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 July 31, 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, 124,008,292 shares outstanding at the close
of business on August 31, 2008.
TIFFANY & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JULY 31, 2008
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - July 31, 2008,
January 31, 2008 and July 31, 2007 (Unaudited) 3
Condensed Consolidated Statements of Earnings - for the
three and six months ended July 31, 2008 and 2007 (Unaudited) 4
Condensed Consolidated Statements of Stockholders' Equity -
for the six months ended July 31, 2008 and Comprehensive
Earnings - for the three and six months
ended July 31, 2008 and 2007 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows - for the
six months ended July 31, 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 14-22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 1A. Risk Factors 25-26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 6. Exhibits 29
(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)
July 31, January 31, July 31,
2008 2008 2007
----------------- ----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 152,156 $ 246,654 $ 129,027
Accounts receivable, less allowances
of $7,766, $9,712 and $6,133 181,109 193,974 152,353
Inventories, net 1,511,921 1,372,397 1,369,019
Deferred income taxes 30,774 20,218 55,778
Prepaid expenses and other current assets 69,484 89,072 79,816
Assets held for sale - - 48,900
----------------- ----------------- -----------------
Total current assets 1,945,444 1,922,315 1,834,893
Property, plant and equipment, net 745,304 748,210 945,280
Deferred income taxes 168,909 158,579 51,100
Other assets, net 173,019 171,800 168,180
----------------- ----------------- -----------------
$ 3,032,676 $ 3,000,904 $ 2,999,453
================= ================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 240,535 $ 44,032 $ 130,995
Current portion of long-term debt 104,560 65,640 5,455
Accounts payable and accrued liabilities 189,714 203,622 164,164
Income taxes payable 14,956 203,611 28,147
Merchandise and other customer credits 67,816 67,956 64,600
Liabilities held for sale - - 14,544
----------------- ----------------- -----------------
Total current liabilities 617,581 584,861 407,905
Long-term debt 294,096 343,465 400,643
Pension/postretirement benefit obligations 83,390 79,254 95,204
Deferred gains on sale-leasebacks 139,438 145,599 4,811
Other long-term liabilities 142,063 131,610 128,047
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 125,180, 126,753 and 136,722 1,252 1,268 1,368
Additional paid-in capital 681,260 632,671 619,456
Retained earnings 1,022,737 1,037,663 1,332,947
Accumulated other comprehensive gain (loss), net of tax:
Foreign currency translation adjustments 48,783 42,117 24,802
Deferred hedging gain 1,464 889 92
Unrealized (loss) gain on marketable securities (1,689) (621) 155
Net unrealized gain (loss) on benefit plans 2,301 2,128 (15,977)
----------------- ----------------- -----------------
Total stockholders' equity 1,756,108 1,716,115 1,962,843
----------------- ----------------- -----------------
$ 3,032,676 $ 3,000,904 $ 2,999,453
================= ================= =================
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 Six Months Ended
July 31, July 31,
------------------------------- ------------------------------
2008 2007 2008 2007
--------------- -------------- -------------- --------------
Net sales $ 732,403 $ 662,562 $ 1,400,552 $ 1,258,291
Cost of sales 309,201 290,656 596,096 552,427
--------------- -------------- -------------- --------------
Gross profit 423,202 371,906 804,456 705,864
Selling, general and administrative expenses 291,707 259,119 569,652 505,160
--------------- -------------- -------------- --------------
Earnings from continuing operations 131,495 112,787 234,804 200,704
Other expenses, net 3,344 2,748 4,852 5,833
--------------- -------------- -------------- --------------
Earnings from continuing operations before income 128,151 110,039 229,952 194,871
taxes
Provision for income taxes 47,381 43,330 84,792 74,335
--------------- -------------- -------------- --------------
Net earnings from continuing operations 80,770 66,709 145,160 120,536
Loss from discontinued operations, net of tax - (26,246) - (25,992)
--------------- -------------- -------------- --------------
Net earnings $ 80,770 $ 40,463 $ 145,160 $ 94,544
=============== ============== ============== ==============
Earnings per share:
Basic
Net earnings from continuing operations $ 0.64 $ 0.49 $ 1.15 $ 0.88
Net loss from discontinued operations - (0.19) - (0.19)
--------------- -------------- -------------- --------------
Net earnings $ 0.64 $ 0.30 $ 1.15 $ 0.69
=============== ============== ============== ==============
Diluted
Net earnings from continuing operations $ 0.63 $ 0.48 $ 1.13 $ 0.86
Net loss from discontinued operations - (0.19) - (0.19)
--------------- -------------- -------------- --------------
Net earnings $ 0.63 $ 0.29 $ 1.13 $ 0.67
=============== ============== ============== ==============
Weighted-average number of common shares:
Basic 125,714 136,743 126,086 136,616
Diluted 128,177 140,325 128,451 140,100
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") 21,571 - - 1,409 14 21,557
Tax benefit from exercise of stock options
and vesting of RSUs 8,879 - - - - 8,879
Share-based compensation expense 22,112 - - - - 22,112
Issuance of Common Stock under
Employee Profit Sharing and Retirement
Savings Plan 4,750 - - 124 1 4,749
Purchase and retirement of Common Stock (128,501) (119,762) - (3,106) (31) (8,708)
Cash dividends on Common Stock (40,324) (40,324) - - - -
Deferred hedging gain, net of tax 575 - 575 - - -
Unrealized loss on marketable securities,
net of tax (1,068) - (1,068) - - -
Foreign currency translation adjustments,
net of tax 6,666 - 6,666 - - -
Net unrealized gain on benefit plans,
net of tax 173 - 173 - - -
Net earnings 145,160 145,160 - - - -
------------------------------------------------------------------------------
$ 1,756,108 $ 1,022,737 $ 50,859 125,180 $ 1,252 $681,260
Balances, July 31, 2008 ==============================================================================
Three Months Ended Six Months Ended
July 31, July 31,
-------------------------------- -----------------------------
2008 2007 2008 2007
-------------------------------- -----------------------------
Comprehensive earnings are as follows:
Net earnings $ 80,770 $ 40,463 $145,160 $ 94,544
Other comprehensive gain (loss), net of tax:
Deferred hedging (loss) gain (1,652) (850) 575 (1,954)
Foreign currency translation adjustments 176 3,441 6,666 12,956
Unrealized loss on marketable securities (1,160) (283) (1,068) (23)
Net unrealized gain on benefit plans 107 335 173 683
-------------------------------- -----------------------------
Comprehensive earnings $ 78,241 $ 43,106 $151,506 $106,206
================================ =============================
See notes to condensed consolidated financial statements.
5
TIFFANY & CO. AND SUBSIDIARIES
------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
-----------
(in thousands)
Six Months Ended,
July 31,
--------------------------------------------------
2008 2007
------------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 145,160 $ 94,544
Loss from discontinued operations, net of tax - 25,992
------------------------- ----------------------
Net earnings from continuing operations 145,160 120,536
Adjustments to reconcile net earnings from continuing operations to net
cash provided by (used in) operating activities:
Depreciation and amortization 67,170 61,730
Amortization of gain on sale-leasebacks (4,986) (132)
Excess tax benefits from share-based payment arrangements (8,945) (9,897)
Provision for inventories 7,327 7,210
Deferred income taxes (17,153) 3,804
Provision for pension/postretirement benefits 12,332 13,402
Share-based compensation expense 21,781 18,481
Changes in assets and liabilities:
Accounts receivable 16,695 18,456
Inventories (143,786) (113,348)
Prepaid expenses and other current assets 20,574 (18,014)
Accounts payable and accrued liabilities (11,290) (23,858)
Income taxes payable (180,463) (24,342)
Merchandise and other customer credits (219) 2,845
Other, net (1,950) (6,114)
------------------------- ----------------------
Net cash (used in) provided by operating activities (77,753) 50,759
------------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities and short-term investments (464) (217,861)
Proceeds from sales of marketable securities and short-term
investments - 231,919
Capital expenditures (67,952) (87,779)
Notes receivable funded (2,500) (2,172)
Acquisitions, net of cash acquired - (400)
Other (940) 1,799
------------------------- ----------------------
Net cash used in investing activities (71,856) (74,494)
------------------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (4,191) (10,082)
Proceeds from short-term borrowings, net 194,706 17,330
Repurchase of Common Stock (128,501) (59,197)
Proceeds from exercise of stock options 21,571 54,032
Excess tax benefits from share-based payment arrangements 8,945 9,897
Cash dividends on Common Stock (40,324) (30,043)
------------------------- ----------------------
Net cash provided by (used in) financing activities 52,206 (18,063)
------------------------- ----------------------
Effect of exchange rate changes on cash and cash equivalents 2,905 3,817
------------------------- ----------------------
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Operating activities - (7,168)
Investing activities - (858)
------------------------- ----------------------
Net cash used in discontinued operations - (8,026)
------------------------- ----------------------
Net decrease in cash and cash equivalents (94,498) (46,007)
Cash and cash equivalents at beginning of year 246,654 175,008
Decrease in cash and cash equivalents of discontinued operations - 26
------------------------- ----------------------
Cash and cash equivalents at end of six months $ 152,156 $ 129,027
========================= ======================
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 July 31, 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 and six months ended July 31, 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 was 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 July 31, 2007
-------------------------------------------------------------
(in thousands, except per share data) As Reported Adjustment As Adjusted
-----------------------------------------------------------------------------------------------------------
Cost of sales $ 296,449 $ (5,793) $ 290,656
Provision for income taxes 41,027 2,303 43,330
Net earnings from continuing operations 63,219 3,490 66,709
Net earnings 36,973 3,490 40,463
Net earnings from continuing operations per share:
Basic $ 0.46 $ 0.03 $ 0.49
-------------------------------------------------------------
Diluted $ 0.45 $ 0.02 $ 0.48
-------------------------------------------------------------
Net earnings per share:
Basic $ 0.27 $ 0.03 $ 0.30
-------------------------------------------------------------
Diluted $ 0.26 $ 0.02 $ 0.29
-------------------------------------------------------------
7
Six Months Ended July 31, 2007
-------------------------------------------------------------
(in thousands, except per share data) As Reported Adjustment As Adjusted
-----------------------------------------------------------------------------------------------------------
Cost of sales $ 564,850 $ (12,423) $ 552,427
Provision for income taxes 69,824 4,511 74,335
Net earnings from continuing operations 112,624 7,912 120,536
Net earnings 86,632 7,912 94,544
Net earnings from continuing operations per share:
Basic $ 0.82 $ 0.06 $ 0.88
-------------------------------------------------------------
Diluted $ 0.80 $ 0.06 $ 0.86
--------------------------------------------------------------
Net earnings per share:
Basic $ 0.63 $ 0.06 $ 0.69
-------------------------------------------------------------
Diluted $ 0.62 $ 0.06 $ 0.67
-------------------------------------------------------------
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
July 31, 2007
-------------------------------------------------------------
(in thousands) As Reported Adjustment As Adjusted
-----------------------------------------------------------------------------------------------------------
Assets:
Inventories, net $ 1,253,657 $ 115,362 $ 1,369,019
Deferred income taxes - current 104,185 (48,407) 55,778
Total Assets 2,932,498 66,955 2,999,453
Liabilities and Stockholders' Equity
Retained Earnings 1,265,992 66,955 1,332,947
Total Liabilities and Stockholders' Equity 2,932,498 66,955 2,999,453
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:
Six Months Ended July 31, 2007
-------------------------------------------------------------
(in thousands) As Reported Adjustment As Adjusted
-----------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net earnings $ 86,632 $ 7,912 $ 94,544
Provision for inventories 7,195 15 7,210
Deferred income taxes (706) 4,510 3,804
Inventories (100,911) (12,437) (113,348)
Net cash provided by operating activities 50,759 - 50,759
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
8
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 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
During the second quarter of 2007, the Company's Board of Directors
authorized the sale of Little Switzerland, Inc. ("Little Switzerland"),
based on management's conclusion that Little Switzerland's operations did
not demonstrate the potential to generate a return on investment consistent
with management's objectives. 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. 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.
9
Summarized statement of earnings data for Little Switzerland is as
follows:
Three Months Ended Six Months Ended
(in thousands) July 31, 2007 July 31, 2007
----------------------------------------------------------------------------------------------------------
Net revenues $ 18,294 $ 43,439
============================================
Loss from operations (58,404) (58,369)
Income tax benefit (32,158) (32,377)
--------------------------------------------
Loss from discontinued operations $ (26,246) $ (25,992)
============================================
Summarized balance sheet data for Little Switzerland is as follows:
July 31,
(in thousands) 2007
----------------------------------------------------------------------------------------------------------
Assets held for sale
Inventories, net $ 66,728
Other current assets 5,026
Property, plant and equipment, net 19,307
Other assets 12,700
Impairment charge (54,861)
---------------------
Total assets held for sale $ 48,900
=====================
Liabilities held for sale
Current liabilities $ 9,268
Other liabilities 5,276
---------------------
Total liabilities held for sale $ 14,544
=====================
5. INVENTORIES
July 31, January 31, July 31,
(in thousands) 2008 2008 2007
----------------------------------------------------------------------------------------------------------
Finished goods $ 1,020,716 $ 942,860 $ 955,841
Raw materials 384,668 352,211 339,964
Work-in-process 106,537 77,326 73,214
-----------------------------------------------------------------
Inventories, net $ 1,511,921 $ 1,372,397 $ 1,369,019
=================================================================
6. INCOME TAXES
During the six months ended July 31, 2008, the gross amount of unrecognized
tax benefits increased $8,240,000 to $41,942,000. As of that date, the
changes in the unrecognized tax benefits that if recognized would affect
the effective tax rate and accrued interest and penalties was not material.
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 U.S. Federal tax year
2006, Japan (tax years 2003-2005, 2007) and New York City (tax years
2002-2004). Tax years from 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.
10
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 Six Months Ended
July 31, July 31,
----------------------------------------------------------------------------
(in thousands) 2008 2007 2008 2007
-------------------------------------------------------------------------------------------------------------
Net earnings for basic and
diluted EPS $ 80,770 $ 40,463 $ 145,160 $ 94,544
============================================================================
Weighted average shares for
basic EPS 125,714 136,743 126,086 136,616
Incremental shares based
upon the assumed
exercise of stock options
and restricted stock units 2,463 3,582 2,365 3,484
----------------------------------------------------------------------------
Weighted average shares for
diluted EPS 128,177 140,325 128,451 140,100
============================================================================
For the three months ended July 31, 2008 and 2007, there were 848,000 and
388,000 stock options and restricted stock units excluded from the
computations of earnings per diluted share due to their antidilutive
effect. For the six months ended July 31, 2008 and 2007, there were
1,708,000 and 388,000 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 platinum and silver 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) July 31, 2008 Level 1 Level 2 Level 3
-----------------------------------------------------------------------------------------------------------
Mutual funds $ 26,922 $ 26,922 $ - $ -
Yen put options 3,093 - 3,093 -
Platinum and silver collars 327 - 327 -
Interest-rate swap agreements 2,975 - 2,975 -
11
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 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. 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.
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 July 31,
-------------------------------------------------------------------
Other
Pension Benefits Postretirement Benefits
-------------------------------------------------------------------
(in thousands) 2008 2007 2008 2007
------------------------------------------------------------------------------------------------------------
Service cost $ 4,393 $ 4,613 $ 416 $ 317
Interest cost 4,397 4,014 478 470
Expected return on plan assets (3,915) (3,429) - -
Amortization of prior service cost 320 320 (197) (224)
Amortization of net loss 216 729 - 10
-------------------------------------------------------------------
Net expense $ 5,411 $ 6,247 $ 697 $ 573
===================================================================
Six Months Ended July 31,
-------------------------------------------------------------------
Other
Pension Benefits Postretirement Benefits
-------------------------------------------------------------------
(in thousands) 2008 2007 2008 2007
------------------------------------------------------------------------------------------------------------
Service cost $ 8,963 $ 9,160 $ 833 $ 635
Interest cost 8,794 7,942 956 940
Expected return on plan assets (7,829) (6,858) - -
Amortization of prior service cost 641 641 (395) (447)
Amortization of net loss 369 1,369 - 20
-------------------------------------------------------------------
Net expense $ 10,938 $ 12,254 $ 1,394 $ 1,148
===================================================================
10. SEGMENT INFORMATION
Effective with the first quarter of 2008, 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 it is more meaningful 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.
12
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.
Certain information relating to the Company's segments is set forth
below:
Three Months Ended Six Months Ended
July 31, July 31,
--------------------------------------------------------------------
(in thousands) 2008 2007 2008 2007
-------------------------------------------------------------------------------------------------------
Net sales:
Americas $ 422,406 $ 408,941 $ 795,971 $ 762,289
Asia-Pacific 214,233 182,962 436,270 366,056
Europe 71,020 52,559 131,145 96,103
--------------------------------------------------------------------
Total reportable segments 707,659 644,462 1,363,386 1,224,448
Other 24,744 18,100 37,166 33,843
--------------------------------------------------------------------
$ 732,403 $ 662,562 $1,400,552 $ 1,258,291
====================================================================
Earnings (losses) from continuing operations*:
Americas $ 93,597 $ 87,582 $ 161,888 $ 149,684
Asia-Pacific 53,895 47,182 110,260 96,481
Europe 15,514 10,671 27,088 18,291
--------------------------------------------------------------------
Total reportable segments 163,006 145,435 299,236 264,456
Other (1,971) (4,796) (5,996) (9,292)
--------------------------------------------------------------------
$ 161,035 $ 140,639 $ 293,240 $ 255,164
====================================================================
*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 Six Months Ended
July 31, July 31,
-------------------------------------------------------------------
(in thousands) 2008 2007 2008 2007
------------------------------------------------------------------------------------------------------
Earnings from continuing
operations for segments $ 161,035 $ 140,639 $ 293,240 $ 255,164
Unallocated corporate
expenses (29,540) (27,852) (58,436) (54,460)
Other expenses, net (3,344) (2,748) (4,852) (5,833)
-------------------------------------------------------------------
Earnings from continuing
operations before income
taxes $ 128,151 $ 110,039 $ 229,952 $ 194,871
===================================================================
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 August 21, 2008, the Company's Board of Directors declared a
quarterly dividend of $0.17 per share. This dividend will be paid on
October 10, 2008 to stockholders of record on September 22, 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 the first quarter of 2008, 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
it is more meaningful 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 11% in both the three months ("second
quarter") and in the six months ("first half") ended July 31, 2008.
Sales growth was strongest in the Asia-Pacific and Europe segments for
both periods.
o Worldwide comparable store sales decreased 1% in the second quarter
and increased 1% in the first half on a constant-exchange-rate basis
(see Non-GAAP Measures).
o Net earnings from continuing operations rose 21% to $80,770,000 in the
second quarter and 20% to $145,160,000 in the first half. Net earnings
from continuing operations per diluted share rose 31% in both the
second quarter and first half.
o The Company repurchased and retired 1.7 million and 3.1 million shares
of its Common Stock during the second quarter and first half of 2008.
o In May 2008, the Board of Directors increased the annual divided rate
by 13%, representing the sixth consecutive annual increase.
14
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.
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:
Second Quarter 2008 vs. 2007 First Half 2008 vs. 2007
---------------------------------------- ------------------------------------------
Constant- Constant-
GAAP Translation Exchange- GAAP Translation Exchange-
Reported Effect Rate Basis Reported Effect Rate Basis
---------------------------------------- ------------------------------------------
Net Sales:
----------
Worldwide 11% 4% 7% 11% 4% 7%
Americas 3% - 3% 4% - 4%
U.S. 2% - 2% 3% - 3%
Asia-Pacific 17% 10% 7% 19% 11% 8%
Japan 12% 15% (3)% 12% 14% (2)%
Other Asia-Pacific 23% 5% 18% 30% 5% 25%
Europe 35% 6% 29% 36% 6% 30%
Comparable Store Sales:
-----------------------
Worldwide 3% 4% (1)% 5% 4% 1%
Americas (2)% 1% (3)% (1)% - (1)%
U.S. (4)% - (4)% (2)% - (2)%
Asia-Pacific 11% 10% 1% 13% 11% 2%
Japan 7% 14% (7)% 7% 14% (7)%
Other Asia-Pacific 18% 5% 13% 23% 6% 17%
Europe 19% 8% 11% 20% 8% 12%
15
RESULTS OF OPERATIONS
---------------------
Certain operating data as a percentage of net sales were as follows:
Second Quarter First Half
----------------------- ----------------------
2008 2007 2008 2007
----------------------- ----------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 42.2 43.9 42.6 43.9
----------------------- ----------------------
Gross profit 57.8 56.1 57.4 56.1
Selling, general and administrative expenses 39.8 39.1 40.7 40.1
----------------------- ----------------------
Earnings from continuing operations 18.0 17.0 16.7 16.0
Other expenses, net 0.5 0.5 0.2 0.5
----------------------- ----------------------
Earnings from continuing operations before income taxes 17.5 16.5 16.5 15.5
Provision for income taxes 6.5 6.5 6.1 5.9
----------------------- ----------------------
Net earnings from continuing operations 11.0 10.0 10.4 9.6
Loss from discontinued operations, net of tax - (3.9) - (2.1)
----------------------- ----------------------
Net earnings 11.0% 6.1% 10.4% 7.5%
======================= ======================
Net Sales
---------
Net sales were as follows:
Second Quarter
-----------------------------------------------------------------------------------------
(in thousands) 2008 2007 Increase
----------------------------------------------------------------------------------------------------------------------
Americas $ 422,406 $ 408,941 $ 13,465 3%
Asia-Pacific 214,233 182,962 31,271 17%
Europe 71,020 52,559 18,461 35%
Other 24,744 18,100 6,644 37%
----------------------------------------------------------------------------------------
$ 732,403 $ 662,562 $ 69,841 11%
========================================================================================
First Half
-----------------------------------------------------------------------------------------
(in thousands) 2008 2007 Increase
----------------------------------------------------------------------------------------------------------------------
Americas $ 795,971 $ 762,289 $ 33,682 4%
Asia-Pacific 436,270 366,056 70,214 19%
Europe 131,145 96,103 35,042 36%
Other 37,166 33,843 3,323 10%
-----------------------------------------------------------------------------------------
$ 1,400,552 $ 1,258,291 $ 142,261 11%
=========================================================================================
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 in the second quarter and
first half primarily due to non-comparable U.S. retail store sales growth
($19,852,000 in the second quarter and $35,367,000 in the first half) and
comparable retail store sales growth in Other America regions ($4,655,000 in the
second quarter and $8,725,000 in the first half). These increases were partly
offset by declines in comparable U.S. retail store sales (4%, or $13,345,000, in
the second quarter and 2%, or $12,929,000, in the first half). The U.S.
comparable store sales decline in the second quarter and first half was due to a
decline in transactions which management attributes to the challenging economic
environment in the U.S. However, transactions and sales increased in the New
York Flagship store, which benefited from higher levels of sales to foreign
tourists. New York Flagship store sales increased 5%
16
and 10% in the second quarter and first half, compared to a decline in
comparable branch stores of 6% and 5% in those same periods.
Asia-Pacific. Total sales in the Asia-Pacific region increased in the second
quarter and first half primarily due to comparable store sales growth (11%, or
$18,320,000, in the second quarter and 13%, or $43,052,000, in the first half)
and non-comparable store sales growth ($9,222,000 in the second quarter and
$20,293,000 in the first half). In the second quarter, on a
constant-exchange-rate basis, Asia-Pacific region sales increased 7% and
comparable store sales increased 1% (consisting of a 13% increase in comparable
store sales in countries other than Japan offset by a 7% decline in Japan
comparable store sales). In the first half, on a constant-exchange-rate basis,
Asia-Pacific region sales increased 8% and comparable store sales increased 2%
(consisting of a 17% increase in comparable store sales in countries other than
Japan offset by a 7% decline in Japan comparable store sales). The total
increase in Asia-Pacific region sales primarily resulted from an increase in the
average price per unit sold in both the second quarter and first half.
Europe. Total sales in the Europe region increased in the second quarter and
first half primarily due to comparable store sales growth (19%, or $7,765,000,
in the second quarter and 20%, or $15,230,000, in the first half) and
non-comparable store sales growth ($7,280,000 in the second quarter and
$12,920,000 in the first half). On a constant-exchange-rate basis, Europe region
sales increased 29% in the second quarter and 30% in the first half and
comparable store sales rose 11% and 12% in those periods, reflecting strong
growth in the United Kingdom and most Continental European markets. The total
increase in Europe region sales resulted from an increase in the number of units
sold in both the second quarter and first half.
Other. Other sales increased in the second quarter and first half primarily due
to increased wholesale sales of diamonds that were deemed not suitable for the
Company's needs. Wholesale diamond sales increased to $20,976,000 in the second
quarter from $15,636,000 in prior year and rose to $30,546,000 in the first half
from $29,274,000 in the prior year. Other sales also increased in the second
quarter and first half due to earnings from licensing agreements and sales
growth in IRIDESSE stores.
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 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
Shandong, China Second Quarter
Perth, Australia Second Quarter
Seoul - Samsung Plaza, Korea Third 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
17
Gross Margin
------------
Gross margin (gross profit as a percentage of net sales) increased in the second
quarter by 1.7 percentage points and in the first half by 1.3 percentage points
primarily due to changes in geographic and product sales mix. To a lesser
extent, gross margin also improved in the second quarter and first half due to
the leverage effect of increased sales applied against fixed product-related
costs, which includes costs associated with merchandising and distribution. To
address rising product costs, the Company has, in certain instances, increased
retail prices.
Selling, General and Administrative ("SG&A") Expenses
-----------------------------------------------------
SG&A expenses increased $32,588,000, or 13%, in the second quarter primarily due
to increased labor and benefit costs of $10,853,000 and increased depreciation
and store occupancy expenses of $10,062,000, (both of which are largely due to
new and existing stores), as well as an increase of $5,393,000 in marketing
expenses. Changes in foreign currency exchange rates increased SG&A expenses in
the second quarter by approximately $8,000,000 compared to the prior year. In
the first half, SG&A expenses increased $64,492,000, or 13%, primarily due to
increased labor and benefit costs of $21,269,000 and increased depreciation and
store occupancy expenses of $18,756,000, (both of which are largely due to new
and existing stores), as well as an increase of $10,726,000 in marketing
expenses. Changes in foreign currency exchange rates increased SG&A expenses by
approximately $18,000,000 compared to the prior year. SG&A expenses as a
percentage of net sales increased by 0.7 percentage point in the second quarter
and 0.6 percentage point in the first half because sales growth in the U.S. was
insufficient to offset increased costs.
Earnings from Continuing Operations
-----------------------------------
Second Quarter % of Net Second Quarter % of Net
(in thousands) 2008 Sales* 2007 Sales*
--------------------------------------------------------------------------------------------------------------------
Earnings (losses) from continuing
operations:
Americas $ 93,597 22.2% $ 87,582 21.4%
Asia-Pacific 53,895 25.2% 47,182 25.8%
Europe 15,514 21.8% 10,671 20.3%
Other (1,971) (8.0%) (4,796) (26.5%)
----------------------------------------------------------------------------
161,035 140,639
Unallocated corporate expenses (29,540) 4.0% (27,852) 4.2%
----------------------------------------------------------------------------
Earnings from continuing
operations $ 131,495 18.0% $ 112,787 17.0%
============================================================================
* Percentages represent earnings (losses) from continuing operations as a
percentage of each segment's net sales.
Earnings from continuing operations increased 17% in the second 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 second quarter of 2008 and
2007 was as follows:
o Americas - the ratio increased 0.8 percentage point primarily due to
an increase in gross margin (due to changes in product sales mix and
the leverage effect of increased sales applied against fixed
product-related costs);
o Asia-Pacific - the ratio decreased 0.6 percentage points partly due to
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 1.5 percentage points primarily due to an
increase in gross margin (due to changes in product 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 decreased 18.5 percentage points primarily due to lower Iridesse
operating losses and earnings from a licensing agreement.
18
First Half % of Net First Half % of Net
(in thousands) 2008 Sales* 2007 Sales*
-------------------------------------------------------------------------------------------------------------------
Earnings (losses) from continuing
operations:
Americas $ 161,888 20.3% $ 149,684 19.6%
Asia-Pacific 110,260 25.3% 96,481 26.4%
Europe 27,088 20.7% 18,291 19.0%
Other (5,996) (16.1%) (9,292) (27.5%)
---------------------------------------------------------------------------
293,240 255,164
Unallocated corporate expenses (58,436) 4.2% (54,460) 4.3%
---------------------------------------------------------------------------
Earnings from continuing operations $ 234,804 16.7% $ 200,704 16.0%
===========================================================================
* Percentages represent earnings (losses) from continuing operations as a
percentage of each segment's net sales.
Earnings from continuing operations increased 17% in the first half. 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 half of 2008 and 2007
was as follows:
o Americas - the ratio increased 0.7 percentage point primarily 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 1.1 percentage points partly due to
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 decreased 11.4 percentage points primarily due to lower Iridesse
operating losses and earnings from a licensing agreement.
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.
Provision for Income Taxes
--------------------------
The effective income tax rates for the second quarter and first half of 2008
were 37.0% and 36.9% versus 39.4% and 38.1% in the prior year.
2008 Outlook
------------
Management's full-year 2008 expectations are currently as follows:
o Net sales growth of 9% 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 mid-single-digit percentage
increase in total sales in the Americas region, which includes U.S.
comparable store sales and Internet/catalog sales to be approximately
unchanged from the prior year; and (iii) a low-double-digit percentage
increase in annual sales growth in dollars in the total Asia-Pacific
region and more than 25% growth in dollars in Europe, including
local-currency comparable store sales increasing by a low-teens
percentage in Asia-Pacific outside Japan, a mid-single-digit
percentage decline in Japan, and a low-double-digit percentage
increase in Europe.
o Management's outlook for U.S. sales includes improvement
later in the year based on easier year-over-year comparisons
in the fourth quarter.
19
o Operating margin to increase slightly over 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 an increase in gross margin partly offset by a
modest increase in the SG&A expense ratio.
o Other expenses, net of approximately $17 million.
o An effective tax rate of approximately 37%.
o Net earnings per diluted share of $2.82 - $2.92.
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 36% at July 31, 2008, 26% at January 31, 2008, and 27% at July 31, 2007.
The following table summarizes cash flows from operating, investing and
financing activities:
First Half
---------------------------------------------------
(in thousands) 2008 2007
---------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by:
Operating activities $ (77,753) $ 50,759
Investing activities (71,856) (74,494)
Financing activities 52,206 (18,063)
Effect of exchange rates on cash and cash equivalents 2,905 3,817
Net cash used in discontinued operations - (8,026)
--------------------------------------------------
Net decrease in cash and cash equivalents $ (94,498) $ (46,007)
==================================================
Operating Activities
--------------------
The Company's net cash outflow from operating activities of $77,753,000 in the
first half of 2008 compared with an inflow of $50,759,000 in the first half of
2007. The cash outflow in the first half of 2008 resulted primarily from
increased income tax payments 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 $1,327,863,000 and 3.2 at July 31, 2008, compared with $1,337,454,000 and
3.3 at January 31, 2008 and $1,426,988,000 and 4.5 at July 31, 2007.
Accounts receivable, less allowances at July 31, 2008 were 7% lower than at
January 31, 2008 (which is typically a seasonal highpoint) and were 19% higher
than at July 31, 2007 primarily due to sales growth, as well as expanded
international wholesale distribution. Changes in foreign currency exchange rates
had an insignificant effect on the change in accounts receivable balances at
July 31, 2008 versus January 31, 2008 and increased accounts receivable balances
by 3% compared to July 31, 2007.
Inventories, net at July 31, 2008 were 10% above both January 31, 2008 and July
31, 2007. Combined raw material and work-in-process inventories increased 14%
over January 31, 2008 and 19% over July 31, 2007 due to increased precious metal
costs and diamond quantities needed to support internal jewelry manufacturing.
Finished goods inventories increased 8% over January 31, 2008, and 7% over July
31, 2007 due to new store openings, increased product costs as well as broadened
product assortments. Changes in foreign currency exchange rates had an
insignificant effect on the change in finished goods inventories at July 31,
2008 versus January 31, 2008 and increased finished goods inventory balances by
3% over July 31, 2007.
20
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 $71,856,000 in the
first half of 2008 compared with an outflow of $74,494,000 in the first half of
2007.
Capital Expenditures. Capital expenditures were $67,952,000 in the first half of
2008 compared with $87,779,000 in the first half of 2007. Management estimates
that capital expenditures will be approximately $190,000,000 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
($464,000) and $14,058,000 in the first half of 2008 and 2007.
Financing Activities
--------------------
The Company's net cash inflow from financing activities of $52,206,000 in the
first half of 2008 compared with an outflow of $18,063,000 in the first half 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:
Second Quarter
---------------------------------------------------
(in thousands, except per share amounts) 2008 2007
---------------------------------------------------------------------------------------------------------------------
Cost of repurchases $ 73,664 $ 34,200
Shares repurchased and retired 1,723 662
Average cost per share $ 42.75 $ 51.69
First Half
---------------------------------------------------
(in thousands, except per share amounts) 2008 2007
---------------------------------------------------------------------------------------------------------------------
Cost of repurchases $ 128,501 $ 59,197
Shares repurchased and retired 3,106 1,182
Average cost per share $ 41.37 $ 50.07
At July 31, 2008, there remained $492,305,000 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 July 31, 2008, the Company was in compliance with all loan covenants.
Contractual Obligations
-----------------------
The Company's contractual cash obligations and commercial commitments at July
31, 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 July 31, 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 and working capital increases for
the foreseeable future. In addition, the Company is currently evaluating
opportunities to issue new debt up to $300,000,000 to repay the
21
$60,000,000 Series A Senior Note and $40,000,000 Series C Senior Note due within
the next 12 months and to fund potential share repurchases.
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.
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.
22
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.
23
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.
24
PART II. Other Information
Item 1. Legal Proceedings
In July 2004, Tiffany initiated a civil proceeding against eBay, Inc. in the
Federal District Court for the Southern District of New York. Tiffany alleged
direct and contributory trademark infringement, unfair competition, false
advertising and trademark dilution. Tiffany sought damages and injunctive relief
stemming from eBay's alleged assistance and contribution to the offering for
sale, advertising and promotion, in the U.S., of counterfeit TIFFANY jewelry and
other jewelry or merchandise which bears the TIFFANY trademark and is dilutive
or confusingly similar to the TIFFANY or TIFFANY & CO. trademarks. In November
2007, the case was tried as a bench trial and in July 2008 the District Court
issued its opinion denying any relief to Tiffany. In August 2008, Tiffany filed
notice of appeal to the U.S. Court of Appeals for the Second Circuit. If the
decision of the District Court is upheld after appeal, it will be more difficult
for Tiffany to prevent the sale of counterfeit TIFFANY jewelry and other
merchandise on internet auction sites. See Risk Factor (vii) below.
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.
25
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.
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.
26
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 second 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*
--------------------------------------------------------------------------------------------------------------
May 1, 2008 through 462,700 $45.16 462,700 $545,075,000
May 31, 2008
--------------------------------------------------------------------------------------------------------------
June 1, 2008 through 447,950 $46.43 447,950 $524,277,000
June 30, 2008
--------------------------------------------------------------------------------------------------------------
July 1, 2008 through 812,551 $39.35 812,551 $492,305,000
July 31, 2008
--------------------------------------------------------------------------------------------------------------
Total 1,723,201 $42.75 1,723,201 $492,305,000
--------------------------------------------------------------------------------------------------------------
* 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.
27
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
At Registrant's Annual Meeting of Stockholders held on May 15, 2008 each of the
nominees listed below was elected a director of Registrant to hold office until
the next annual meeting of the stockholders and until his or her successor has
been elected and qualified. All directors are elected at each annual meeting.
Tabulated with the name of each of the nominees elected is the number of Common
shares cast for and against each nominee and the number of Common shares
abstaining to vote for each nominee. There were no broker non-votes with respect
to the election of directors.
Number of
Shares
Nominee Voted For Voted Against Abstaining
--------------------------------------------------------------------------------------------------------------
Michael J. Kowalski 108,213,399 1,509,676 1,088,260
Rose Marie Bravo 108,054,097 1,657,632 1,099,606
Gary E. Costley 108,302,691 1,406,875 1,101,769
Lawrence K. Fish 108,408,028 1,297,991 1,105,316
Abby F. Kohnstamm 108,464,636 1,251,353 1,095,346
Charles K. Marquis 107,999,187 1,706,124 1,106,024
Peter W. May 108,267,328 1,446,090 1,097,917
J. Thomas Presby 104,421,514 5,268,376 1,121,445
William A. Shutzer 108,029,955 1,683,384 1,097,996
At such meeting, the stockholders approved the appointment of
PricewaterhouseCoopers LLP as the independent registered public accounting firm
to examine the Company's fiscal 2008 financial statements. With respect to such
appointment, 108,084,930 shares were voted to approve, 1,631,127 were voted
against, and 1,095,278 shares abstained from voting. There were no broker
non-votes with respect to the approval of the appointment of
PricewaterhouseCoopers LLP.
Also at such meeting, the stockholders approved the Tiffany & Co. 2008 Directors
Equity Compensation Plan. A majority of shares outstanding on March 20, 2008
voted on the proposal. With respect to such approval, 88,296,366 shares voted to
approve, 6,238,749 shares voted against, and 2,752,887 shares abstained from
voting. There were 13,523,333 broker non-votes that were discarded for purposes
of determining the quorum and voting with respect to the approval of the Tiffany
& Co. 2008 Directors Equity Compensation Plan.
28
ITEM 6 Exhibits
(a) Exhibits:
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.
29
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: September 3, 2008 By: /s/ James N. Fernandez
----------------------------
James N. Fernandez
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Exhibit Index
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.