Tiffany (NYSE: TIF ) on Wednesday delivered rock-solid financial numbers for the second quarter of fiscal 2014, beating analysts' forecasts for both sales and earnings growth. Let´s review the jewelry retailer's latest earnings conference call to see what management said regarding Tiffany's recent performance and the future of the company.
Strength in the Americas is coming from the high end of the pricing spectrum.
Tiffany performed particularly well in the Americas region; this is quite encouraging considering that many other companies that rely on discretionary consumer spending are reporting weak demand. Higher-priced products actually sold better than more affordable choices, which shows that Tiffany is as strong as ever among high-end consumers, and that the brand´s power is not being diluted as the company expands.
According to Mark Aaron, vice president of investors relations:
In the Americas, total sales were up 9% primarily due to an overall increase in the average price per jewelry unit sold. We were pleased to experience healthy unit growth in the statement, fine, and solitaire jewelry category, as well as in our engagement jewelry and wedding band category. And we're pleased that fashion jewelry unit sales are benefiting from strength in gold jewelry.
However, continued softness and silver jewelry unit sale in particular entry level sales under $500 was the reason why we had no growth in total jewelry units in the Americas.
Abundant room for expansion in Asia
Sales boomed in the Asia-Pacific even though Tiffany did not open any new stores in the market during the last quarter. As of the end of the second quarter, Tiffany owned 72 stores in the region from a total base of 293 locations. Considering demand strength in such a promising market, it looks like Tiffany enjoys considerable room to expand its store base in the Asia-Pacific over the long term.
In Aaron's words:
The Asia-Pacific region achieved a 14% total sales increase in the quarter due to growth in the average price per jewelry unit sold and in jewelry unit volume.
On a constant-exchange-rate basis increases of 13% in total sales and 7% in comp store sales reflected strength primarily in greater China and in Australia. You should note that the 7% comp increase followed a 10% increase in the first quarter and was on top of a 13% increase in last year's second quarter. We didn't open any stores in this region during the quarter but are on track to open two stores later in the year; one in Adelaide, Australia, and one in China as well as relocating our store within the Hong Kong airport. Two additional stores in China and one in Thailand that were initially scheduled to open near the end of this year are now slated to open in the first half of 2015 due to timing delays.
Strong pricing is generating increases in gross profit margins
Chief Financial Officer Ralph Nicoletti noted during the conference call that Tiffany is producing expanding profit margins on the back of strong pricing. This is not only a positive when it comes to financial performance, but it also shows that demand remains remarkably strong and that brand differentiation is a crucial competitive advantage for the company.
Gross margin rose 2.4 points to 59.9% in the second quarter, largely due to favorable product costs and price increases taken across all product categories and regions. And to a lesser extent some sales leverage on fixed costs. Additionally, we are pleased to see fashion jewelry sales grow in line with total company sales which contributed to the margin exceeding our expectations. Gross margin also benefited versus our forecast from a lower than expected level of wholesale sales of diamonds.
Inventories increased more than sales during the quarter, which management attributed to increased stocking in preparation for the launch of the new Tiffany T collection. Investors may want to monitor inventory levels to make sure that growth there remains below sales growth rates over the coming quarters.
Inventories of $2.5 billion at July 31 were up 9% from a year ago, partly to support overall anticipated sales growth but with disproportionate increases in raw materials and working process inventories partly to support the launch of the Tiffany T collection.
Our full-year and longer-term objective continues to call for maintaining inventory growth less than the rate of sales growth.
Growing dividends for investors
Management plans to increase dividends in line with earnings growth over the long term. The current dividend payment of $1.36 annually represents a yield of 1.5%, which is not particularly high. However, considering recent performance and long-term opportunities for growth, investors have solid reasons to expect material dividend expansion from Tiffany in the future.
Besides, the dividend payout ratio is quite low at 31% of average earnings estimates for fiscal 2014, and the company has a healthy balance sheet. This leaves considerable upside room when it comes to dividends and share buybacks.
According to Nicoletti:
In terms of share repurchases during the quarter, we spent approximately $9 million to repurchase 102,000 shares at an average cost of approximately $91 a share. There was $284 million available for future repurchases under a $300 million three-year program that was authorized by Tiffany's board of directors in March.
As Mark mentioned, Tiffany's board increased the quarterly dividend rate by 12% in the second quarter, reflecting our longer term objective to grow dividends roughly in line with earnings growth and thus maintaining the current payout ratio.
While investors may want to keep an eye on management's ability to keep inventory under control, Tiffany delivered broadly good news to shareholders during the last quarter. Considering demand strength and opportunities for growth, it looks like Tiffany will continue sparkling in the years ahead.
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