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Tiffany & Co. (NYSE:TIF)
Q4 2017 Earnings Conference Call
March 16, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to this Tiffany & Co. Fourth Quarter 2017 Conference Call. Today's call is being recorded. Participating on today's call is Mr. Alessandro Bogliolo, Tiffany's Chief Executive Officer; Mr. Mark Erceg, Tiffany's Chief Financial Officer; and Mr. Mark Aaron, Vice President of Investor Relations. I'll turn the call over to Mr. Mark Aaron.

Mark Aaron -- Vice President of Investor Relations

Thank you, and good day, everyone. On today's call, I'm pleased to have our CEO, Alessandro Bogliolo, and our CFO, Mark Erceg, here with me to share some observations, insights, and commentary about Tiffany's recent performance, strategies, and outlook. We will then allow time to answer your questions. And I should add that going forward, we will take questions on all future calls as well.

Before continuing, please note that statements made on this call that are not historical facts are forward-looking statements. Actual results might differ materially from the planned, assumed, or expected results expressed in or implied by these forward-looking statements. The company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances, except as required by applicable law or regulation. Additional information concerning factors, risks, and uncertainties that could cause actual results to differ materially, as well as the required reconciliations of the non-GAAP measures referenced in this presentation to their comparable GAAP measures is set forth in Tiffany's form 10-K, filed earlier today with the Securities and Exchange Commission, as well as the news release filed today under cover of Form 8-K. Those filings can be found on Tiffany's investor website, www.tiffany.com, by selecting Financial Information in the left-hand column.

So, I believe we can now proceed, and I'll turn the call over to Alessandro.

Alessandro Bogliolo -- Chief Executive Officer

Thank you, Mark. Good morning. I would like to share a few thoughts with all of you, and then later, we will be pleased to answer your questions. As you know, I joined Tiffany last October, and I can tell you that I'm increasingly excited about the capabilities of this amazing company, the growth opportunities available to us, and the very talented and dedicated people who work here in all aspects of our business. In my first six months, I've been pursuing a strategic assessment of our business with my senior management colleagues and with active review by our board of directors. We all believe that our brand is remarkably powerful. Our mission is to be makers of beauty, creators of joy. Simply put, Tiffany brings beautiful, enduring designs to love and life that will be cherished for generations. Our artisans craft some of the world's finest jewelry, timepieces, and accessories, yet everybody's ultimate purpose at Tiffany is to create memorable moments of joy for our customers.

We have also agreed on the strategic direction that we must follow, one that I would characterize somewhat as an evolution of where Tiffany has been. But we also agree that we need to accelerate the pace of execution of those strategies, and we need to increase the required investment spending to achieve the sustainable state and earnings growth that I believe Tiffany is capable of. The outcome of our strategic review is a set of six priorities that will be totally focused on as we move forward.

Now, the first priority is amplifying an evolved prime message. We have already begun to see some evolution in our marketing communications through a variety of media. The evolved messaging will be more evident to you as they progresses. And one example is our recent Believe in Love marketing campaign.

Our second priority is renewing our product offerings and enhancing the in-store presentation. We will accomplish that through an accelerated rate of product introductions across all categories. Specifically, our new jewelry design and innovation workshop will be instrumental in developing more distinctive units in jewelry. Importantly, we have also planned and allocated resources to evolve the different merchandizing of assortments in our stores.

Third, while Tiffany has made progress in its e-commerce in past years, our efforts are not focused on delivering a seamless, omnichannel customer experience. We all know that our customers are more free than ever in their shopping, and we must enhance our capabilities and functionalities to match their growing and evolving expectations, whether in Tiffany stores on our website.

As we grow our business, our fourth priority is to cultivate a more efficient operating model. We intend to achieve that through the continuation of a major revamp of our IT systems and the revision of selected core offices, such as procurement, all while restraining expense growth where appropriate so we can ultimately drive merchant growth.

Our fifth priority is to inspire an aligned and agile localization tool. I said before that Tiffany organization is filled with talent and dedicated people. And I would add passionate to that description. Now, with a clear direction and a shared sense of urgency, everyone, from our longest tenure to our newest colleagues, is called up into focus on healthy and sustainable acceleration of growth.

Following from all of these initiatives is the key final priority, to strengthen our competitive position and lever in key markets. The global jewelry luxury industry is competitively fragmented, and our brand strength and global reach position helps very well. Our regional teams are empowered to leverage their relationships with customers and have the power of our physical and digital network to increase the brand relevance, and thus market share, in local communities.

As I said on the last call, I accepted this position because I strongly believe that the Tiffany & Co. brand is healthy. But it also has tremendous opportunities to grow at least in line with, if not better than, our industry peers. As we move forward, we will leverage our core strength and adapt as appropriate, while of course always remaining true to our heritage and brand integrity.

Well, I will stop here and allow Mark and Mark to make some comments before we take your questions. I will just add that I look forward to meeting some of you in the coming weeks and months, and appreciate your interest in this great company. Thank you.

Mark Aaron -- Vice President of Investor Relations

Thanks, Alessandro, for sharing those insights. Now, let's look at the financial results. I hope all of you on the call have had an opportunity to read the news release, so I'll just focus on some key highlights of our performance. These fourth quarter sales results are pretty consistent with the holiday sales results that we reported in January, which had indicated improvements in our business by region and across product categories. We had varying degrees of sales growth in the quarter in all regions, ranging from total sales growth of 13% in Europe to 2% in Japan, although performance was a bit different when viewed on a constant exchange rate basis.

Wealth had growth in all product categories, ranging from the strongest growth in the jewelry collections category to fractional growth in the engagement jewelry category. And that regional sales growth was driven by increased unit volume. We saw a decline in growth margin in the quarter, as we expected, and an increase in SG&A expenses. And net earnings were pretty much in line with our forecast.

Let's look at performance in each region. In the Americas, after beginning 2017 with declining sales, there was some improvement as the year progressed, and we were pleased to finish the year with a solid sales increase in total and on a comp basis in the fourth quarter that was generated by a continued increase in jewelry units sold. Ecommerce sales also had a solid increase in the quarter and full year. Sales growth in the quarter was geographically broad, based across the U.S., Canada, and Latin America, and it was largely comprised of higher spending attributed to local customers. While spending attributed to foreign tourists in the quarter was unchanged from prior year, that was nonetheless an improvement from the past couple of years, when we faced the challenge of a strong U.S. dollar and its negative repercussions on tourist spending here. For all of 2017, we estimate the spending attributed to foreign tourists represented a bit less than 20% of U.S. sales.

There was modest store activity in the regions, and we finished 2017 operating 124 stores in the Americas, including 94 in the U.S., 13 in Canada, and 17 in Latin America. In addition to opening one store, we also tested some popup stores in the latter part of the year that we do not include in the store count, and have been quite pleased with their results. And, as we noted on our last call, we removed the fourth floor of our New York flagship store to showcase our new home accessories collections and to open our first ever Blue Box Cafe, which has fast become a New York tradition.

Results in the Asia-Pacific region were mixed in the fourth quarter and in the full year as well, but total Asia-Pacific sales did increase in every quarter in 2017, partly reflecting the opening of new stores. We were pleased with sales growth in mainland China throughout the year, and we returned to growth in Hong Kong in the fourth quarter after three years of declines. Sales in greater China represented roughly 60% of Asia Pacific region sales in 2017, similar to the prior year. Results were less favorable in some other countries, which we attribute at least partly to lower spending by Chinese tourists. However, it's worth noting very strong wholesale sales growth in Korea throughout the year, which, while not included in our comp store sales, reflect duty-free sales demand that we attribute largely to Chinese tourists. Overall, jewelry units volume was up in both the fourth quarter and year.

During the year, we opened five stores in the Asia-Pacific region, closed three, relocated four, and renovated many, and finished the year operating 87 stores in the region. We were pleased with the results in Japan throughout the year, although results fluctuated from quarter to quarter due to some difficult year-over-year comparisons. Low spending in Japan is attributed to local customers, and there was no discernible pattern to changes in unit volume and price in the quarter or the year. We closed one store in Japan in 2017 and finished the year operating 54 stores.

In Europe, total sales increased in the quarter and full year, as reported in dollars, primarily reflecting the translation effect of stronger European currencies and two major new stores openings in Milan and Moscow, which we believe negatively affected existing store sales. Performance was soft across much of the region, and the UK continued to represent about 40% of European sales. In addition, the growth was largely generated by higher spending that we attribute to local customers, which we estimate represent about three-quarters of our European sales. And we're pleased with growth in jewelry unit volume in both periods.

The picture was a bit different in Europe on a constant exchange rate basis. While total sales rose in both periods, but to a lesser extent than as reported in dollars, comp store sales on that basis declined in most periods. During the year, we opened three stores in Europe and finished the year with 46 stores in the region. Other sales growth in the quarter and year primarily resulted from increased wholesale sales of diamonds. We also operate four stores in the UAE, and comparable store sales rose modestly.

In terms of sales productivity for the year, we achieved worldwide sales per square foot for company-operated stores of $2,700.00 in 2017, which was approximately in line with 2016. This resulted from our sales growth and the 3% increase in square footage. By region, sales productivity ranged from $3,800.00 in Asia-Pacific to $3,600.00 in Japan, to $2,300.00 in Europe, and to $2,200.00 per square foot in the Americas. Now, keep in mind that these productivity levels are calculated in U.S. dollars, so the numbers could vary based on currency changes.

Looking at the coming year, we are currently planning to open nine stores, including at least one in each region; close two stores; and relocate at least 15 existing stores, primarily in the Americas and Asia-Pacific; and continue to renovate many stores. This is all expected to equate to an increase in global square footage of approximately 2%.

Beyond stores, we are increasingly looking at an overall omnichannel perspective. You just heard Alessandro say that we will be more focused on optimizing on our omnichannel presence and capabilities. We were pleased with e-commerce sales growth in the quarter and the year, which, worldwide, increased at a slightly faster pace than overall sales growth. We also believe that a complete omnichannel view should include not only e-commerce sales, but also sales generated through our catalogues. Taking that full view indicates those nonretail sales accounted for 7% of worldwide sales in 2017, which was consistent with the past two years. I should add that beginning with the first quarter of 2018, we will report comparable sales for the periods presented on an omnichannel basis with combined company-operated retail stores sales performance with sales generated by our website and catalogues. Lastly, we still strongly believe that our website and catalogues also serve as a powerful information source and are catalysts for customers to visit our stores for a unique in-store experience.

There are several things to point out regarding product performance. First, from a reporting perspective, you should note that we are now combining the previously reported fashion jewelry and the high fine and solitaire jewelry categories into one new category called jewelry collections to parallel the way that we are now internally analyzing our jewelry assortments, as well as reflecting how customers shop for jewelry. Additionally, the designs of Jean Schlumberger which was previously reported within the high fine and solitaire jewelry category, has been reclassified into the designer jewelry category, and we made no changes to the made from jewelry category.

You can see this new presentation of product category sales by region in the report on form 10-K that we filed with the SEC this morning. Looking at it the old way or the new way, we were pleased with improving sales trends as the year progressed. The jewelry collections category posted growth throughout the year with improvement over the course of the year, and finished the year on a strong note. Sales in the designer jewelry category increased in the quarter and the year, and the engagement jewelry category finished the year with a fractional sales increase from the fourth quarter, but it's full year sales were lower than 2016.

Complementing jewelry is our collection of watches, and we were very pleased with sales growth in 2017. And our new home accessories collection gave a strong boost to that area when it was launched in the fourth quarter. Speaking of innovation, it was a relatively active year. In addition to the home and accessories collection, we introduced the Tiffany hardware jewelry collection, and added new designs in existing jewelry collections, such as within the Tiffany T, Return to Tiffany, and the Keys collections. We introduced the Tiffany Metro Watch collection, and we launched our new signature fragrance with great success.

But as Alessandro said earlier, one of our strategic priorities is to accelerate the rate of product introductions. As one example, we will soon launch a new jewelry collection focused on platinum and diamonds, our first in many years. And there will certainly be other newness during the year. I hope you now have a good understanding of our sales performance from a geographical and profit perspective. I'm not pleased to turn the call over to Mark Erceg for some comments on the rest of the income statements, the balance sheet, and our 2018 guidance.

Mark Erceg -- Chief Financial Officer

Thanks, Mark, and good morning, everyone. From a financial standpoint, 2017 was an interesting year. On one hand, comparable store sales were flat, which is clearly below our long-term growth target. On the other hand, while net earnings per share declined due to tax charges, net earnings per share on a pro forma basis, excluding charges in both years, were up 10%. We also generated very strong cash flow, with $932 million of cash flow from operations, and $693 million of free cash flow for the year. Finally, we returned significant amounts of capital to our shareholders in the form of dividends, where we increased our quarterly dividend by 11%. And through the repurchase of $99 million of stock at an average price of $95.00 per share, the cash flow generation in 2017 certainly reflected strong earnings. In addition, an increase in accounts payable was partly tied to more effective manage of payables, but also to the timing of inventory purchases in the fourth quarter. And lastly, tax payments were lower.

Now, these results tell me several things. First, we are doing a much better job managing costs, as evidenced by the fact that for the full year, SG&A expense as a percentage of sales, again on a pro forma basis excluding charges in 2016, was virtually flat versus prior year for the first time in four years. Second, although we slightly increased marketing support as a percentage of sales during 2017, we should be investing more to support and amplify the Tiffany brand, which we believe has tremendous upside potential. Third, having finished the year with $1.3 billion of cash, cash equivalents, and short-term investments, and with short-term and long-term total debt representing only 31% of stockholders equity, we have the financial strength to continue investing in our business and also return cash to our shareholders.

Ultimately, our long-term objective is to drive solid and sustainable growth in both comparable store and online sales to increase customer visits and higher conversion rates in order to drive higher total sales, and expand margins, and grow earnings. Being mindful of the fact that these long-term goals will only be achieved if we increase investment now and properly execute the strategic priorities Alex has laid out, we are maintaining our guidance for the coming year, which we had disclosed on a preliminary basis, excluding the potential impact of recent U.S. tax reform back in January. Specifically, we expect 2018 pre-tax earnings to be flat to slightly down from last year, and net earnings to increase over last year's non-GAAP earnings, after taking into account a lower tax rate. Importantly, in saying this, we acknowledge that pro forma earnings per share just grew by 10% in a year when comparable store sales were flat. And while we expect an improvement in comparable store sales growth during 2018, we are also planning to make significant investments in technology, marketing and communications, visual merchandizing, digital, and store presentation. These are all investments which we believe are ultimately needed to generate sustained mid single-digit sales and high single-digit earnings-per-share growth.

With that said, let's talk a few minutes to discuss U.S. corporate tax reform, which reduced the statutory corporate tax rate to 21%, but also added several new complexities impacting both our 2017 results as well as future earnings. The $1.17 per share charge we reported during the fourth quarter of 2017 on a GAAP basis was primarily comprised of three times. First, the transition tax is a one-time tax on all undistributed earnings of foreign subsidiaries, which drove a charge of $56 million, or $0.45 per share. Second, we were required to remeasure the carrying value of our deferred tax assets to reflect the new statutory rate of 21%, which resulted in a tax charge of $95 million, or $0.76 per share. Finally, since the new tax law went into effect on January 1st, but our fiscal year ended January 31st, we realized a $5 million, or $0.04 per share, benefit from having a lower statutory tax rate in the U.S. in effect for one month.

With respect to the 2017 transition tax, the cash tax payment will be made in installments over an 8-year period, beginning in 2018. The expected tax implications for 2018 and beyond likely require a bit more explanation. For many companies, particularly those with little to no domestic manufacturing and quick inventory terms, the effect of a change in the U.S. corporate tax rate may be realized in the financial statements immediately post-enactment. However, because we manufacture a large portion of our jewelry in the U.S., sell to our international affiliates, and have relatively long inventory terms, we expect to see a gradual phasing in before we realize the full benefit of the lower statutory rate. This is because while we pay tax on the intercompany profit on these sales from the U.S. to our international affiliates when that intercompany sale occurs, U.S. GAAP requires the profit and the associated U.S. tax expense be deferred for financial reporting purposes until the merchandise is sold by our global affiliates to our customers.

A simple way to think about it is that when our global affiliates sell merchandise they purchased intercompany from the U.S. prior to 2018, the associated tax on the intercompany profit recognized from the sale of that merchandise will reflect a historical 35% statutory tax rate. As a practical manner, this means we will not realize the full benefit of U.S. tax reform until all the individual items our local affiliates had on hand or were in transit as of December 31, 2017 are physically sold. With this understanding, we expect an overall 2018 effective tax rate somewhere in the high 20% area before seeing a further step down in rate in 2019.

Now, with respect to the balance of the 2018 P&L, there's just a handful of things we'd like to point out. We have built our 2018 financial plan assuming mid single-digit sales growth, the majority of which we expect to come from comparable sales growth. Gross margins should expand due to somewhat lower diamond input costs, with the balance coming from product mix and pricing, including a low single-digit price increase. SG&A growth due to the expenses we will be making is expected to exceed worldwide sales growth. So, all in, our sales and earnings guidance implies a decline in operating margin in 2018. However, once higher levels of SG&A spending are annualized, and assuming healthy sales growth, we expect to resume operating margin expansion on 2019 and beyond. And to reiterate what we've said before, we do not believe there is any structural barrier which would preclude Tiffany from meaningfully improving its operating margin over the long-term.

One of the key projects we are investing behind is our foundation information technology platforms. A year ago, you may recall that we took a $25 million charge to write off certain developmental efforts associated with our IT replatforming. Today, we're pleased to report that we recently stood up our first key geographic market, as we continue to work toward the development of our new information system platform as part of a multi-year rollout plan which, when completed, is expected to dramatically improve our business and omnichannel capabilities. Interest and other expenses should be roughly in line with 2017 levels.

All of this, excluding taxes, including the effect of the recent changes to U.S. corporate tax law, would be expected to result in 2018 earnings per share being flat to slightly down from 2017's net earnings per diluted share on a pro forma basis. However, after factoring and passing through the full benefit of a 2018 overall effective tax rate somewhere in the high 20s, we expect net earnings to increase to somewhere between $4.25 to $4.45 per diluted share. Within that, we expect first quarter earnings to be up versus a year ago, after which the phasing in of increased investment spending should have some effect on year-over-year earnings growth over the balance of the year.

We are planning for inventory growth in line with sales growth in 2018 as we invest more in certain categories, and anticipate capex spending continuing between 6 and 7% of sales. Based on our forecast for net earnings and the balance sheet, we are predicting approximately $660 million of cash flow from operations and approximately $380 million of free cash flow in 2018, which is lower than the prior year, largely due to the timing of payables and taxes in late 2017.

So, in summary, despite a moderate increase in topline performance in 2017, we delivered solid pro forma earnings-per-share growth, strong cash results, and continue to return cash to our shareholders. Our brand remains strong, and we have a clear set of strategic priorities, which we are committed to executing against, as well as balance sheet to fund those activities. And by making the clear declaration that we are going to be managing this 180-year-old business for the long-term benefit of our shareholders, we are investing what we believe required to generate solid returns and drive sustainable mid single-digit sales and high single-digit earnings-per-share growth annually over the long-term.

I'll now turn the call back to Mark.

Mark Aaron -- Vice President of Investor Relations

Well, thanks, Mark and Alessandro. And now, I'll turn the call back to the operator so we can answer your questions.

Questions and Answers:

Operator

And to ask a question on today's call, that is *1 on your telephone keypad. We'll go first with David Schick from Consumer Edge Research.

David Schick -- Consumer Edge Research -- Analyst

Hi, thank you. Good morning. My first question is just a quick question on any impact of Chinese New Year movement into mid-February from late January, and how you feel about the fourth quarter numbers.

Alessandro Bogliolo -- Chief Executive Officer

Well, thank you, David, for your question. Well, as we all know, Chinese New Year shifted a little bit compared to the previous year. So, this had a light effect on our retail sales. But actually, the way we look at the results, every year, we try to neutralize this effect of a shifting in calendar, so there was this effect.

David Schick -- Consumer Edge Research -- Analyst

Okay. So, you feel it did not affect the reported regional comp for 4Q?

Alessandro Bogliolo -- Chief Executive Officer

Not really.

David Schick -- Consumer Edge Research -- Analyst

Okay. And then the second question, sort of the bigger picture question, is there's a of moving pieces to what you're talking about with you're -- and thanks so much for laying out the six pieces of the strategic planning, some of which are adding costs in the near-term as different revenue drivers get work. I guess a sense for all of us on the call of how much is undoing older initiatives, whether it's around IT, some of the things that were already started, certainly in merchandizing, or the in-store presentation, or the digital. So, how much is an unwind versus an amplification or an acceleration of projects that have been going on for, say, a year or longer?

Alessandro Bogliolo -- Chief Executive Officer

Well, I guess your question refers maybe to a write-off we had some years ago about an accepted investment in our IT technology. But honestly -- OK, that was a few years ago. But honestly, what I see is not really about unwinding, about restructuring or cutting, but it's really about building. I think that when it comes to the various aspects of our business, you can call it the infrastructure, the technology -- we have a lot to build there for future growth. Likewise, when it comes to the product offering, we have a very strong product offering, but we have really committed to come with more units and more distinctive units. But honestly, I think that the brand, after these six months in the job, is really healthy. So, it's not about curing problems, but actually to build on a very solid basis.

David Schick -- Consumer Edge Research -- Analyst

Thank you. Very helpful.

Operator

We'll go next to Paul Lejuez with Citi.

Paul Lejuez -- Citi -- Analyst

Hey, thanks, guys. On the relaunch of Home, I'm curious what you learned, what worked, what didn't work, and what's next on that product line? And if you can share comp performance of that line of business in the fourth quarter, how much did that help 4Q comps? Thanks.

Alessandro Bogliolo -- Chief Executive Officer

Sure. Thank you for your question. Actually, Home and Accessories has been a very meaningful test for us, because it has been substantial units that have been introduced in that product category, with the leadership of Reed Krakoff. And for me, it was meaningful twice. First of all, for sales, because actually, it has generated nice double-digit growth in that category, which of course is important and we're pleased with. But it was even more important for me because of the reaction of consumers to meaningful innovation. And in that respect, the test was extremely positive. And this is what makes me confident about accelerating the pace of innovation, because we can see and we can measure that when we do something new that is truly innovative and different, consumers, consumers react in a very positive way. So, the connection between customers and the brand is there, and it's solid.

Paul Lejuez -- Citi -- Analyst

Anything particular within the line that stood out as being a big driver of sales versus maybe what wasn't as successful?

Alessandro Bogliolo -- Chief Executive Officer

Always referring to the Home and Accessories? Well, that is a category that we call one category, but in reality, is a mix of very different items, because it ranges from silver to gifts to crystal to many. So, honestly, it has been an overall success. It has not been driven by a particular category. So, I will say it was overall positive across the categories.

Paul Lejuez -- Citi -- Analyst

Okay, thank you, guys. Good luck.

Alessandro Bogliolo -- Chief Executive Officer

Thank you.

Operator

We'll go next to Simeon Siegel with Nomura Instinet.

Simeon Siegel -- Nomura Instinet -- Analyst

Thanks. Good morning. Recognizing what looks like a January deceleration off a difficult compare, any color you could provide on current trends from then? And then just more broadly, Alessandro, can you talk about your store strategy? You've now successfully opened up -- it seems like you are looking for more models, or more relocations, rather, than in the past, so have you changed how you're thinking about your stores versus the past? Thanks.

Alessandro Bogliolo -- Chief Executive Officer

Yeah. Thank you for the question, Simeon. Well, actually, what is really relevant for me is going for -- about the stores, because the stores are really the place where our customers can feel the entire experience of the brand. And when I stay stores, I mean, of course, the physical stores, but let's not forget also the nonphysical store. That's our website, where the traffic is huge. So, stores are definitely one of the key areas of attention and of investment for us going forward, which doesn't mean to increase dramatically the number of stores. It's not about that. Our story is and wants to be a story of like for like. But what we want to dramatically improve and modernize is the experience for customers in our stores. So, this is why we also mentioned -- and I think Mark was very clear about that -- about this need of increased investments in areas such as visual merchandizing, store presentations, because we want to make a difference. And we are working on that in order to enhance the newness and the icons in our stores for the benefit and better experience of our customers.

Simeon Siegel -- Nomura Instinet -- Analyst

Great. Thank you.

Alessandro Bogliolo -- Chief Executive Officer

Thank you.

Operator

We'll go next to Laurent Vasilescu with Macquarie.

Laurent Vasilescu -- Macquarie Capital (USA) Inc. -- Analyst

Good morning. Thanks for taking my question. Can you provided updated thoughts regarding your vertical integration of the supply chain? According to this morning's 10-K, I think 60% of your jewelry is still produced internally. Any color on vertical integration, how it should evolve this year and beyond, would be appreciated.

Alessandro Bogliolo -- Chief Executive Officer

Thanks, Laurent, for your question. Because I'm very, very proud of our supply chain, because I really believe that Tiffany is really a best-in-class in luxury when it comes to not only selling and marketing skills, but also to the craftsmanship, prototyping, and manufacturing of products. So, it's true, we are a vertically integrated company, and we are in jewelry, jewelry-making, where you're right, depends on the year, about 60, 65% of our jewelry is manufactured, made in house in several sites in the U.S. And I think that this ratio, which is substantial, is a strength of the company, because this allows us, first of all, to be independent when it comes to product capacity. But even more so, to really master the way we make the products and the cost of it. Now, I would never go to 100% of internal production, because that would just make our system too rigid. But let's say, 60-40, two-thirds, one-third is a very, very healthy kind of ratio.

Now, even more specific for Tiffany, differently from other global jewelers, is our vertical integration in diamonds. Now for me, this is not only a strength, but is a real point of difference, because when it comes to diamonds, the fact that we have internal capabilities to cut and polish the rough diamond -- that means that we master the craftsmanship of diamonds, and this is one of the reasons, and an important one, why Tiffany is, rightfully so, considered the brand that stands for diamonds in the market. It's, of course, a matter of legacy. 130 years ago, we designed the Tiffany setting. It's a matter of size because of our sales volumes in this category, but it's also a matter of expertise, and this is what really makes a brand great and set for leadership.

Laurent Vasilescu -- Macquarie Capital (USA) Inc. -- Analyst

Thank you for that. And as a follow-up, the prepared remarks called out strong cash flow generation tied to more effective management of payables and inventory purchases. Should we expect further opportunities around working capital in 2018? Are there any target metrics that you're willing to share around inventory turns and days payable outstanding?

Mark Erceg -- Chief Financial Officer

Yeah, that's a great question. One of the things we've been talking about is the new information architecture and platforms that we're putting in place. One of the things that that will bring for us, is much better visibility across our payable spend pool. We have 35,000 active suppliers, and we don't currently have best-in-class systems to allow us to manage that appropriately. You will see us doing better with working capital as a result of the initiatives that we are driving, capturing discount payment terms, getting to electronic receipt -- all those types of things will make us a much more efficient company, and it will generate additional working capital on the positive side, which will help us then fund other investments that we may choose to make as we grow out more product innovation, which may require some slightly higher levels of inventory, so.

Mark Aaron -- Vice President of Investor Relations

And let me just add -- Laurent, I will just add that we also did mention that there was a timing issue on some of that as well at the end of the quarter, and that's the reason that we're forecasting somewhat lower free cash flow for 2018. So, yes, we're certainly getting more effective and efficient on that, but there was some timing shift from late 2017 into 2018.

Laurent Vasilescu -- Macquarie Capital (USA) Inc. -- Analyst

Thank you, and best of luck.

Operator

We'll go next to Lorraine Hutchinson with Bank of America.

Lorraine Hutchinson -- Bank of America -- Analyst

Thank you. Good morning. Alessandro, as you've reviewed the business, have you found any other pockets of sales opportunities, be it categories or channels, that the brand has not targeted before?

Alessandro Bogliolo -- Chief Executive Officer

Thank you, Lorraine, for your question. Well, as we all know, the large majority of sales revenues of Tiffany is from jewelry. Now, having -- so, I would answer your question two ways. First, let's look at what is not jewelry. I mean, we have watches. That, for me, is an absolute priority. It's something that is important for any jeweler in the world, is a category where the brand, even if we go back in history to Mr. Tiffany, was, in the 19th century, very much devoted and interested in this, and it's a must. So, this is a category where I truly believe we are putting a lot of effort in it. We all know that is a category where growth and development is slow, but we are absolutely determined to go that path in order to achieve the position that this brand deserves in the world of watches, and especially women's watches.

Then, the Home and Accessories category, we just -- as I mentioned some comments before, it's an equally important one. I mean, Tiffany has a special competitive advantage in that area, and I think we should keep on exploiting it, as we have started redoing from the last quarter of 2017.

And there is Fragrances, where last year has been very important for the launch of our new fragrance. It's through a license, as you know, but it's a product that is very poetic and that is, in my opinion, perfectly in line with Tiffany, with the world of Tiffany, our values, and also our customer's profile. So, these are three, let me say, categories outside of jewelry where we are totally focused on, and I think we will have a lot to do, but also great satisfaction going forward.

Now, I would go back to the other 90% of the business, which is jewelry. When we talk about that, jewelry is a group of very diverse categories, subcategories, usage price points, and I tell you, I see a lot of opportunities in the different segments of the jewelry where we operate. And if you want, that is the lower-hanging fruit for a company that has been leading in jewelry for 180 years, and that has all the capabilities to do that. So, I am honestly very, very confident also on that side. What we are not considering in the short term, short or medium term, are diversifications in very different kinds of businesses from this.

Lorraine Hutchinson -- Bank of America -- Analyst

And then as some of these categories become larger portions of the business, does wholesale become a bigger part of your revenue mix?

Alessandro Bogliolo -- Chief Executive Officer

Well with the exception of fragrances, where obviously the wholesale is the natural business model, for the other categories, I think that one of the key strengths of Tiffany is the fact of having a fleet of mono-brand, directly owned stores. That is very powerful. And the fact that those products can be purchased only in a Tiffany environment, I think, is an enormous strength that is limited to very, very few, less than a handful of brands, of luxury brands. Tiffany is one of those, and I would definitely stick to that.

Lorraine Hutchinson -- Bank of America -- Analyst

Thank you.

Alessandro Bogliolo -- Chief Executive Officer

Thank you.

Operator

We'll go next to Erwan Rambourg with HSBC.

Erwan Rambourg -- HSBC -- Analyst

Yes, hi, good morning, gentlemen. Thanks a lot for the Q&A today and in the future. I have three questions. One is more of a sort of helicopter view for Alessandro. There has been historically a sort of dichotomy in the brand between affordability and then higher end. You have a background where you've obviously worked for an exuberant high-end Roman jeweler, but also, you've worked for more fast-moving consumer type goods. I'm just wondering how do you think about the dichotomy within Tiffany between affordable goods and goods that are more in line with some of the European peers? How do you think about your competitive positioning, and where would you push in the future?

Secondly, just a question on jewelry for this year. I had in mind that you had a new platform or a new product launch that was quite important for the year to come. I'm wondering if you could maybe mention what the product pipeline is there? And then thirdly, sorry, a bit of a technical question, maybe for Mark, very clear on the tax rate taking a while to come down because you have to basically get the benefit only if you've shipped products after the first of January '18. In an ideal situation, where 100% of the products are there, where do you see the sort of exit rate of the tax rate going, whether it's in late 2019 or in 2020? Thank you.

Alessandro Bogliolo -- Chief Executive Officer

Thank you, Erwan, for your questions. Well, on the first question, first of all, I think this dichotomy of the brand is a great thing, because this was probably one of the reasons why I was hired for this job, having had the experience on both extremes of the product range. But now, apart from jokes, Tiffany has since, more than essentially almost two centuries, has the capabilities of offering women, and general customers products that are of very high quality in a wide price range. Now I consider this a blessing. Also, because it's not an offer that is bifurcated in something, let me say, very cheap, and something very expensive. That's not the case. The offer in Tiffany is very well-structured, starting from, we can say $100.00 -- I mean, if I think about, for example, the famous silver bracelet at $180.00, up to $1,000.00, $2,000.00, $5,000.00, $10,000.00, $50,000.00, $100,000.00. And then we're on top, $1 million, $2 million, $3 million, $5 million. So, it's a very well-stratified kind of offer, that I find it extremely modern, because this is the way customers, and especially women, shop today. At the end of the day, all these different products, that as we can analyze in different price ranges, but at the end of the day, they are all products for the adornment of a person, and that ends up in the same jewelry box of a woman. So ,for me, that is a real reach of the brand. Now the point is, to be balanced and have the different price points, and also to keep real innovation in the different segments of that diverse offer.

As for the second point, yes, you are absolutely true, we are thrilled that we have, after now, one year in the job as Chief Artistic Officer, is really on the verge to present his first new jewelry collection. It's a jewelry collection that is in platinum and diamonds, is across different price points, and I think is going to be a very nice surprise for the market, but especially a very addictive kind of product one would offer. So, we are very confident about it. We are very excited about it, and we really look forward to launch it very soon.

Mark Aaron -- Vice President of Investor Relations

And then relative to the tax rate, and with the full understanding that there are still a lot of moving parts -- there's a lot of regulations that still haven't been fully clarified, whether it relates to branch operations or whether it relates to the foreign-derived intangible income provisions and a whole bunch of other things that still need additional materials published on them. We believe that, on a going basis, because 70% of our income is earned in the U.S., we'll end up somewhere in the mid-20s.

Erwan Rambourg -- HSBC -- Analyst

Very clear. Thanks a lot for your help, gentlemen. Thanks.

Operator

We'll go next to Kimberly Greenberger with Morgan Stanley.

Kimberly Greenberger -- Morgan Stanley -- Analyst

Great. Thank you. Good morning. I wanted to follow up on your comments regarding investments in IT platforms. And Mark, you referred to expecting some better inventory management out of the new IT system investment. But I'm wondering if you can just sort of step back and talk more broadly about the new or improved capabilities you're looking for from these investments in IT systems? And then lastly, you talked about expectations longer-term from meaningful improvement in your operating margin. Do you have any initial thoughts on long-term margin targets that you care to share with us today? Thank you so much.

Mark Erceg -- Chief Financial Officer

Thank you for the question. So with respect to the information replatforming, we're very excited by what we're doing in this regard. It's going to give us one global order management system, which is going to allow us to effectively run one global distribution network, which currently is a bit of a challenge for us, given the complexity of the items we ship around the world, and requests, and requirements for the duties, given the fact that we ship precious metals and gemstones.

We're also going to be able to consolidate our financial instances. We're currently running over two dozen financial instances all around the world. We're going to be able to consolidate that down to one. You could imagine what that will do for shared services and other types of platforms that can drive a lot of efficiencies. We have talked about indirect procurement. We began our indirect procurement journey back in 2015. The team has been doing fabulous, generating a lot of savings across all aspects of the business. But they've been doing it, in effect, with one hand tied behind their back, because they haven't had a global procurement system to let them aggregate suppliers, let them do electronic invoicing and receipting, let them capture discount payments. And so, that's another big element of it.

And then really, the biggest one probably is what the omnichannel capabilities will be, that we'll be able to have. We'll be able to have a seamless network, from orders to shipment to fulfillment. You'll be able to order online and pickup in store. I mean, there's really all kind of additional elements that will come along with it, and our digital capabilities will also be significantly enhanced, with a focus on mobile and mobile technology first as far as that is concerned.

Kimberly Greenberger -- Morgan Stanley -- Analyst

And then just the long-term margin targets, Mark?

Mark Erceg -- Chief Financial Officer

Of course, yes. Look, we're confident that we're going to be able to continue to expand operating margins after we get past the reset year or so. In 2018, we're gonna' making some significant investments, as Alex indicated, in technology, in marketing communications, visual merchandising, digital store presentation. But we have had our operating margin the low 20s in the past, and we see no reason at all structurally why we won't be able to get back to that level at some point in the future.

Mark Aaron -- Vice President of Investor Relations

And beyond.

Mark Erceg -- Chief Financial Officer

And beyond.

Kimberly Greenberger -- Morgan Stanley -- Analyst

Great. Thank you so much.

Operator

We'll go next to Ed Yruma with KeyBanc Capital Markets.

Ed Yruma -- KeyBanc Capital Markets -- Analyst

Hi, good morning, and thanks for taking my questions. Just a broader picture question, Alessandro The business sales gap or growth gap versus the European luxury peers has narrowed a bit recently. But any big takeaway as to why sales growth has been slower than some of your big peers? I know obviously, mix and geography is certainly different. But any kind of big takeaway? And then, I guess, second, on ecom, you do have an existing relationship with Net-A-Porter. I guess, how do we think about growth both on an owned basis and through select third parties? Thank you.

Alessandro Bogliolo -- Chief Executive Officer

Thank you for your question. Yes, you are absolutely right that if we look at the last few years, there has been a gap between our growth, very limited, and the one of some European luxury brands, and jewelers and not jewelers. Now, the reason for that, I would say, is nothing structural. I mean, after six months in the job, I can tell you that, because this is obviously my first area of concern, and I can tell you that my assessment says that, there is nothing structural why Tiffany has not been growing, at least in line with other players. Honestly, we have had newness also in the past few years. The point was that that newness was probably not as distinctive as the one that we would like to have in the future to really make a difference. I think that the brand has been a little bit understated during the last period of time. So, nothing was really wrong, but I think we can get that up and increase the things that we are doing well, and we can just do it more intensively, faster, and with a bigger impact on the market. So, honestly, I see -- OK, the past is the past, but I see that as a marvelous opportunity for the future, because there is nothing really broken to fix. On the contrary, there is a wide space that has been left there, and we are ready to occupy that.

Now, for your second question about e-commerce. Now, first of all, Tiffany has been one of the pioneers. I remember when I was on the other side of the fence, and Tiffany was really a pioneer in e-commerce. And the proof of that is that we have a quarter of a billion business in e-commerce in our own web site. So we are talking about something that is substantial, really substantial in the industry. I don't want to repeat what we already said. We are committed to make that business grow.

And about your question about other platforms, yes, we are in Net-A-Porter. We are looking very carefully at that world, because it's a world that. as we all know, it's changing at a very fast pace. And we don't have any prejudice toward platforms as far as, which is, for example, the case of Net-A-Porter, among others, are platforms that are luxury platforms. And we have to be consistent online, as we are brick and mortar, when it comes to a controlled environment where our customers purchase -- a proper price integrity, adequate marketing communications. So, these are the criterias for us. So, totally open and looking at it closely.

Ed Yruma -- KeyBanc Capital Markets -- Analyst

Thank you very much.

Alessandro Bogliolo -- Chief Executive Officer

Thanks, Ed.

Operator

We'll go next to Oliver Chen with Cowen and Company.

Oliver Chen -- Cowen and Company -- Analyst

Hi. Thank you. Alessandro, as you look ahead to the in-store experience, what are your thoughts on the future of the store and how you can ensure that you get the customer engagement and innovation in store, that's consummate with the brands? And a related question, is that the future of luxury in digital? And what does that mean in terms of where you should be in offering elevated convenience and engagement, and how the supply chain and inventory management will intersect with the evolution of omnichannel and digital, just to drive an effective experience, as well as net working capital and the human side of engagement as well? Thank you.

Alessandro Bogliolo -- Chief Executive Officer

Thank you. Well as for our stores, at the end of the day, our aim is to surprise our customers, and of course, as a result of this, we will achieve meaningful comparable sales growth. But the point is really about the surprise of the customers. Customers nowadays have everything. They have such a huge offer in all kinds of facets of luxury and not luxury. I think Tiffany can bring a lot in terms of innovation attention through frequent -- more frequent innovation, but especially meaningful and distinctive newness, in all categories. Now, together with that goes the presentation of the products in the stores. This is why we want to invest more in different merchandising, and this is why we are investing, even if this will take a little bit longer, more into the omnichannel experience. Because nowadays, there is no silos anymore for a customer between the digital advertising or media that the customer sees, the tiffany.com where he or she lands, the physical store. I mean, all these things in the mind of consumers will -- even more so millennials. But results say it's not only millennials; it's also baby boomers of my generation. We are changing our pattern of purchase, and that we are very, very fluid from one to another, and there are no silos anymore.

So, that is definitely the tack for the future. And what I would like to underline is that in all this, Tiffany is set in a very good position because of the positioning of the brand. I mean, Tiffany has always been compared to other brands as more inclusive, more open to innovation. Less absolutely not -- or less formal, and more about a joyful experience. For sure, very relevant for younger consumers. So, we are really set in a special place in order to succeed in this kind of challenge.

Oliver Chen -- Cowen and Company -- Analyst

Okay. And any thoughts on the supply chain? Because really revolutionizing digital has a lot to do with thinking about inventory accuracy in non-linear networks of placement, as well as enabling the salespeople to facilitate the convenience factor. So are there thoughts on where you are in that journey, and how that will match up with what you will be like, in terms of offering supreme digital convenience to new customers?

Mark Erceg -- Chief Financial Officer

Yeah. What I would offer on that is, as we think about our information platforming, there is a bunch of base elements that go along with it. Call that the source to pay procurement module, call that the financial model, call that the order management modules. We're also doing a digital replatforming, and then we're also endeavoring to build a data hub, which will allow us to put all kinds of additional analytical overlays on top of our merchandising tools and our pricing tools. So, this is a complete suite of services we are effectively bringing forward that's gonna allow us to enhance our capabilities across all the areas. Alex talked about the fact that we do a quarter of billion dollars of business on ecom. There's a huge treasure trove of customer data there that we're gonna be able to mine more efficiently once we get all of our IT systems in place. We do that work today, but we're gonna have a lot of additional enhanced capabilities as it relates to it, and we're gonna get even closer to our customers and do an even better job of clienteling. So, we think we have a lot of upside in all of those regards.

Oliver Chen -- Cowen and Company -- Analyst

Okay. Just lastly, Alessandro, self-purchases versus gifting, the brand carries both. In terms of opportunities and range, would just love your thoughts on your diagnosis from that angle, in terms of what you want to do?

Alessandro Bogliolo -- Chief Executive Officer

Well, that for me is a real blessing of this brand, because it's a brand that is relevant for a customer that wants to make a self-purchase, as well as it's a magic brand for somebody who wants to gift a significant other, or just a friend, or whoever. This brand suits all these different cases, and this is not something obvious of many jewelers around the world. Now this is -- it's important. It's a competitive advantage. And this will be sustained in the different initiatives that Mark was referring to before, also digitally, because when you go on tiffany.com to buy a gift for somebody, or when you want to do a purchase for yourself, you must clearly find on our website the path, the area that is more -- makes it easier for you to do your purchase. So, we are definitely on it, and I truly believe that is a big advantage for Tiffany.

Oliver Chen -- Cowen and Company -- Analyst

Thank you, and best regards.

Mark Aaron -- Vice President of Investor Relations

And if I could just add, just in the interest of time, we still have a number of people, I'm sure, who want to ask questions. Could you please limit yourself to one question and not these multipart questions? Thanks.

Operator

We'll go next to Brian Nagel with Oppenheimer.

Brian Nagel -- Oppenheimer -- Analyst

Hi, good morning. Thank you for all the color. Thanks for taking questions. So, I'll ask one question with two parts. But first off, and it's all financially related really -- on a very short-term, you're recognizing that the fourth quarter sales seemed to hit the guidance you laid out in mid-January. What explains the -- what seems to be a comp slowdown in the month, I guess since the holiday, so probably in the month of January? Then the second part of the question, longer-term, you talk a lot about the initiatives here. We obviously now have guidance to 2018. To what extent do potential benefits of some of these key initiatives link into guidance for 2018? Thank you.

Mark Erceg -- Chief Financial Officer

I think it's a great set of questions. So, with respect to the comp stores, I just want to make sure that we're clear. We finished 2016 and our comps were down mid single-digits. Throughout the course of 2017, we 've seen that strength, and we were down two in the first quarter; we were down one in the second. We went flat, then we went to plus one. So, at the end of the day, we're feeling that we're making progress. We still have a long way to go, but we're clearly moving in the right direction, and we're not overly concerned about what might be one month, particularly when there was the Chinese New Year, which kind of flopped from one period to the next to some extent. So, we feel that we are strengthening, and we want to look at things over the quarters, which again, sequentially, have improved.

Mark Aaron -- Vice President of Investor Relations

And we did have a strong January last year, so it was a bit of a tougher comparison.

Mark Erceg -- Chief Financial Officer

Correct. As far as whether or not there are some of these initiatives already baked through the 2018 guidance, I think I would say that the simple answer is yes. We've been working on a number of these initiatives for a while now, and they're starting to provide meaningful benefits. We think those benefits will increase over time, which we're excited about. But yes, there are some factored into 2018.

Brian Nagel -- Oppenheimer -- Analyst

Got it. Thank you very much.

Operator

We'll go next to Omar Saad with Evercore ISI.

Omar Saad -- Evercore ISI -- Analyst

Thank you for taking my question. Just a little bit of a follow-up. It seems like Asia was the area where you saw the biggest drop-off, holiday to January. And then as you think about the comp guidance, low to mid singles for '18, help us think about ecom, now that you're going to be including that in the comp, as most retailers do at this point. What's the growth rate there, and how much of a contributor is that to the kind of overall comp trends we should expect going forward? Thanks, guys.

Mark Aaron -- Vice President of Investor Relations

Yeah. Omar, I'll just say that, in terms of Asia looking like it dropped off, we said there was no big effect from the shift in the Chinese New Year. There was certainly some effect. We also have noted a lot of wholesale sales in the Asia-Pacific region, especially in Korea, and that can be a little bit choppy from month to month and certainly quarter to quarter. But there's nothing really unusual to point out in terms of AsiaPac slowing down technically from the holiday season to the full fourth quarter.

Mark Erceg -- Chief Financial Officer

And then with respect to ecom, we do expect ecom to grow faster than our base business during 2018, which I think Mark shared in his prepared remarks.

Mark Aaron -- Vice President of Investor Relations

Yeah.

Omar Saad -- Evercore ISI -- Analyst

Great. Thank you, guys. Welcome, Alessandro.

Alessandro Bogliolo -- Chief Executive Officer

Thank you.

Operator

We'll go next to Michael , with Credit Suisse.

Michael Binetti -- Credit Suisse -- Analyst

Hey guys. Good morning. Thanks for taking my question here. And a lot of my questions have been answered, but maybe I could just ask on -- I might be curious on the economics of the popup stores, and how you guys look at that strategy? Is that something that you guys could see rolling out more going forward? And maybe just touch on the economics about how it impacts some of the touch points along the P&L? Thanks.

Alessandro Bogliolo -- Chief Executive Officer

Thank you, Michael, for your question. Yes, we were very excited in the last quarter of last year to open a few popup stores, a couple of them in New York City, and some also in Canada. During the year, we had also one for a few weeks in Tokyo. So, all this is a very effective way for me to connect with customers out of the usual skin, and it's also a way to measure the reaction of consumers and to see if the link with the brand is there. And in this respect, all these popup stores have been really a positive factor in this respect. When it comes to the financials, I have to say, they have been financially profitable, in the sense that we didn't lose money doing that, but it's not -- first of all, it's nothing material, and especially, it's not really the main purpose of that exercise. Let me say, they are self-financed kind of activities, but the major work of it is testing new things with customers.

Michael Binetti -- Credit Suisse -- Analyst

Thank you very much.

Alessandro Bogliolo -- Chief Executive Officer

Thank you.

Operator

We'll go next to Dana , with Telsey Advisory Group.

Dana Telsey -- Telsey Advisory Group -- Analyst

Good morning, and welcome, Alessandro. Given your background and coming from Bulgari, what are the similarities and differences between your assessment of Tiffany's and how you accelerated and enhanced Bulgari? Are there similarities between the two businesses? Thank you.

Alessandro Bogliolo -- Chief Executive Officer

Well, the similarities are many. Of course, we talk about two global brands, two brands that are really founded on jewelry, where most of the business relies on jewelry. And what -- and I think they are two wonderful and very respected brands. Now, having said so, what I see directly, after six months in the job as a difference of Tiffany versus Bulgari is that Tiffany is more understated, younger, and also more joyful than Bulgari as a brand. And this for me is very important, because this is the DNA of the brand, is the way the brand is. It's like the personality of a person. There is not good or bad personality. Everybody has his own personality. But the fact of being so young, joyful, and understated, I think, is a great opportunity for Tiffany, because this is very much in line with the changes that are going on in the luxury experience in this space.

In these days, luxury is very solid, but the luxury experience is changing. Luxury is no longer equal to formality. Luxury is no longer predominantly for richer and typical, traditionally, more older people. Now luxury is meaningful to a larger audience, and I think in that respect, Tiffany, because of its DNA, because of its personality, is really best set to define the new cost of luxury. And I think this is so exciting, both personally as a professional challenge, as well as, I think, financially for the future of this company.

Dana Telsey -- Telsey Advisory Group -- Analyst

Thank you.

Alessandro Bogliolo -- Chief Executive Officer

Thank you.

Operator

We'll go next to Rick Patel with Needham and Company.

Rick Patel -- Needham and Company -- Analyst

Thank you. Good morning, everyone, and thanks for taking the question. I was hoping you could provide more color on your plans to increase marketing this year. You've done a really nice job over the last year on the creative side and partnering with some ambassadors. When we think about the increase this year, are you just going to be doing more of that? Are you taking a different approach,? And how do we think about the emphasis between digital versus more traditional channels? Thank you.

Alessandro Bogliolo -- Chief Executive Officer

Thank you, Rick. Well, I said before that we want to surprise our customers. So, we will not repeat anything that we did last year that was successful -- for example, the launch of HardWear. And it was a very good launch, and it was successful. We are pleased with it. But we are in the business of surprise. So, we have a long list of projects for this year to surprise customers in a different way. And --

Mark Aaron -- Vice President of Investor Relations

It will surprise you too.

Alessandro Bogliolo -- Chief Executive Officer

And we really look forward. But really, I am talking about the next -- starting from the next few months, you will start seeing a lot of activities in marketing related to the new launch that we were referring to before, as well as -- and this is very important -- icons, our icons. So, it's about the new product, but it's about our icons, that will be sustained together with high jewelry throughout the year with a lot of exciting marketing initiatives. All of them will be also digital, and most of our marketing investment is, since already two years now, is more on the digital side rather than the traditional print media. This is a trend of all the brands, and Tiffany is surely leading that.

Rick Patel -- Needham and Company -- Analyst

Look forward to seeing you. Good luck.

Alessandro Bogliolo -- Chief Executive Officer

Thank you.

Operator

We'll go next to Ike Boruchow with Wells Fargo.

Tom , -- Wells Fargo -- Analyst

Hey, good morning everyone. This is actually Tom Nikic on for Ike. Thanks for taking our question. I wanted to ask you, you spoke about accelerating the pace of new product introductions, and you 've obviously had some success over the last couple of years with new products that you've launched, such as HardWear and Tiffany T, but you also have this vault of very classic styles and classic collections. And I guess, sort of how do you balance this initiative to sort of accelerate the rate of new product platforms while also maintaining that sort of classic Tiffany style? Thanks.

Alessandro Bogliolo -- Chief Executive Officer

Thank you for your question. I don't remember exactly the day and the year, but when Tiffany opened a new store, a big store -- I'm talking about the 19th century, in Union Square -- the newspaper, I think it was the New York Times or the equivalent at the time, had that now in New York, there is a new palace of jewels. Well, Tiffany has been true to that statement through centuries. So, really, as the palace of jewels, there is room, and it's needed under that roof to have a wide offer that covers the different consumer preferences, occasions of usage. So, this mix of very design lines, Tiffany T for example; or more edgy lines, HardWear; or more classic lines, like Victoria, for example. Not to mention, all the solitaire diamond, these are all different facets of today's jewelry, of today's way of wearing jewelry by women. So, I don't see absolutely a contrast or a contradiction there; on the contrary, it's all complementary in order to provide a really full experience in line with the palace of jewels that our predecessors managed to build more than 100 years ago.

Tom Nikic -- Wells Fargo -- Analyst

All right. Sounds good. Best of luck this year.

Alessandro Bogliolo -- Chief Executive Officer

Thank you.

Operator

We'll go next to Janet Kloppenburg with JJK Research.

Janet Kloppenburg -- JJK Research -- Analyst

Good morning, everyone, and congratulations on a good holiday. Just two quick questions. Alessandro, if you could talk a little bit about the Engagement category opportunity. You talked about Watches and Homes. I was wondering what you envision for the Engagement category and if there was an opportunity to perhaps capture market share there? And Mark, I was wondering if you could talk a little bit about the puts and takes on gross margin and how we should be thinking about it for fiscal '18 and '19? I know mix issues are at hand, as well as commodity pricing and some potential price increases. Thanks so much.

Alessandro Bogliolo -- Chief Executive Officer

Thank you. Well, touching on your first point, Diamond and Engagement Jewelry. Now, Tiffany stands for several things in the mind of consumers since generations. For sure, love, engagement is definitely equal and synonymous to Tiffany. And this is something that is very important, and is a strength of the brand. Now, the world changes. The world has changed. The way people love, the way people express their love has changed, and is changing recently. And we see a tremendous opportunity for Tiffany in that area, because we believe that the business of love is a business that will be there forever until humanity exists. But our opportunity is to evolve with the new morals of society, and if there is one brand that can do that, that is definitely Tiffany. I think we have seen already a little bit of that, I mean, to give you something more tangible, in the recent Believe in Love campaign. I don't know if you have seen it, otherwise you can find it easily on YouTube. That is a first indication of a direction. But Engagement, although it has been a challenging category in the past few years, I think at the same time, reserves us a very good opportunity.

Mark Erceg -- Chief Financial Officer

And real quickly on the gross margin question, we do expect gross margin to expand somewhat in 2018. Over the past many years, there's been a large benefit we've been deriving from significantly lower metal and rough diamond prices. We think metals will be roughly flat year-over-year, but we do expect a little bit of help from lower diamond input costs. We do believe that we are still a brand, and increasingly still, a brand that has pricing power as we reassert ourselves more aggressively in the marketplace. The pricing power we 've always enjoyed, we believe will expand, frankly, over time. And so, we're confident that we'll be able to continue to push gross margin.

We also are confident that we're doing other things to find ways to structurally address our costs. We've talked in the past about the need to be able to achieve SG&A leverage at a lower rate of sales growth, and we have a lot of initiatives that are related to that. And while the primary intent of the jewelry design and innovation workshop is just that, to drive innovation, it will also allow for fast prototyping. It will allow for cost analysis. It will allow us to have some additional high end costing tools. We will be able to bring detailed spec packages forward, and that will let us manage our production network more nimbly as well.

Janet Kloppenburg -- JJK Research -- Analyst

Thanks so much. Good luck.

Alessandro Bogliolo -- Chief Executive Officer

Thank you.

Operator

We'll go next to Kevin , with Guggenheim.

Kevin Heenan -- Guggenheim -- Analyst

Hi good morning. This is Kevin on for Bob Drbul. I just wanted to follow up on the advertising. As we move into 2018, I think, as a percent of sales, if that stepped up over the past few years? I was wondering, how we might be able to think about the change as a percent of sales into '18, and just any thoughts on what the rate level for the company might be over the longer term? Thanks.

Alessandro Bogliolo -- Chief Executive Officer

Thank you, Kevin. Now, as you know, marketing is typically 7%, 7.5% of our total sales turnover. Now honestly, I believe that there is not a magic number. I wouldn't know to tell you which is the magic percentage of marketing over total sales. 7.6% is in the range. There are brands that spend more than that, whether it's a substantial amount. Now honestly, more than talking about the percentage of marketing investment over the total sales, for me, the most important thing is, the effectiveness of that expense and to use that money in a way that really, I come back to my obsession, surprises the customers, because sometimes, you can put a lot of money in a more traditional kind of campaign or media, and you don't sort -- the same effect on doing something else. Let me make an example. For me, one of the great campaigns of last year has been the opening of the Blue Box Cafe. Now, honestly speaking, that was not media. We actually opened the cafe. But that had a huge number that we talked about, millions of impressions, and that was a fantastic marketing tool. So, the world has become more complicated maybe, but also more open to smart ideas, and this is where I am really challenging and trying to push and inspire the teams to be more daring when it comes to our way to communicate to customers above and beyond the marketing budget.

Mark Aaron -- Vice President of Investor Relations

Yeah. And then Kevin, I would just add to that that -- and it sort of ties to a previous question -- that we don't disclose our marketing mix in terms of how much is print versus digital versus social and all that. But certainly, it's a combination of all three. Print is still very important, but increasingly, digital and social as well, and as Alessandro said, even PR activities, which can really resonate with customers as well. So, it's a whole big combination of things.

Okay, next question?

Operator

We'll go next go to Laura Champine with Loop Capital.

Laura Champine -- Loop Capital -- Analyst

Good morning, and thanks for taking the question. Just wanted a little more color on the changes that you plan to make in the store environment, just because to us, stores already look pretty good. So, if you could be specific on changes you're looking to make there, we're very interested? Thanks.

Alessandro Bogliolo -- Chief Executive Officer

Thank you, Laura, for this question, and thank you for your appreciation of our stores. Yes, definitely, Tiffany has a wonderful fleet of stores, and I have to say, some are brand new, some are less new, but all of them are kept to a very high level. Honestly, I have seen also stores 13, even 15 years old, some of them, and they look good. So, that is not the point. The point for me is to inject some freshness, some newness, some excitement in the store, because nowadays, consumers are more demanding. It's not enough to have a beautiful store. The point is that you have a beautiful store. I've been to the store a couple of times. Why shall I come a third time or a fourth time when I can comfortably buy the same product from tiffany.com? So, it is that excitement that is needed, and this is what we are planning to do. This is why, in the guidance or the financial indication that we gave, we said that we are going to increase investment in visual merchandising, store presentations, because it's exactly to deliver excitement in the stores.

Above and beyond store construction, store comps at the end of this, because this is a totally different area that is a multiyear kind of work, is more linked to capex than expenses. I am more referring to visual merchandising and the in-store presentations as a way to animate the point of sale.

Laura Champine -- Loop Capital -- Analyst

Got it. Thank you.

Alessandro Bogliolo -- Chief Executive Officer

Thank you.

Operator

We'll go next to Brian Tunick with Royal Bank of Canada.

Brian Tunick -- Royal Bank of Canada -- Analyst

Thanks very much. Curious, Alessandro, if any of the six strategies you laid out, particularly focus on the millennial customer? There was a lot of focus these last couple of years there, so just curious, anything very focused on the millennial to bring the new customer in? And my second question, can you maybe help us understand or benchmark, from a product newness or introduction perspective, how Tiffany would rank versus the global luxury peer set that you referred to? Thanks very much.

Alessandro Bogliolo -- Chief Executive Officer

Thank you, Brian. Well, let me share with you my thoughts, because there is a lot of talking about millennials in all industries. Now, if we look at luxury, and especially jewelry, if there is a brand that traditionally has been dealing with the millennials of all the years, since 180 years, that is Tiffany. Now we call them millennials, but Tiffany, having been so strong historically with the engagement business and also with the gift business, has been the brand of choice for younger customers that were there for graduation, for engagement, for marrying. So, Tiffany, because of its past as being the brand of millennials, is almost 100 years. Now, all these six priorities that we have set down, all of them are focused over millennials, because millennials are the clients of Tiffany, an important portion of the clients of Tiffany. And especially because of these changes that are going on in society that actually are starting from millennials, from the younger generation, and then they contaminate, let me say, the other generations, it's even more important for Tiffany that whatever we do, in all six priorities, we are really focused over the way young generations act.

And I would -- and this is just to take an example, the first priority, amplify and evolve brand message. What do I mean by evolve? By evolve, I mean, really to shift our historic perceived brand message to being more -- to be closer to today's younger generation's way of approaching life, more self-attraction, celebrating love in a different way, and more everyday usage of jewelry, or simply a more and strong empowered kind of woman. So, for me, the real objective is, when I say amplify and evolve the brand message, is to bring Tiffany in the middle of the new cultural conversations. This is really what inspires all the priorities we have set.

Okay.

Operator

We will go next to Marni Shapiro with Retail Tracker.

Marni Shapiro -- Retail Tracker -- Analyst

Thank you. Congratulations on a great holiday. So, Alessandro, as you think about a lot of terms, a lot of conversation on this call, it feels like there is a lot of energy at the brand here, and a lot of what I would think of as more modern energy. You are relocating and renovating a bunch of stores this year. How will you use what you've learned from your popup stores and your cafe to inform what the stores will look like going forward? And you mentioned that luxury doesn't and no longer has to -- is no longer equal to formality. How should we think about your sales associates going forward? Because Tiffany sales associates have historically been a very formal proposition in your store.

Alessandro Bogliolo -- Chief Executive Officer

Thank you for your question. Well, definitely, I can assure that the energy is there, and this is what keeps us moving and going every day. Now, one of the reasons -- of the many reasons why we invest in some popups, is also to experiment things that -- to see if they're relevant for consumers and in order to then roll them out or not in the rest of the stores. I will give you a small example. One of the recent popups was one on the West Coast, in --

Marni Shapiro -- Retail Tracker -- Analyst

In the Grove?

Alessandro Bogliolo -- Chief Executive Officer

In the Grove, exactly. And it was a very small store, and quite unusual, and it lasted just for a few weeks. It was in February. But one of the highlights of that popup was the personalization of jewelry. So, basically, you could go there, buy a pendant in gold and silver, whatever, and have a personalization, where you were basically the designer. You could draw simply on an iPad itself and design, and that design would be engraved on the spot, on the product that you were purchasing. Now, that resonated very strongly with the consumers, to the previous question, to millennials, but also non-millennial. And we found that that was a proof of concept that for us was very important, and this is an area where we are going to invest a lot, and to roll it out in many other stores. So, yes, the answer is definitely, these popups are also useful for these kind of experiments.

Marni Shapiro -- Retail Tracker -- Analyst

The sales associates?

Alessandro Bogliolo -- Chief Executive Officer

Yes, about the sales associates. Well, you know, I think we have thousands and thousands of sales associates in our stores. Where we really focus about is, the level of service that -- I have to say that service is a real obsession in this company. I was impressed how all the retail teams are really serious about that, and not only in talking as a lip service that every brand would do, but also in terms of resources, money that is invested in training; in metrics that are strictly monitored at store level, at country level, at global level, at sales associate level. So, service is definitely there. Well, about the modernization, I don't think it is a company role to modernize people. I think that -- the good thing of luxury brands is that they are very inspirational for all of us as employees of the brand. So, the moment the brand gets more -- I mean, more modern, more joyful, more easygoing in its communication, in its product, in its marketing, naturally, we will all be contaminated and sales associates, as well as the CEO, will become more modern, I hope.

Marni Shapiro -- Retail Tracker -- Analyst

Thank you very much. Best of luck for spring season.

Alessandro Bogliolo -- Chief Executive Officer

Thank you.

Operator

And at this time, there are no further questions. I'll turn the call back to Mark Aaron.

Mark Aaron -- Vice President of Investor Relations

Okay. Thank you. I think we can wrap up the Q&A now. I hope our formal remarks and the Q&A sufficiently addressed your areas of interest. Please note on your calendars that we expect to report first quarter results on Wednesday, May 23, with a conference call and Q&A. Please feel free to call me with any other questions or comments, and I thank you all for listening today.

Operator

This does conclude today's conference. We thank you for your participation.

Duration: 99 minutes

Call participants:

Alessandro Bogliolo -- Chief Executive Officer

Mark Erceg -- Chief Financial Officer

Mark Aaron -- Vice President of Investor Relations

David Schick -- Consumer Edge Research -- Analyst

Paul Lejuez -- Citi -- Analyst

Simeon Siegel -- Nomura Instinet -- Analyst

Laurent Vasilescu -- Macquarie Capital (USA) Inc. -- Analyst

Lorraine Hutchinson -- Bank of America -- Analyst

Erwan Rambourg -- HSBC -- Analyst

Kimberly Greenberger -- Morgan Stanley -- Analyst

Ed Yruma -- KeyBanc Capital Markets -- Analyst

Oliver Chen -- Cowen and Company -- Analyst

Brian Nagel -- Oppenheimer -- Analyst

Omar Saad -- Evercore ISI -- Analyst

Michael Binetti -- Credit Suisse -- Analyst

Dana Telsey -- Telsey Advisory Group -- Analyst

Rick Patel -- Needham and Company -- Analyst

Tom Nikic -- Wells Fargo -- Analyst

Janet Kloppenburg -- JJK Research -- Analyst

Kevin Heenan -- Guggenheim -- Analyst

Laura Champine -- Loop Capital -- Analyst

Brian Tunick -- Royal Bank of Canada -- Analyst

Marni Shapiro -- Retail Tracker -- Analyst

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