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OPERATOR: Good day, everyone, and welcome to this tiffany & necklaces Holiday Sales Conference Call. Today’s call is being recorded. Participating on today’s call is the Vice President of Investor Relations, Mr. Mark Aaron, and the Executive Vice President and Chief Financial Officer, Mr. Jim Fernandez. At this time, I’d like to turn the call over to Mr. Mark Aaron. Please go ahead, sir.
MARK AARON, VP, IR, TIFFANY & CO.: Thank you. Good morning and happy new year to all of you.
By now, we hope you have received and read the press release we issued earlier today. On today’s brief call, Jim and I will elaborate on these holiday season results, which we think were quite respectable in total, and comment on our expectations.
Before continuing, please note Tiffany’s Safe Harbor provision as follows — statements made on this call that are not historical facts are forward-looking statements. Actual results might differ materially from the expectations projected in those forward-looking statements. Additional information concerning risk factors that could cause actual results to differ materially are set forth in Tiffany’s 2003 annual report and in Form 10k, 10-Q and 8-K reports filed with the SEC. The Company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. Now, we can proceed.
The 2004 holiday season, covering the months of November and December, is now officially over. We are delighted to report that, overall, Tiffany’s holiday season was a good one due to continued strength in U.S. retail sales and growth in direct marketing sales.
International results were decent in total, although mixed by market with continued weakness in Japan. Total tiffany sales rose by a strong 12 percent in this just-completed holiday season, which was especially gratifying considering it was on top of an 18 percent increase last year. Even excluding the effect of foreign currency translation, worldwide sales still rose by a healthy 10 percent and comparable store sales increased 4 percent.
Let’s look more closely at Tiffany’s four channels of distribution. U.S. retail sales rose 11 percent in the holiday season. Comparable store sales increased 8 percent, which was higher than our mid single digit expectation.
In terms of the monthly trend, comps were strong throughout the holiday season with a 10 percent increase in November and a 7 percent increase in December. Let me remind you that U.S. comps rose 16 percent in last year’s holiday season, which included a 14 percent increase in November and a 16 percent increase in December. Last year’s fourth quarter then concluded with a huge 24 percent comp increase in January.
The 8 percent comp increase in this holiday season consisted of an 11 percent increase in New York’s flagship store sales and a 7 percent increase in comparable brand store sales. In the New York metro market, comps for the six suburban stores were roughly equal to the prior year. We are also experiencing an exceptionally strong start in our new store in Westport, Connecticut, which is likely having some cannibalization effect on a couple of New York-area stores.
Looking around the country, the comp growth was geographically broad-based, but some stores with the largest comp increases included Bal Harbour, Bellevue, Charlotte, Dallas Galleria, Orlando, Tampa and Walnut Creek.
Continuing a trend we’ve seen all year, the comp store sales growth was generated by customers spending more per transaction. Store traffic and transactions were lower than last year, but the conversion rate held steady.
Sales increased in all jewelry categories, but the higher end was especially strong with diamond jewelry and engagement jewelry performing brilliantly. New designs were also popular, with exceptional strength in the new ATLAS jewelry collection in gold and silver.
From a price stratification perspective, sales and transactions rose in every price layer above $500, which is consistent with trends all year and we saw especially strong activity in sales over $10,000. We also saw a solid increase in sales of electronic gift cards during the holiday season, which ultimately contributes to sales growth when customers come in to redeem them.
In addition, many of you have read about or observed the large increase in the foreign visitors to New York, especially Europeans, as a result of the weaker U.S. dollar, and Tiffany is benefiting from that trend. However, as always, the vast majority of purchasers in our U.S. stores, especially during the holiday season, were domestic customers.
Finally, we are experiencing exceptionally strong results in the new U.S. stores we’ve opened this year. I already mentioned Westport, but also want to recognize the stores in Edina, Kansas City, and Palm Beach Garden, each of which posted sales results far above our expectations.
Looking beyond the U.S., international retail sales rose 12 percent in the holiday season. On a constant-exchange-rate basis, sales rose 6 percent but comp store sales declined 2 percent due to softness in Japan.
Let’s review results by region on a constant-exchange-rate basis. Starting with Japan, comparable store sales declined 7 percent in the holiday season. That was below the flat comp that we had projected and was on top of a 7 percent comp decline last year. The monthly trend included an 11 percent decline in November on top of a 3 percent decline last year and a 5 percent decline in December, on top of a 9 percent decline last year. Comps in January last year declined 5 percent. This year’s 7 percent comp decline consisted of a 9 percent decline in the Tokyo market, including a 6 percent decline in our Ginza flagship store, while comps declined 6 percent outside Tokyo.
While comp store sales are a key measurement of store productivity, we think it’s also important to consider the effect from several new stores and boutiques that contributed to a fractional increase in total Japan retail sales in the holiday season. The two new freestanding stores we opened this year in the Marunouchi area of Tokyo and the Umeda area of Osaka create custom excitement and sales, which likely cannibalized comps to some degree but increased Tiffany’s overall market penetration.
The U.S. dollar has weakened against most foreign currencies and certainly played a role in translating Japan’s yen-denominated results into dollars. The yen averaged 104 to the dollar in this holiday season, versus 108 last year. As a result, the slight increase in total retail sales in yen translated into a 4 percent increase in dollars.
For total Japan retail sales, engagement jewelry sales were equal to the prior year. Silver jewelry sales continued to decline, but at a very modest rate, and we were pleased to see a dramatic increase in gold jewelry sales. The silver and gold jewelry categories are both benefiting from new product introductions but sales of Perrettibanglescontinued below expectations in Japan.
So, Japan sales were clearly not as good as we expected, but we believe we are on the right track and, with a new management team in Japan, are positioned to make some headway in 2005.
In the rest of the Asia-Pacific region outside Japan, comp store sales rose 5 percent in the holiday season, which was below our expectation but was on top of a 25 percent comp increase last year. The markets showing the largest percentage increases were Hong Kong and Australia. Our first two stores in Beijing in Shanghai are exceeding our sales expectations and although a very small piece of the sales mix, we believe China will ultimately be an important market for Tiffany. If our customer base in China is even just a very small percentage of the population, it could still result in our opening quite a few stores over the longer term.
In Europe, comp store sales rose 3 percent in the holiday season, which was below our expectations but was on top of a 13 percent increase last year. All markets in continental Europe posted solid growth. However, sales in London declined on a comp basis, but total retail sales there rose almost 10 percent when including the very successful store we opened last spring on Sloane Street. Rounding out international retail, we achieved solid sales growth in Toronto and are developing a good business in Mexico.
Returning to the U.S., direct marketing sales increased 11 percent in the holiday season, which was on top of a 14 percent increase last year. We achieved a modest 3 percent increase in the business gift division. However, the much larger portion of direct marketing is Internet and catalog sales, which, on a combined basis, increased 13 percent in the holiday season and was on top of a 27 percent increase last year. That growth was fueled by a sharply higher increase in eCommerce sales due to increases in the average order size.