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Tiffany & Co. (NYSE:TIF)
Q3 2018 Earnings Conference Call
Nov. 28, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Please stand by. We are about to begin. Good day and welcome to this Tiffany & Co. Third Quarter 2018 Conference Call. Today's conference is being recorded. Participating on today's call is Mr. Mark Aaron, Vice President of Investor Relations; Mr. Alessandro Bogliolo, Tiffany's Chief Executive Officer; and Mr. Mark Erceg, Tiffany's Executive Vice President and Chief Financial Officer. And at this time, I would like to turn the call over to Mr. Mark Aaron. Please go ahead, sir.

Mark Aaron -- Vice President of Investor Relations

Thank you, everyone, for joining us on today's call. I hope you have all had a chance to review the news release we issued earlier today. Alessandro and Mark have some brief comments to share with you and then we will be pleased to take your questions.

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-Q filed earlier today with the Securities and Exchange Commission, as well as the news release filed today under the cover of Form 8-K. Those filings can be found on Tiffany's Investor website, www.investor.tiffany.com, by selecting Financial Information in the left-hand column.

I'm now pleased to turn the call over to Alessandro.

Alessandro Bogliolo -- Chief Executive Officer

Thanks, Mark, and hello, everyone. The details of our financial results are contained in today's news release and 10-Q filing so we decided to abdicate our formal comments in order to have more time to answer your questions. But before taking any questions, I want to spend a few minutes commenting on some highlights of those results and developments to our long-term strategies. Mark Erceg will then address the financial results and the outlook.

I joined Tiffany a little more than one year ago and I cannot be more pleased with and appreciate of what our team has accomplished in a short time. Worldwide net sales have increased 10% in the year-to-date with balanced performance throughout the business. We have modernized our marketing communication and accelerated new product innovations and have enhanced our store base. I previously said that we are on a long and exciting journey and I'm pleased to report that we have had a good start.

Earlier this year, we laid out our six key strategic priorities and also said that we would be increasing investment spending in several areas in order to support sustainable sales growth. Despite some external factors that have mitigated a portion of our recent sales growth and related near-term uncertainties, I am encouraged and as confident as ever about the long-term path that we are on.

Communicating brand relevance and desirability begins at home, to local customers in the Americas, Asia Pacific, Japan, and Europe. In this objective, we are making good progress. We have increased the sales attributed to local customers in each of the first three quarters of the year and in all regions. Such gains were partly offset in the third quarter in some markets by lower sales attributed to foreign tourists, particularly to Chinese. Of course, tourist sales for Tiffany and the overall industry can be volatile due to currency shifts, regulations, travel patterns, and other factors.

In the third quarter, sales attributed to Chinese tourists were lower in the Americas and in Hong Kong, as well as wholesale sales to Korean duty-free operators related to Chinese tourist purchases, which had been very strong for several quarters. But, on the contrary, we have achieved a healthy double-digit sales growth in mainland China throughout the year with even stronger momentum in local currency in the third quarter. We can speculate on the reasons for the tourist spending slowdown outside of China but the reality is that the Tiffany brand is appealing to Chinese customers, as evidenced by the continued strong sales growth in mainland China in the quarter.

Another objective is to achieve increased jewelry unit volume and I am pleased that overall jewelry unit volume has increased in all three quarters of the year. Consistent with this, product innovation that is more frequent and distinctive is one of our priorities and we have been exciting customers this year with the launches of the Paper Flowers and Tiffany True collections, as well as making additions to existing jewelry collections, such as Tiffany T, Tiffany Keys, Hardwear, and Return to Tiffany. In fact, in September, we celebrated the launch of Paper Flowers in Shanghai with a major event attended by hundreds of customers, celebrities, and influencers. The resonance across digital and traditional media all over China has been spectacular.

As we disclosed three months ago, we are also investing more in our high jewelry assortment, which we believe offers meaningful long-term opportunities in key global markets. In October, we held our annual Blue Book event in New York for select customers who reacted enthusiastically to the extraordinary creations and to the ninth high jewelry offering that we presented. We were very pleased with sales results.

Introducing new products and communicating an inclusive and culturally relevant message are intended to increase store and online traffic and conversion rates. Both metrics have increased in the quarter and year-to-date. We are pleased with customer reaction to our Make it My Tiffany program to personalize pieces of jewelry and we recently launched a powerful holiday marketing campaign, which I hope you have watched the whimsical video on YouTube or our social platforms.

Another strategic point is to invest in digital and omnichannel and we are seeing the benefits. Our website serves as a powerful marketing vehicle to further enhance brand and product awareness and online shopping has been increasing. In fact, we have been very pleased with double-digit e-commerce sales growth in the quarter and year-to-date.

To improve the in-store experience, our sales professionals are engaging with customers in a more consultative way and we are increasingly seeing the benefit from utilizing our global selling system capabilities. We are also addressing the look and feel of the stores with visual merchandising enhancements in our North American stores this year and will do so in all stores globally next year.

In closing, our third quarter results came in close to our expectations. We are certainly mindful of external, uncontrollable factors but will not be distracted by them. So, I believe that we are taking the right steps on this long and exciting journey.

I will now turn the call over to Mark Erceg.

Mark Erceg -- Executive Vice President and Chief Financial Officer

Thanks, Alex. Reported sales grew 4% during the third quarter and, as predicted, earnings per share came in slightly below year-ago at $0.77 per share, as an increase in gross margin and a lower than expected tax rate on the quarter was offset by a substantial increase in SG&A-related investment spending, as well as an unexpected charge of $0.05 per share for the estimated net loss from the recent bankruptcy filing of a precious metals refiner.

Net inventories were 6% above prior year as we built stock in anticipation of the holiday season and made incremental investments in our high jewelry assortment, which was, in part, and as Alex already mentioned, responsible for a very strong Blue Book event this past October.

With total debt representing only 31% of stockholders' equity and $655 million of cash and cash equivalents on hand at quarter-end, our balance sheet remains strong. As we have clearly and repeatedly communicated, we are increasing strategic investment spending this year across a number of areas and intend to maintain these higher levels of support going forward in order to drive sustainable top-line sales growth, margin expansion, and higher asset productivity.

One of those areas is information systems, where we're happy to report that seven additional countries were placed onto our new IT platform during the third quarter. These countries are in addition to China, which was converted during the first quarter of this year. You will recall that this suite of IT tools enable a common order and inventory management system, a single financial instance, and for the first time, a source-to-pay procurement system. The multifunctional teams responsible for these efforts are working very hard and we remain pleased with the progress being made to improve our systems and processes as part of this multiyear modernization effort.

In terms of our financial outlook for the year, we continue to expect high-single-digit sales growth and diluted earnings per share of $4.65 to $4.80 per share. We expect our tax rate to be in the low to mid-20s, share repurchases of approximately $400 million, and we expect to generate nearly $300 million of free cash flow.

Finally, as is our normal practice, we will provide a holiday sales update in January and comment on our initial financial guidance for 2019 when we report our full-year results in March. I'll now turn the call back to Mark.

Mark Aaron -- Vice President of Investor Relations

Thanks, Alessandro and Mark. Operator, I think we're ready to take some questions.

Questions and Answers:

Operator

Thank you. If you would like to ask a question, please press "*1" on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach the equipment. Again, that is "*1" for questions.

We'll go first to Paul Lejuez at Citi Research.

Paul Lejuez -- Citigroup -- Analyst

Hey. Thanks, guys. Can you talk about the pricing actions you took in China? When were prices lowered and on what percentage of the assortment? I'm curious what the response has been and whether or not you think that might have contributed to strength on the mainland and maybe a little bit of a weaker Chinese tourist business. Thanks.

Mark Erceg -- Executive Vice President and Chief Financial Officer

Yeah. I think what we would tell you is that we did make some pricing adjustments in China. The first one was in July. That was in response to the change in tariffs. We talked about that during our last call and felt that it was important for us to be mindful of what was happening in that marketplace and so we did pass through, in effect, the full value of that tariff/duty reduction. Now, subsequent to that, we have continued to look at our global pricing, as we always do, and we have made some adjustments since that point in time to our global pricing strategies, which went into effect toward the very later stages of the month of August and China was a part of that.

Paul Lejuez -- Citigroup -- Analyst

And how did the consumer respond there?

Mark Erceg -- Executive Vice President and Chief Financial Officer

So far, as Alex indicated, we've been doing exceedingly well with mainland Chinese. Our domestic business there was very strong for the first two quarters of the year and it's only accelerated into the third.

Paul Lejuez -- Citigroup -- Analyst

Is that unit driven or is that ticket driven, Mark?

Mark Erceg -- Executive Vice President and Chief Financial Officer

Both.

Alessandro Bogliolo -- Chief Executive Officer

Both.

Paul Lejuez -- Citigroup -- Analyst

Good. Great. Thanks, guys.

Operator

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

Omar Saad -- Evercore ISI -- Analyst

Thanks for all the information this morning. Good morning. Could you talk about if you saw in the quarter or in the weeks leading up to the quarter, if you're willing to comment, the financial market volatility. Are you seeing that, especially in Asia, having an effect on the customer base or do you see customer behavior that's still really separated from what we're seeing in the financial markets? I know there's a lot of concern out there that financial market volatility will eventually start to weight on consumers' minds, especially the luxury consumer. Any thoughts you have around that would be really appreciated. Thanks.

Alessandro Bogliolo -- Chief Executive Officer

Thank you, Omar, for your question. What we have clearly seen in the quarter has been a shift in Chinese tourism and spending. So we have seen spending of Chinese tourists going down in important markets outside of China and we have seen strong sales in mainland China. Our sales in mainland China were actually double-digit in the first two quarters and they even accelerated in local currency in the third quarter. So, this is the clear pattern that we have seen now since a few months.

As far as the general stock market is doing, this is something we look closely because this can be an effect on the perceived wealth of people. So far, we have not seen a direct impact of it on sales because our sales to local customers around the world has kept being positive, very positive in the third quarter. But, of course, it's something that we look closely because we know that it may have an effect on luxury consumption.

Omar Saad -- Evercore ISI -- Analyst

Thank you. Nice job.

Alessandro Bogliolo -- Chief Executive Officer

Thank you.

Operator

We'll go next to Brian Nagel at Oppenheimer.

Brian Nagel -- Oppenheimer & Co. -- Analyst

Good morning. I appreciate you taking my questions. So, I also want to just dive even a little bit deeper into the issue of spending on the part of Chinese tourists. Could you help us do the math? Maybe for Mark, just what weaker sales to Chinese tourists, how large that impact was to your total company comps. And then the second question, I guess this is maybe a follow-up to what Paul was asking initially, but is Tiffany just really at the mercy of these currency shifts or are there actions you can take to help offset the impacts in your business?

Mark Erceg -- Executive Vice President and Chief Financial Officer

Yeah, I think maybe I'll start and then Alex can provide some additional commentary. Clearly, if you look at our business and you say what was different in the first and second quarters relative to the third, there's not a lot to point to specifically outside of some of these macro factors that we're now contending with. Alex, in his prepared remarks, said very clearly that unit volume growth was strong throughout the quarters with domestics. We've talked about domestic sales being strong pretty much in all regions and all product categories for the first, second, and third quarters of the year.

And so with strong product, with a store that is improving each and every day, with a strong communicating and higher share voice, brand message, I think you could then, in some ways, answer your own question that clearly the tourism impact that we did see in the third quarter was one of the largest delineating factors between the sales results we posted in the first half of the year versus the third quarter trends.

We look at Chinese tourist travel very closely. We look at it market by market. We have a very strong business with the mainland domestic Chinese. We also look at Hong Kong and Macau and we look at global tourism flows and patterns. And we do know that Chinese tourists, not surprisingly, as for all global luxury players, they are an important part of the equation today and going forward. We believe that we have strong programs and plans that speak directly to them and we think the evidence of that is clearly shown in our mainland domestic results in the third quarter, which, as we said, were even stronger than the first half of the year.

Alessandro Bogliolo -- Chief Executive Officer

And I would add to that, I mean, let's take an example. A practical example. If we take Hong Kong, Hong Kong government issued some statistics recently about Chinese tourist arrivals in Hong Kong. And for the first eight months of the year, the increase of Chinese arrivals was ranging between 10% and 20%, depending on the month. And in September, it went down to a very low single-digit. Now, you can imagine that our people, our organization in Hong Kong, there is little they can do to compensate for this. Of course, we have marketing that is really focused to tourists. But, of course, it depends a lot -- its effectiveness depends a lot on the number of tourists that come to a single place.

So, to answer your question, what is important for me is to keep the relevance of the brand with Chinese customers in general because we know this is a huge engine of growth and is an important portion of our business. And this is why I am so pleased about the launch of Paper Flowers in China that has been really amazing. The sales to Chinese in mainland China accelerating, this is a sign of the fundamental health and appeal of the brand to Chinese customers. Then, unfortunately, when it comes to travel patterns, this is something that we have seen -- they vary. And we have seen it several times in the past, changing suddenly one quarter to another, in one way and another, and this is only very marginally influenced by our actions.

Mark Erceg -- Executive Vice President and Chief Financial Officer

Travel patterns, currency moves, regulations, all of that. Okay.

Brian Nagel -- Oppenheimer & Co. -- Analyst

Very helpful. I appreciate it. Thank you.

Operator

We'll go next to Michael Binetti at Credit Suisse.

Michael Binetti -- Credit Suisse -- Analyst

Hey, guys. Thanks for taking our questions here. I know you don't want to get into too much detail on 2019 today but I think the burning question really is, as you think about the framework that you've already spoken to to help us guide us over the multiyear path here, I think you commented that this year would be the SG&A reset year for the algorithm, with very low EPS growth on the same mid-single-digit comp, but next year would be back to a more normalized algorithm with margin leverage.

But you signed up for some very long-dated investments here that are no doubt the right thing to do for the business over the long-term but if we are in for a period of extended subdued tourism trends, how much flexibility do you have with the investment schedule next year to manage SG&A inflation in that kind of a global consumer scenario?

Mark Erceg -- Executive Vice President and Chief Financial Officer

Well, I think we want to take things one step at a time. I don't think it's appropriate for us to say too much about 2019 other than the fact that we have stated very publicly that we do expect to have operating margin expansion in 2019. You're right. This has been kind of earmarked as a bit of an investment year across the five key areas that we identified that we had lagged and hadn't made sufficient investments in prior years to really drive sustainable top-line sales growth.

Some of those elements, you're right, will continue to roll forward to some extent. So, for example, you think about IT systems. We are now standing up multiple geographies simultaneously. And if you look back to the first quarter this year, we stood up China. So, you could argue that there'll be more IT spending in maybe the first quarter of '19 relative to the first quarter of '18 and that might be a fair assessment. We're continuing to roll out our CBM elements into the stores and we've done a lot of that in the current year but that will continue into next year. So, there will be some areas that carry forward, in effect, as it relates to that.

But we have very clearly stated that we expect to drive operating margin expansion in 2019 and are committed to that and we certainly built plans internally to allow for that as well. We're doing that by getting really aggressive on the procurement side and a lot of the other work take-outs that we have been effecting here corporately as a team.

Michael Binetti -- Credit Suisse -- Analyst

Okay. And then, I guess, you have that same confidence if, away from your control, we are in a bit of -- if the same-store sales trajectory comes in at the low end of what you guys think about historically, you feel like you have ample flexibility to continue that commitment on the operating line next year?

Mark Erceg -- Executive Vice President and Chief Financial Officer

I guess what I would say is we have said very clearly that we need to be able to extract P&L leverage at a lower rate of overall sales growth. And we are putting programs and processes in place to allow for that. Now, obviously, we'd like to see more top-line as opposed to less. That makes things considerably easier. And we can't be too predictive of where things will be a quarter from now with respect to Chinese tourism.

What I can tell you is that we feel very good about the long-term trends. One of the things that we've talked often about is the fact that, when you do look at tourism, people tend to spend more when they are traveling, when they are on holiday. We've had these types of shifts before where certain key groups, like the Chinese, might be traveling more heavily to Japan one quarter and then maybe to the U.S. the next and Europe the one thereafter. Those things we can't control. But as Alex said, if we have the right messages tailored to the Chinese themselves and they find the brand appealing, that provides a real ballast there.

So, if you also think about just long-term trends, I think the estimate is right now is that only 6%, 7%, 8% of total Chinese even have a passport. Right? So, the long-term trend of the Chinese who are having an emergence of their middle class and their high-net worth folks, there's gonna be more and more Chinese traveling the world, which is a good thing for all of us and we welcome that and we think that they will continue to frequent our stores when they make those purchase occasions.

Michael Binetti -- Credit Suisse -- Analyst

All right. Thanks for all the help. I really appreciate it, Mark.

Operator

We'll move next to David Schick with Consumer Edge Research.

David Schick -- Consumer Edge Research -- Analyst

Hi, good morning. Thanks for taking my question. I think that one of the things that's been so interesting to all of the observers on the Street is your connectivity with the consumer in different ways, whether it's product, the stores -- new product, the stores, and the marketing. I guess sales move around, as you said, and you want to build the model for the long-term, but could you talk about markers, whether it's in your CRM, in your interactions, that give you the confidence that those newness pathways are gonna mean more than just the latest change in sales direction? What I'm trying to say is whether it's what you're hearing at the store level around engagement -- I know that moved around a little bit this quarter -- or customers asking about new gift catalogues. Just a little more, I think, anecdote around your relationship with customers and what that could mean over time.

Alessandro Bogliolo -- Chief Executive Officer

Thank you, David, because I think this question is really the core matter that we are focusing on, which is we have taken -- we have started taking a lot of actions in the past quarters in modernizing our marketing and innovating products, etc., etc. So, as management, our -- my -- constant obsession, really, is to see, day by day, how these things impact on the fundamentals of our business. And there are several things that are really encouraging us and are clearing from certain concerns that at the beginning I could have. And let me make a few examples.

First of all, we have seen in the last nine months an increase -- a substantial increase in traffic, both in our stores, the physical stores, as well as our website. We have seen conversion rate increasing in the first part of the year, as well as in the last quarter. Now, difficult to say if this is directly related to the activities that we have done in the stores but, for example, we have enhanced our visual merchandising in the United States and the conversion rate that was growing in the first two quarters, after these enhancements, has grown at an even faster pace.

Now, is it totally due to the enhanced visual merchandising? I mean, nobody knows but, for example, talking -- I've been to several stores in the U.S. after this new VM project and our teams were enthusiastic. They were reporting customers saying, "What did you do to the store? It's new." Well, in reality, it was simply new visual merchandising.

But let me make some more examples. What I constantly look at is what's happening to our sales between existing customer and new customers. Because you know that we have quite radically changed our communication in the past year and so this was an area of concern for me to monitor is it working or it's not working. And I'm very pleased because, constantly, including the last quarter, we have seen an increase in sales, both to new customers as well as an increase to existing customers.

So, this, to me, shows two things. One is that the new messaging of the brand is resonating with new customers but is not alienating existing customers. Now, this growth to existing customers is due more to the new communication or is due more to the enhanced CRM I have? That I am not able to tell you. But what I can see is that the fundamentals of the business, that at the end of the day is local customers, traffic, conversion rate, they are all positive throughout the geographies.

And even if we have a slowdown to a mid-single-digit growth in the third quarter, when we look at the products, I didn't see -- there is a not a product-related factor. The pattern that we have seen is more geography and tourism flow related. So, all this is, of course, we were more pleased with double-digit growth than mid-single-digit growth but when it comes to the fundamentals, we are really encouraged by the actions we have taken.

David Schick -- Consumer Edge Research -- Analyst

Thanks very much.

Operator

We'll move next to Oliver Chen at Cowen and Company.

Oliver Chen -- Cowen and Company -- Analyst

Hi. What are your thoughts about the duration of the Chinese consumer and your own plans? And what happened with the product assortment in terms of the composition of products and what that may mean for how you should plan globally? And just related to that is your thoughts on if this is a continued shift, as more people consume domestically in mainland China, and where you think -- how long do you think that will go on for and how we should characterize this shift versus a reduction in spending or some combination of both. Thank you.

Alessandro Bogliolo -- Chief Executive Officer

Thank you, Oliver, for your question. Well, difficult to tell for us how long this will last. I mean, here we're getting into macroeconomic speculation that we are not the best people to answer to this. Obviously, the fact that the habits in China have decreased, the fact that Chinese government has declared that they want to enhance and push the local consumption, these are all factors that affect any retail business, including ours. This is unfortunately outside of our control and it's impossible for me to preview how long this will last.

On the other side, what we can do and we have been doing and we started doing is following the flows of Chinese customers. And now I see them spending more in mainland China rather than abroad. Of course, we are making adjustments to our inventory in order to make sure that we are not missing any sale in mainland China where the demand now is really very, very strong. So, operationally, we are doing a lot in order to follow or try to follow where customers are buying with the best possible offer. And so far, in mainland China, this is paying back.

Oliver Chen -- Cowen and Company -- Analyst

Okay. And, lastly, digital engagement has been really improving and a lot more exciting. What are the features that you are planning ahead and where do you think the biggest opportunities are? And the digital will manifest in both inventory as well as features as well as engagement. Just would love your thoughts on how that will evolve and what it means for luxury. Thank you.

Alessandro Bogliolo -- Chief Executive Officer

Well, our e-commerce sales, we have 13 countries where we operate our e-commerce. And the sales growth in this channel has been strong double-digit year-to-date and is exact in line also in the third quarter, even slightly higher. So, we are pleased with this because it shows that the investments we are making in the e-commerce to improve our platforms, our assets, and our offer there are paying back. And the growth is much higher than in the brick-and-mortar.

Of course, I mean, we are just at the beginning of a journey. I keep on repeating this because we've been working very hard in the last three quarters but I think we have years in front of us. And when it comes specifically to e-commerce, we are working very hard now for major improvements next year and in the years to come. So, this is not something that is like anything else. It is not something that is fixed in a couple of quarters. But I can tell you we take very seriously the e-commerce opportunity in Western countries as well as in Asia and we are investing in it in order to further grow our performance of the last three quarters.

Oliver Chen -- Cowen and Company -- Analyst

Happy holidays. Thanks.

Alessandro Bogliolo -- Chief Executive Officer

Thank you.

Operator

We'll go next to Erwan Rambourg at HSBC.

Erwan Rambourg -- HSBC -- Analyst

Hi. Good morning, gentlemen. Thanks a lot for taking my questions. Sorry to belabor the point around Chinese tourism flows, but when you speak to your teams in the different markets, can you assess what you believe is down to psychology, i.e., what was asked around equity markets and potentially tariffs and trade and other elements of stress that could impact consumer confidence. And what is more linked to FX, i.e., when your wealth is in RMB, basically the world looks pretty expensive to you? So, can you split what you think is linked to psychology of Chinese consumption versus just FX matters?

And then related to that, how does that impact the U.S.? The local U.S. consumer seems to be doing really well. Chinese flows here into the U.S. seem to be affected. What's the split between the two? And are you seeing anything different from other nationality of tourism? Is every nationality impacted by the strength of the dollar or are you seeing certain nationalities do well into the U.S.? Thank you.

Alessandro Bogliolo -- Chief Executive Officer

Thank you, Erwan. Well, let's look a little bit at our comp sales and I will look at it at constant exchange rates because this is more meaningful business-wise. So, year-to-date, we are growing comp sales at 6% and, in the quarter, is plus 3% globally. Now, in the Americas, the growth went from 7% year-to-date to 5% in the quarter. Now, this has been mainly attributed to Chinese -- general foreign spending but I will say mainly Chinese spending. Because if I look at sales to domestic local customers in North America, we have seen a very solid growth in the first two quarters and exactly the same growth also in the third quarter.

Now, you are asking me about the stock market's influence. Now, through that two quarters -- I mean, six months ago -- nobody was talking about technology share prices being weak and this is something that has happened more recently. So, I'm unable to tell you about the future but as far as the year-to-date and the third quarter, we have seen no slowdown in demand from local customers in the U.S.A.

Where there has been a slowdown is clearly in Japan because if you look at comp sales, they go from 6% year-to-date to 2% last quarter. And this is due both to Chinese tourists but also to a softer demand in Japan, where the sales to local customers have been soft in the last quarter. But this -- I mean, you never hear me talking about the weather and these kind of things, but we have to admit that there was an earthquake in Japan that affected, of course, a lot of consumption. And, honestly, I don't see any problem of the brand with Japanese consumers. We have a very strong leadership position there. There is no matter of lack of confidence or change of something.

So, I will say what is really meaningful, in a nutshell, for me is that sales to local customers in the third quarter have remained strong. Let's hope that this trend continues or even improves going forward. But you know that in our business, this is a very special moment because we are now in November and you know that December, the single month of December is more than half of our last quarter. So, naturally, the games are open. Everything will happen in the four weeks that are in front of us. And I think that, internally, we have put down all the actions, in terms of products, marketing, training, CRM, that we could do. Now, really, everything is in the hands of customers and their propensity to buy. We hope that they will be good.

Alessandro Bogliolo -- Chief Executive Officer

Okay. Thank you very much. Best of luck. Thanks.

Operator

We'll move next to Francesca Di Pasquantonio of Deutsche Bank.

Francesca Di Pasquantonio -- Deutsche Bank -- Analyst

Yes. Hi. Good afternoon. I have three follow-up questions, please. The first one is regarding your global footprint of stores, whether you feel it is adequate or somehow it's not allowing you to express your full potential in terms of capturing the traffic and the demand in the different regions, especially by the Chinese tourists traveling around.

The second question is following up on what you just said on December. Would it be a good, let's say, description to say that you are feeling good about the forthcoming holiday season, given what we have seen in terms of the strength of the U.S. consumer recently?

And the third question is on diamond prices. I know it doesn't affect you but DeBeers lowering the selling prices for their lower-quality diamonds, how do you see this and do you see it as a signal for future trends in diamond prices? How do you feel about the idea of diamond as a store of value on the one hand and DeBeers signaling something else? Many thanks.

Alessandro Bogliolo -- Chief Executive Officer

Francesca, thank you for your questions. So, first of all, about the store network, I think we have a very, very strong store network. It's covering -- it's truly global. And if we think specifically to the latest trend of this increasing demand in mainland China, even in mainland China, we have a network that feels really compatible with our best competitors and is a network where we have been investing a lot. If you think even this year, we have opened new stores in China in Suzhou, in Changsha, in Hefei. We have the two locations, one in Nanjing, one in Xian. So, we are investing in the network, not only in China but particularly in China. And we will keep doing so in the future, where we have plans of enhancing our store network in China and elsewhere for next year.

So, honestly, I see that as a strength of the brand, not as a weakness. Now, if you ask me, there are opportunities for Tiffany to open 10, 20, 30, 40 stores? Yes, but we tend to be more conservative about this in the sense that we are really focusing on the efficiency and productivity of existing stores. We are more really working on the like-for-like rather than taking the easy way of just adding additional stores. That is a nice thing. There is a reserve from that we have there and we will, in due time, exploit it but this is not really our main focus. That is more on productivity.

Mark Erceg -- Executive Vice President and Chief Financial Officer

Yeah. The long-term plan is still to grow global square footage about 2% a year.

Francesca Di Pasquantonio -- Deutsche Bank -- Analyst

Okay. Thank you.

Alessandro Bogliolo -- Chief Executive Officer

To answer your second question about my feeling about the next four or five weeks, honestly, it's something that, in general, we don't comment on the current business. Even less so on the future. And, honestly, I think it's a little bit difficult for anybody in the world to have these answers so I'm really not able to comment on this.

Mark Erceg -- Executive Vice President and Chief Financial Officer

And then to the third question about diamond prices and what DeBeers recently did, that was on low-end quality stones. I really don't think that has any bearing on what we purchase and what we buy. We talked about the fact that we basically reject 99.96% of the world's gem-quality stones. And you talked about diamonds as a store of value and whether or not this will be impeded or affected by this. I think the answer is clearly no. I mean, think about high-end, classic luxury cars. Those hold their value. They're an asset class unto themselves. You buy a lower-end car, it's a depreciating, wasting asset. I think the types of diamonds that we deal in and the diamonds that we provide our customers are of such high quality that they will always be a store of value and they will always appreciate going forward as a general rule.

Francesca Di Pasquantonio -- Deutsche Bank -- Analyst

Thank you.

Operator

We'll take our next question from Simeon Siegel at Nomura Instinet.

Dan Stroller -- Nomura Instinet -- Analyst

Hi. This is Dan Stroller on for Simeon. Thanks for taking our question. Mark, can you quantify how much the gross margin expansion was due to fewer wholesale sales of diamonds? And then just any thoughts going forward on the use of those sales. Thank you.

Mark Erceg -- Executive Vice President and Chief Financial Officer

Yeah. That's not something that we would typically break out specifically. What I will tell you is that we have been working really hard to ensure that we uncover every rock as it relates to cost-savings opportunities. So, we've talked about our procurement function a little bit in the past and how it's a relatively recent construct. It was only begun a couple of years back.

But just by way of an example, we currently have a portfolio, a project portfolio, in the procurement team that is over 300 projects. And we have dedicated groups that are looking at ways to have cost take-out across design and construction, information technology, a strategic sourcing team, a corporate services team. We have teams dedicated toward marketing and design and construction, as well as packaging. IT contract is a specific area that we have dedicated groups against as well.

And so maybe just for the purposes of an example, I can kind of point out one thing that was just recently done. This was a project that started in September. It was completed in October of this year. And we basically took 18 credit card processing providers, 18 that we had used across the EMEA region -- this was across 11 different countries -- and we put in place an RFP process, where we worked with the business to understand exactly what the requirements were, and we were able to go from 18 providers across EMEA for credit card processing down to one. We did that in a way where we can now have more customer payment forms accepted, like Alipay and WeChat, which, again, makes it more consumer-friendly. And in doing so, we also reduced the costs that we were paying for the credit card processing fees by over 40%, as an example.

So, gross margin, there's a lot of things that go into that. We don't want to get too specific or too granular on teasing out any one given element. But I can assure that the cost take-out programs that we have across the company are pervasive and becoming more and more so each and every day.

Dan Stroller -- Nomura Instinet -- Analyst

Got it. Thank you.

Operator

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

Brian Tunick -- RBC Capital Markets -- Analyst

Great. Thanks. Good morning, guys. Curious. Maybe, Alex, you could talk about sort of how you feel about product innovation pipeline and maybe some more details on the product categories. Specifically, as you head into 2019, sort of how do you think Tiffany looks, position-wise, from product newness? Any big ideas versus maybe previously -- before you joined the company? And second question, just maybe on Europe, maybe give some more color on the improvement there and if you think the worst is behind the company from a macro perspective in Europe. Thank you very much.

Alessandro Bogliolo -- Chief Executive Officer

Thank you, Brian. Well, in this year, in 2018, we started accelerating product innovation. This was the beginning of our program. It happened with Paper Flowers. The results so far are encouraging and especially there is another factor on the entire platinum, gold, and diamond jewelry that is very positive so we are pleased with it. Difficult to say on Tiffany True. It's a pre-launch now since a few weeks in North America. Anecdotally, our salespeople are very enthusiastic about it but it's early to say about the total results.

But, definitely, we have a strong pipeline for innovation for next year. And you have to understand that this is a process I started when I joined 14 months ago and the lead time for product development, it takes one and a half years normally. So, yes, we have very solid plans for next year. We are confident on what internally we are doing about it. And so far, the results are positive and we see it from, as I said, traffic, conversion rate, and growth in existing and new customers, with domestic customers everywhere.

Brian Tunick -- RBC Capital Markets -- Analyst

And maybe some more color about Europe trends and thoughts?

Alessandro Bogliolo -- Chief Executive Officer

Well, about Europe, also there what we said about Chinese customers buying less abroad is valid also in Europe. And we have also there very strong programs for the holiday. We have an amazing initiative in the UK, in London. We have the pop-up store there in Covent Garden that has had an enormous coverage, in terms of press, and enormous traffic. We have an initiative with our partners in perfume in St. Pancras Station. I received hundreds of pictures from friends of the house about this amazing installation. So, let me say, the teams have been working very hard in order to really get the most of out of London customers.

Mark Aaron -- Vice President of Investor Relations

Next question.

Operator

Next, we'll move to Laurent Vasilescu at Macquarie.

Laurent Vasilescu-Macquarie Capital -- Analyst

Good morning and thanks for taking my question. I wanted to follow up on greater China. I see the 10-K parses out that it's approximately 60% of China's 2017 Asia Pacific revenues, which I think equates to 16% of total company revenues. Can you parse out how much the Chinese consumer represents of overall total company sales if we include shopping in other regions? Is it fair to say 25%? And then can you maybe quantify if greater China grew overall this quarter if we include Hong Kong and Macau?

Alessandro Bogliolo -- Chief Executive Officer

Well, when we take luxury brands -- and there are many studies that are public about this -- typically, around one-third of the total business nowadays is made with Chinese nationals. And typically the split is, of this 33%, one-third is made in mainland China and two-thirds is made up of Chinese nationals spending abroad. Now, these are industry-general data. At Tiffany, we are, more or less, in that range as well. So, this explains also the concerns we have about Chinese travelers because it's an important portion of our business. And on the other side, explains why we are satisfied with the growth in mainland China because that is the real engine of growth.

Laurent Vasilescu-Macquarie Capital -- Analyst

Okay. Very helpful. Thank you very much. And then as a quick follow-up, year-to-date, the free cash flow was slightly down. To get to the $300 million in free cash flow for the year, Mark, maybe can you walk us through the fourth quarter cash from operations to get to the full-year guide?

Mark Erceg -- Executive Vice President and Chief Financial Officer

Yeah. What I would tell you is that we modified our language just a little bit as it relates to free cash flow. The short answer, in the interest of time, is that it relates to tax payments. As you can imagine, there's been a lot of moving parts on the corporate tax law changes and the tax payments will be what drives the slight differential in our free cash flow guidance.

Laurent Vasilescu-Macquarie Capital -- Analyst

Okay. Very helpful. Thank you very much.

Operator

We'll move next to Bob Drbul at Guggenheim Securities.

Robert Drbul -- Guggenheim Securities -- Analyst

Hi, guys. Good morning. I was just wondering if you could talk to the Blue Book event, how that was received generally and if you did anything different this year versus last year. And just an update on the investment you were making in the high-end jewelry and sort of where we are in that initiative as well. Thank you.

Alessandro Bogliolo -- Chief Executive Officer

Thanks, Bob, because that is an important initiative and we haven't had the opportunity to expand on it. You know that every year, we have two major high jewelry events, one in the first semester and the second one in the second semester, in addition to more regular activities that we do. This year, the event that we held in New York, we call it Blue Book, was held in the second part of the year -- actually, in October -- while last year, it was in the first part of the year. But still there were two events in the two parts of the year both last year and this year.

Now, the difference is about this Blue Book -- there were two major differences. One is that we have a new Chief Artistic Officer so this is why we decided to have the New York event in the fall instead of the spring, in order to allow him to have more time with his team to design these amazing pieces. And the second thing is that, as we announced a couple of quarters ago, we have invested more in more important stones that, of course, go in this high jewelry.

And so in this Blue Book event, there were more important pieces of stones than normally. I have to say that the reaction of customers have been very, very positive to both factors. Both the design innovation brought by Reed and his team, as well as by the extremely -- I will say the exceptional stones that we offered to our customers that were very, very well-received.

Robert Drbul -- Guggenheim Securities -- Analyst

Great. Thank you very much.

Alessandro Bogliolo -- Chief Executive Officer

Thank you.

Operator

We'll go next to Dana Telsey at Telsey Advisory Group.

Dana Telsey -- Telsey Advisory Group -- Analyst

Hi. Good morning, everyone. As you think about the collections, the category performance in jewelry, engagement, and designer jewelry, how does it break out between the regions? Is there anything you saw differently, particularly relative to the change in performance and designer jewelry? Thank you.

Alessandro Bogliolo -- Chief Executive Officer

Overall, looking at product performance by category, and even at the more granular level of the collections, etc., there was not a change in pattern between the third quarter and the first part of the year. The only exception is about designer, specifically Peretti. There were several factors. Probably the most relevant one is that the Peretti Collection is traditionally very strong in Japan and Japan has been more affected because of the results that we said in this last quarter. But apart from this detail, I will say really no product-related changes in performance.

Dana Telsey -- Telsey Advisory Group -- Analyst

Thank you.

Alessandro Bogliolo -- Chief Executive Officer

Thank you.

Operator

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

Laura Champine -- Loop Capital -- Analyst

Thanks and good morning. In your 10-Q today, you spelled out that over the next three years, you'll see about $0.10 to $0.15 of pressure each year on EPS from the New York flagship remodeling. Can you put that in context by telling us about how much pressure you'll see from the remodelings in the chain overall globally over the next three years?

Mark Erceg -- Executive Vice President and Chief Financial Officer

I guess what I would say is -- I'd offer two things, one just to provide additional clarity on what we said about the flagship project. We did say that it would be about $0.10 to $0.15 of cost during the construction build-out, in effect. We did say that about $0.07 of that would be already absorbed and incurred in the current fiscal year and so the year-over-year differential will be another, call it, $0.07 or $0.08 incrementally year versus year.

As far as the other question is concerned, we've been building out our store network over the last many years and the amount of CapEx we plan to spend going into '19 and the amount of money that we spend in '18 for the base store network will be comparable to what we spent, in effect, in '16 and the prior year. So, I wouldn't expect there to be a meaningful change in our burn rate or our cost as it relates to the underlying store network. And then, of course, the flagship does come on top but that's what spoke to that $0.10 to $0.15.

Laura Champine -- Loop Capital -- Analyst

Got it. Thank you.

Operator

We'll go next to Alexandra Walvis at Goldman Sachs.

Alexandra Walvis -- Goldman Sachs -- Analyst

Great. Thank you so much for taking the question. I was wondering if we could reflect for a moment on some of the new launches in the last year, in particular Everyday Objects and Paper Flowers. A year into that process of some of these new collections, I was wondering if there is anything that had surprised you in terms of the shake of demand following the launches. For example, was the initial pop in demand higher than expectations and how persistent has demand for those product areas been since the initial launch? And then I suppose, finally, have the trends that you've observed in that respect changed the way, at all, that you think about how you're introducing newness into the collection in the future?

Alessandro Bogliolo -- Chief Executive Officer

Thank you, Alexandra, for your question. Well, we are very pleased, actually, with the performance of home and accessories as well as Paper Flowers. I mean, it's in line with our expectations. You have to understand that in our business, in jewelry, newness is important but is not -- is extremely important when it comes to messaging, to driving traffic. It's not so radical when it comes to sales, in the sense that it's different from fashion, when you have a new collection that can represent 20%, 30%, 40%, 50% or even more of your sales. This is absolutely not the case in jewelry, where the strength of every brand are the pillars of iconic designs that remain successful for the cave. And this is the case of Tiffany, with Peretti, with Hardwear, with Keys, as it is for the best jewelers in the world.

So, overall, we are pleased and I think that we wouldn't have had an increase in traffic in our stores if our launches were not well-received. People would have not come to the stores. Then they come to the store and some buy new products but most of the customers tend to buy iconic existing products, which makes us very happy.

Also, because this allows efficiencies when it comes, for example, to manufacturing to the gross margin. I mean, we didn't talk so much about gross margin until now in this call but this is something that has improved in the year and in the quarter and I think is a sign of a healthy business and of, also, efficiencies on the manufacturing point of view, which we are very happy. Thank you.

Alexandra Walvis -- Goldman Sachs -- Analyst

Thanks.

Mark Aaron -- Vice President of Investor Relations

Okay. Operator?

Operator

Yes. Please go ahead, sir.

Mark Aaron -- Vice President of Investor Relations

It's now 9:30 a.m. so I think we're going to wrap it up.

Operator

And that does conclude today's conference. Again, thank you for your participation.

Duration: 59 minutes

Call participants:

Mark Aaron -- Vice President of Investor Relations

Alessandro Bogliolo -- Chief Executive Officer

Mark Erceg -- Executive Vice President and Chief Financial Officer

Paul Lejuez -- Citigroup -- Analyst

Omar Saad -- Evercore ISI -- Analyst

Brian Nagel -- Oppenheimer & Co. -- Analyst

Michael Binetti -- Credit Suisse -- Analyst

David Schick -- Consumer Edge Research -- Analyst

Oliver Chen -- Cowen and Company -- Analyst

Erwan Rambourg -- HSBC -- Analyst

Francesca Di Pasquantonio -- Deutsche Bank -- Analyst

Dan Stroller -- Nomura Instinet -- Analyst

Brian Tunick -- RBC Capital Markets -- Analyst

Laurent Vasilescu-Macquarie Capital -- Analyst

Robert Drbul -- Guggenheim Securities -- Analyst

Dana Telsey -- Telsey Advisory Group -- Analyst

Laura Champine -- Loop Capital -- Analyst

Alexandra Walvis -- Goldman Sachs -- Analyst

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