFANY & CO. stores in the
Asia-Pacific region (which includes sales in Japan, in
Asia-Pacific countries outside Japan, and in the Middle
East), as well as sales in those markets of TIFFANY & CO.
products through business-to-business, Internet and
wholesale operations.
o "Europe" includes sales in TIFFANY & CO. stores in Europe,
as well as sales in those markets of TIFFANY & CO. products
through business-to-business, Internet and wholesale
operations.
The "Other" channel of distribution includes all non-reportable
segments. Sales in the Other channel of distribution primarily consist
of wholesale sales of diamonds obtained through bulk purchases that
were subsequently deemed not suitable for the Company's needs. In
addition, Other includes worldwide sales made by businesses operated
under trademarks or tradenames other than TIFFANY & CO. and earnings
received from third party licensing agreements.
12
Certain information relating to the Company's segments is set forth
below:
Three Months Ended April 30,
-------------------------------------------------------
(in thousands) 2008 2007
-----------------------------------------------------------------------------------------------------------
Net sales:
Americas $ 373,565 $ 353,349
Asia-Pacific 222,037 183,094
Europe 60,125 43,544
-------------------------------------------------------
Total reportable segments 655,727 579,987
Other 12,422 15,742
-------------------------------------------------------
$ 668,149 $ 595,729
=======================================================
Earnings (losses) from continuing operations*:
Americas $ 68,291 $ 62,102
Asia-Pacific 56,365 49,299
Europe 11,574 7,620
-------------------------------------------------------
Total reportable segments 136,230 119,021
Other (4,025) (4,496)
-------------------------------------------------------
$ 132,205 $ 114,525
=======================================================
*Represents earnings (losses) from continuing operations before
unallocated corporate expenses and other expenses, net.
The following table sets forth a reconciliation of the segments'
earnings from continuing operations to the Company's consolidated
earnings from continuing operations before income taxes:
Three Months Ended April 30,
-------------------------------------------------------
(in thousands) 2008 2007
-----------------------------------------------------------------------------------------------------------
Earnings from continuing operations for
segments $ 132,205 $ 114,525
Unallocated corporate expenses (28,896) (26,608)
Other expenses, net (1,508) (3,085)
-------------------------------------------------------
Earnings from continuing operations before $ 101,801 $ 84,832
income taxes
=======================================================
Unallocated corporate expenses include certain costs related to
administrative support functions which the Company does not allocate
to its segments. Such unallocated costs include those for information
technology, finance, legal and human resources.
11. SUBSEQUENT EVENT
On May 15, 2008, the Company's Board of Directors declared a 13%
increase in the quarterly dividend rate on its Common Stock,
increasing it from $0.15 per share to $0.17 per share. This dividend
will be paid on July 10, 2008 to stockholders of record on June 20,
2008.
13
PART I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
--------
Tiffany & Co. (the "Company") is a holding company that operates through its
subsidiary companies. The Company's principal subsidiary, Tiffany and Company,
is a jeweler and specialty retailer whose principal merchandise offering is 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.
Effective with this first quarter, management has changed segment reporting to
reflect operating results for the following regions: the Americas, Asia-Pacific
and Europe. Prior year results have been revised to reflect this change. The
Company has expanded its global reach and management has determined to assess
performance on a region-by-region basis, rather than on a channel of
distribution basis. The Company's reportable segments are as follows:
o "Americas" includes sales in TIFFANY & CO. stores in the U.S., Canada
and Latin/South America, as well as sales in those markets of TIFFANY
& CO. products through business-to-business, Internet, catalog and
wholesale operations.
o "Asia-Pacific" includes sales in TIFFANY & CO. stores in the
Asia-Pacific region (which includes sales in Japan, in Asia-Pacific
countries outside Japan, and in the Middle East), as well as sales in
those markets of TIFFANY & CO. products through business-to-business,
Internet and wholesale operations.
o "Europe" includes sales in TIFFANY & CO. stores in Europe, as well as
sales in those markets of TIFFANY & CO. products through
business-to-business, Internet and wholesale operations.
o The "Other" channel of distribution includes all non-reportable
segments. Sales in the Other channel of distribution primarily consist
of wholesale sales of diamonds obtained through bulk purchases that
were subsequently deemed not suitable for the Company's needs. In
addition, Other includes worldwide sales made by businesses operated
under trademarks or tradenames other than TIFFANY & CO. and earnings
received from third party licensing agreements.
All references to years relate to fiscal years ended or ending on January 31 of
the following calendar year.
Highlights
----------
o Worldwide net sales increased 12% in the three months ("first
quarter") ended April 30, 2008. Sales were strong in the Asia-Pacific
and Europe segments.
o Worldwide comparable store sales increased 3% in the first quarter on
a constant-exchange-rate basis (see Non-GAAP Measures).
o Net earnings rose 19% to $64,390,000 in the first quarter. Net
earnings per diluted share rose 28%.
o The Company repurchased and retired 1.4 million shares of its Common
Stock during the first quarter.
o In May 2008, the Board of Directors increased the annual divided rate
by 13%.
NON-GAAP MEASURES
-----------------
The Company's reported sales reflect either a translation-related benefit from
strengthening foreign currencies or a detriment from a strengthening U.S.
dollar.
14
The Company reports information in accordance with U.S. Generally Accepted
Accounting Principles ("GAAP"). Internally, management monitors its
international sales performance 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 believes this
constant-exchange-rate measure provides a more representative assessment of the
sales performance 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 sales percentage increases (decreases)
from the GAAP to the non-GAAP basis versus the previous year:
First Quarter 2008 vs. 2007
-------------------------------------------------------------------------------
Constant-Exchange-
GAAP Reported Translation Effect Rate Basis
-------------------------------------------------------------------------------
Net Sales:
----------
Worldwide 12% 4% 8%
Americas 6% 1% 5%
U.S. 5% - 5%
Asia-Pacific 21% 11% 10%
Japan 13% 15% (2)%
Other Asia-Pacific 39% 7% 32%
Europe 38% 8% 30%
Comparable Store Sales:
-----------------------
Worldwide 7% 4% 3%
Americas 1% - 1%
U.S. - - -
Asia-Pacific 15% 11% 4%
Japan 7% 14% (7)%
Other Asia-Pacific 28% 6% 22%
Europe 21% 9% 12%
RESULTS OF OPERATIONS
---------------------
Certain operating data as a percentage of net sales were as follows:
First Quarter
-----------------------------------------
2008 2007
-----------------------------------------
Net sales 100.0% 100.0%
Cost of sales 42.9 43.9
-----------------------------------------
Gross profit 57.1 56.1
Selling, general and administrative expenses 41.6 41.3
-----------------------------------------
Earnings from continuing operations 15.5 14.8
Other expenses, net 0.3 0.6
-----------------------------------------
Earnings from continuing operations before income taxes 15.2 14.2
Provision for income taxes 5.6 5.1
-----------------------------------------
Net earnings from continuing operations 9.6 9.1
Earnings from discontinued operations, net of tax - -
-----------------------------------------
Net earnings 9.6% 9.1%
=========================================
15
Net Sales
---------
Net sales were as follows:
First Quarter
---------------------------------------------------------------------------------
2008 2007 Increase
(in thousands) (Decrease)
------------------------------------------------------------------------------------------------------------
Americas $ 373,565 $ 353,349 6%
Asia-Pacific 222,037 183,094 21%
Europe 60,125 43,544 38%
Other 12,422 15,742 (21%)
---------------------------------------------------------------------------------
$ 668,149 $ 595,729 12%
=================================================================================
Comparable Store Sales. Reference will be made to "comparable store sales"
below. 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 in comparable store sales if the relocation occurs
within the same geographical market. In Japan (included in the Asia-Pacific
segment), sales for a new store or boutique are not included if the boutique was
relocated from one department store to another or from a department store to a
free-standing location. In all markets, the results of a store in which the
square footage has been expanded or reduced remain in the comparable store base.
Americas. Total sales in the Americas region increased 6%, or $20,216,000, in
the first quarter primarily due to non-comparable U.S. retail store sales growth
of $15,515,000. U.S. retail comparable store sales were equal to the prior year,
resulting from a 16% increase in the New York Flagship store offset by a 4%
decline in comparable branch stores. U.S. retail stores benefited from higher
levels of sales to foreign visitors, especially in the New York Flagship store.
Asia-Pacific. Total sales in the Asia-Pacific region increased 21%, or
$38,943,000, in the first quarter primarily due to comparable store sales growth
of 15% (or $24,732,000) and non-comparable store sales growth of $11,071,000. On
a constant-exchange-rate basis, Asia-Pacific region sales increased 10% and
comparable store sales rose 4% (consisting of a 22% increase in comparable store
sales in Asia-Pacific regions outside of Japan offset by a 7% decline in Japan
comparable store sales). Management does not expect a significant improvement in
comparable store sales in Japan in the short term. Management will continue its
efforts to improve sales in that market by improving the locations of its
boutiques and stores and by cultivating important customer relationships. The
sales increase in the Asia-Pacific region on a constant-exchange-rate basis
primarily resulted from an increase in the number of units sold.
Europe. Total sales in the Europe region increased 38%, or $16,581,000, in the
first quarter due primarily to comparable store sales growth of 21% (or
$7,465,000) and non-comparable store sales growth of $5,640,000. On a
constant-exchange-rate basis, Europe region sales increased 30% and comparable
store sales rose 12%, reflecting strong growth in the United Kingdom and most
Continental European markets. The total increase in Europe region sales on a
constant-exchange-rate basis resulted from an increase in the number of units
sold.
Other. Other sales decreased 21% (or $3,320,000) in the first quarter primarily
due to decreased wholesale sales of diamonds that were deemed not suitable for
the Company's needs, which decreased to $9,570,000 from $13,638,000 in the prior
year first quarter.
16
Store Data. Management expects to open approximately 24 Company-operated TIFFANY
& CO. stores and boutiques in 2008, increasing the store-base by approximately
13%. Management's announced openings and closings of TIFFANY & CO. stores are:
Actual Openings Expected Openings
Location 2008 2008
------------------------------------------------------------------------------------------------------------------
Americas:
Los Angeles - Westfield Topanga Center, California First Quarter
West Hartford, Connecticut Second Quarter
Glendale, California Third Quarter
Pittsburgh, Pennsylvania Third Quarter
Uncasville - Mohegan Sun, Connecticut Third Quarter
Columbus, Ohio Fourth Quarter
Asia-Pacific:
Fukuoka, Japan First Quarter
Osaka, Japan First Quarter
Shizuoka, Japan First Quarter
Tokyo, Japan First Quarter
Chengdu, China First Quarter
Shenyang, China First Quarter
Perth, Australia Second Quarter
Europe:
London - Heathrow Airport, United Kingdom First Quarter
Brussels, Belgium Second Quarter
London - Westfield, United Kingdom Third Quarter
Madrid, Spain Third Quarter
Dusseldorf, Germany Third Quarter
Dublin, Ireland Third Quarter
Gross Margin
------------
Gross margin (gross profit as a percentage of net sales) increased in the first
quarter by 1.0 percentage point. The primary components of the net increase were
(i) a 0.6 percentage point increase due to the leverage effect of increased
sales applied against fixed product-related costs, which includes costs
associated with merchandising and distribution, and (ii) a 0.4 percentage point
increase due to a decrease in low-margin wholesale sales of diamonds.
Selling, General and Administrative ("SG&A") Expenses
-----------------------------------------------------
SG&A expenses increased $31,904,000, or 13%, in the first quarter primarily due
to increased labor and benefit costs of $10,415,000 and increased depreciation
and store occupancy expenses of $8,693,000, (both of which are largely due to
new and existing stores), as well as an increase of $5,332,000 in marketing
expenses. Changes in foreign currency exchange rates increased SG&A expenses by
approximately $9,000,000 compared to April 30, 2007. SG&A expenses as a
percentage of net sales increased by 0.3 percentage point to 41.6% in the first
quarter.
17
Earnings from Continuing Operations
-----------------------------------
First Quarter % of Net First Quarter % of Net
(in thousands) 2008 Sales* 2007 Sales*
--------------------------------------------------------------------------------------------------------------------
Earnings (losses) from continuing
operations:
Americas $ 68,291 18.3% $ 62,102 17.6%
Asia-Pacific 56,365 25.4% 49,299 26.9%
Europe 11,574 19.2% 7,620 17.5%
Other (4,025) (32.4%) (4,496) (28.6%)
----------------------------------------------------------------------------
132,205 114,525
Unallocated corporate expenses (28,896) 4.3% (26,608) 4.5%
----------------------------------------------------------------------------
Earnings from continuing
operations $ 103,309 15.5% $ 87,917 14.8%
============================================================================
* Percentages represent earnings (losses) from continuing operations as a
percentage of each segment's net sales.
Earnings from continuing operations increased 18% in the first quarter. On a
segment basis, the ratio of earnings (losses) from continuing operations (before
the effect of unallocated corporate expenses, other operating income and other
expenses, net) to each segment's net sales in the first quarter of 2008 and 2007
was as follows:
o Americas - the ratio increased 0.7 percentage point due to an increase
in gross margin (due to changes in sales mix and the leverage effect
of increased sales applied against fixed product-related costs);
o Asia-Pacific - the ratio decreased 1.5 percentage points partly due to
a decline in gross margin (due to changes in sales mix) as well as
increased operating expenses in Japan (marketing and new store
related), partly offset by increased profitability in most markets
other than Japan;
o Europe - the ratio increased 1.7 percentage points partly due to an
increase in gross margin (due to changes in sales mix) and the
leveraging of operating expenses; and
o Other - The operating loss in each year primarily reflects the
operating performance of the Company's Iridesse subsidiary. The loss
ratio increased 3.8 percentage points primarily due to a decline in
wholesale diamond sales.
Unallocated corporate expenses include certain costs related to administrative
support functions which the Company does not allocate to its segments. Such
unallocated costs include those for information technology, finance, legal and
human resources.
Other Expenses, net
-------------------
Other expenses, net decreased $1,577,000 in the first quarter primarily due to a
decrease in interest expense as a result of favorable variable interest rates.
Provision for Income Taxes
--------------------------
The effective income tax rate for the first quarter was 36.7% versus 36.5% in
the prior year.
2008 Outlook
------------
Management's full-year 2008 expectations are currently as follows:
o Net sales growth of 10% in 2008. The net sales objective is composed
of (i) an increase in the number of company-operated TIFFANY & CO.
locations by approximately 13%; (ii) a high-single-digit percentage
increase in total sales in the Americas region, which includes a
low-single-digit percentage increase in U.S. comparable store sales
for the year and a mid-single-digit percentage increase in
Internet/catalog sales; (iii) a low-teens percentage increase in
annual sales growth in dollars in the total Asia-Pacific region and
more than 20% growth in dollars in Europe, including local-currency
comparable store sales increasing by a mid-single-digit percentage in
Asia-Pacific and by a low-double-digit percentage in Europe; and (iv)
a modest decline in the Other channel.
18
o Management's outlook for U.S. sales includes improvement later in
the year based on easier year-over-year comparisons as well as
the assumption of a gradually improving economic scenario.
o Operating margin to be approximately equal to the prior year, when
adjusted for the various one-time items recorded in 2007 and the
change in the inventory accounting method. The operating margin
objective includes (i) an increase in gross margin and (ii) a modest
increase in the SG&A expense ratio.
o Other expenses, net of approximately $15 - $17 million.
o An effective tax rate of approximately 36% - 37%.
o Net earnings per diluted share of $2.80 - $2.90.
New Accounting Standards
------------------------
See note 3 to condensed consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's liquidity needs have been, and are expected to remain, primarily a
function of its seasonal and expansion-related working capital requirements and
capital expenditures needs. The ratio of total debt (short-term borrowings,
current portion of long-term debt and long-term debt) to stockholders' equity
was 35% at April 30, 2008, 26% at January 31, 2008, and 27% at April 30, 2007.
The following table summarizes cash flows from operating, investing and
financing activities:
First Quarter
---------------------------------------------------
(in thousands) 2008 2007
---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in):
Operating activities $ (154,565) $ (29,146)
Investing activities (27,255) (26,942)
Financing activities 91,674 (2,888)
Effect of exchange rates on cash and cash equivalents 3,117 2,692
Net cash used in discontinued operations - (2,950)
---------------------------------------------------
Net decrease in cash and cash equivalents $ (87,029) $ (59,234)
===================================================
Operating Activities
--------------------
The Company's net cash outflow from operating activities of $154,565,000 in the
first quarter of 2008 compared with an outflow of $29,146,000. The cash outflow
in the first quarter of 2008 resulted primarily from increased income taxes
payable largely associated with the sale-leasebacks of the TIFFANY & CO.
Flagship stores in Tokyo and London.
Working Capital. Working capital (current assets less current liabilities) and
the corresponding current ratio (current assets divided by current liabilities)
were $1,373,639,000 and 3.5 at April 30, 2008, compared with $1,337,454,000 and
3.3 at January 31, 2008 and $1,395,714,000 and 4.5 at April 30, 2007.
Accounts receivable, less allowances at April 30, 2008 were approximately equal
to January 31, 2008 and were 21% higher than at April 30, 2007. The
year-over-year change is primarily due to a foreign tax receivable (that is
expected to be collected later this year) and an increase in sales. Changes in
foreign currency exchange rates had an insignificant effect on the change in
account receivable balances at April 30, 2008 versus January 31, 2008 and
increased account receivable balances by 6% compared to April 30, 2007.
Inventories, net at April 30, 2008 were 7% above January 31, 2008 and 10% above
April 30, 2007. Combined raw material and work-in-process inventories increased
11% over January 31, 2008 and 19% over April 30, 2007 due to increased precious
metal costs and diamond quantities needed to support internal jewelry
manufacturing. Finished
19
goods inventories increased 5% over January 31, 2008, reflecting new store
openings, increased product costs as well as broadened product assortments.
Finished goods inventories increased 6% over April 30, 2007 primarily due to
changes in foreign currency exchange rates.
Management continues to expect a high-single-digit percentage increase in
inventories, net in 2008.
Investing Activities
--------------------
The Company's net cash outflow from investing activities of $27,255,000 in the
first quarter of 2008 compared with an outflow of $26,942,000 in the first
quarter of 2007.
Capital Expenditures. Capital expenditures were $26,208,000 in the first quarter
of 2008 compared with $31,548,000 in the first quarter of 2007. Management
estimates that capital expenditures will be approximately $200,000,000 in 2008
(compared with approximately $186,000,000 in the prior year) due to costs
related to the opening and renovation of stores and to ongoing investments in
new systems.
Marketable Securities. The Company invests excess cash in short-term investments
and marketable securities. The Company had (net purchases of) or net proceeds
from investments in marketable securities and short-term investments of
($209,000) and $5,238,000 in the first quarter of 2008 and 2007.
Financing Activities
--------------------
The Company's net cash inflow from financing activities of $91,674,000 in the
first quarter of 2008 compared with an outflow of $2,888,000 in the first
quarter of 2007. The cash inflow was due to higher proceeds from short-term
borrowings, partly offset by increased share repurchases and reduced proceeds
from the exercise of employees' stock options.
Share Repurchases. The Company's stock repurchase activity was as follows:
First Quarter
---------------------------------------------------
(in thousands, except per share amounts) 2008 2007
---------------------------------------------------------------------------------------------------------
Cost of repurchases $ 54,837 $ 24,997
Shares repurchased and retired 1,383 521
Average cost per share $ 39.66 $ 48.01
At April 30, 2008, there remained $565,969,000 of authorization for future
repurchases. The Company's stock repurchase program expires in January 2011. The
timing of repurchases and the actual number of shares to be repurchased depend
on a variety of discretionary factors such as price and other market conditions.
Borrowings. The Company's current sources of working capital are
internally-generated cash flows and borrowings available under a revolving
credit facility.
At April 30, 2008, the Company was in compliance with all loan covenants.
Contractual Obligations
-----------------------
The Company's contractual cash obligations and commercial commitments at April
30, 2008 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, 2008.
Based on the Company's financial position at April 30, 2008, 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.
Seasonality
-----------
As a jeweler and specialty retailer, the Company's business is seasonal in
nature, with the fourth quarter typically representing at least one-third of
annual net sales and approximately one-half of annual net earnings. Management
expects such seasonality to continue.
20
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 margin, expenses, earnings per share, 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 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.
21
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, interest rates and precious metal prices, 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 potential effect of a
weakening yen on U.S. dollar-denominated transactions over a maximum term of 12
months. The Company also uses foreign-exchange forward contracts to protect
against changes in local currencies. Gains or losses on these instruments
substantially offset losses or gains on the assets, liabilities and transactions
being hedged.
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.
The Company uses a combination of call and put option contracts in a net-zero
cost collar arrangement ("collars"), as hedges of a portion of forecasted
purchases of platinum and silver for internal manufacturing. If the price of the
precious metal at the time of the expiration of the collar is within the call
and put price, the collar would expire at no cost to the Company. The maximum
term over which the Company is hedging its exposure to the variability of future
cash flows for all forecasted transactions is 12 months.
Management neither foresees nor expects significant changes in the Company's
exposure to fluctuations in foreign currencies, interest rates or precious metal
prices, nor in its risk-management practices.
22
PART I. Financial Information
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 the ordinary course of business, Registrant reviews its system of
internal control over financial reporting and makes changes to its systems and
processes to improve controls and increase efficiency, while ensuring that
Registrant maintains an effective internal control environment. Changes may
include such activities as implementing new, more efficient systems and
automating manual processes.
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 above 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.
23
PART II. Other Information
Item 1A. Risk Factors
As is the case for any retailer, Registrant's success in achieving its
objectives and expectations is dependent upon general economic conditions,
competitive conditions and consumer attitudes. However, certain factors are
specific to the Registrant and/or the markets in which it operates.
The following "risk factors" are specific to Registrant; these risk factors
affect the likelihood that Registrant will achieve the financial objectives and
expectations communicated by management:
(i) Risk: that a decline in consumer confidence will adversely affect
Registrant's sales.
As a retailer of goods which are discretionary purchases, Registrant's
sales results are particularly sensitive to changes in consumer confidence.
Consumer confidence is affected by general business conditions; changes in the
market value of securities and real estate; inflation; interest rates and the
availability of consumer credit; tax rates; and expectations of future economic
conditions and employment prospects.
Consumer spending for discretionary goods generally declines during times
of falling consumer confidence, which will negatively affect Registrant's
earnings because of its cost base and inventory investment.
(ii) Risk: that sales will decline or remain flat in Registrant's fourth fiscal
quarter, which includes the holiday selling season.
Registrant's business is seasonal in nature, with the fourth quarter
typically representing at least one-third of annual net sales and approximately
one-half of annual net earnings. Poor sales results during Registrant's fourth
quarter will have a material adverse effect on Registrant's sales and profits.
(iii) Risk: that regional instability and conflict will disrupt tourist travel.
Unsettled regional and global conflicts or crises which 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 Registrant operates retail stores could adversely affect the
Registrant's sales and profits.
(iv) Risk: that the Japanese yen will weaken against the U.S. dollar and require
Registrant to raise prices or shrink profit margins in Japan.
Registrant's sales in Japan represented approximately 17% of Registrant's
net sales in Fiscal 2007. A substantial weakening of the Japanese yen against
the U.S. dollar would require Registrant to raise its retail prices in Japan or
reduce its profit margins. Japanese consumers may not accept significant price
increases on Registrant's goods; thus there is a risk that a substantial
weakening of the yen will result in reduced sales or profit margins.
(v) Risk: that Registrant will be unable to continue to offer merchandise
designed by Elsa Peretti or Paloma Picasso.
Registrant's long-standing right to sell the jewelry designs of Elsa
Peretti and Paloma Picasso and use their trademarks is responsible for a
substantial portion of Registrant's revenues. Merchandise designed by Elsa
Peretti and by Paloma Picasso accounted for 11% and 3% of Fiscal 2007 net sales,
respectively. Tiffany has exclusive license arrangements with Elsa Peretti and
Paloma Picasso; these arrangements are subject to royalty payments as well as
other requirements. Each license may be terminated by Tiffany or the designer on
six-months notice, even in the case where no default has occurred. Also, no
agreements have been made for the continued sale of the designs or use of the
trademarks ELSA PERETTI or PALOMA PICASSO following the death of either
designer. Loss of either license would materially adversely affect Registrant's
business through lost sales and profits.
(vi) Risk: that increased commodity prices or reduced supply availability will
adversely affect Registrant's ability to produce and sell products at historic
profit margins.
24
Most of Registrant's jewelry and non-jewelry offerings are made with
diamonds, gemstones and/or precious metals. A significant change in the prices
of these commodities could adversely affect Registrant's business, which is
vulnerable to the risks inherent in the trade for such commodities. A
substantial decrease in the supply or an increase in the price of raw materials
and/or high-quality rough and polished diamonds within the quality grades,
colors and sizes that customers demand could lead to decreased customer demand
and lost sales and/or reduced gross profit margins.
(vii) Risk: that the value of the TIFFANY & CO. trademark will decline due to
the sale by infringers of counterfeit merchandise.
The TIFFANY & CO. trademark is an asset which is essential to the
competitiveness and success of Registrant's business and Registrant takes
appropriate action to protect it. However, Registrant's enforcement actions have
not stopped the imitation and counterfeit of Registrant's merchandise or the
infringement of the trademark. The continued sale of counterfeit merchandise
could have an adverse effect on the TIFFANY & CO. brand by undermining Tiffany's
reputation for quality goods and making such goods appear less desirable to
consumers of luxury goods. Damage to the brand would result in lost sales and
profits.
(viii) Risk: that Registrant will be unable to lease sufficient space for its
retail stores in prime locations.
Registrant, positioned as a luxury goods retailer, has established its
retail presence in choice store locations. If Registrant cannot secure and
retain locations on suitable terms in prime and desired luxury shopping
locations, its expansion plans, sales and profits will be jeopardized.
(ix) Risk: that Registrant's business is dependent upon the distinctive appeal
of the TIFFANY & CO. brand.
The TIFFANY & CO. brand's association with quality, luxury and exclusivity
is integral to the success of Registrant's business. Registrant's expansion
plans for retail and direct selling operations and merchandise development,
production and management support the brand's appeal. Consequently, poor
maintenance, promotion and positioning of the TIFFANY & CO. brand through market
over-saturation may adversely affect the business by diminishing the distinctive
appeal of the TIFFANY & CO. brand and tarnishing its image. This will result in
lower sales and profits.
25
PART II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
This table provides information with respect to the Company's purchases of
shares of its Common Stock during the first fiscal quarter of 2008:
--------------------------------------------------------------------------------------------------------------
(c)Total Number
of Shares (d)Approximate
(a)Total Purchased Under Dollar Value of
Number of (b)Average all Publicly Shares that May Yet
Shares Price Paid Per Announced be Purchased Under
Period Purchased Share Programs* the Programs*
--------------------------------------------------------------------------------------------------------------
February 1, 2008 through 423,600 $38.43 423,600 $604,526,000
February 29, 2008
--------------------------------------------------------------------------------------------------------------
March 1, 2008 through 443,000 $37.83 443,000 $587,768,000
March 31, 2008
--------------------------------------------------------------------------------------------------------------
April 1, 2008 through 516,000 $42.25 516,000 $565,969,000
April 30, 2008
--------------------------------------------------------------------------------------------------------------
Total 1,382,600 $39.66 1,382,600 $565,969,000
--------------------------------------------------------------------------------------------------------------
* In January 2008, the Company's Board of Directors extended the expiration date
of the program to January 2011 and increased by $500,000,000 the amount
authorized for repurchase of its Common Stock.
26
ITEM 6 Exhibits
(a) Exhibits:
10.154 Preferability Letter from Independent Registered Public Accounting Firm.
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.
27
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 3, 2008 By: /s/ James N. Fernandez
------------------------------
James N. Fernandez
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Exhibit Index
10.154 Preferability Letter from Independent Registered Public Accounting Firm.
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.