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Tiffany & Co  (NYSE:TIF)
Q1 2019 Earnings Call
Jun. 04, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to this Tiffany & Company First Quarter 2019 Conference Call. Today's call 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; Mr. Mark Erceg, Tiffany's Executive Vice President and Chief Financial Officer, and Mr. Jason Wong, Vice President and Treasurer.

And at this time, I would like to turn the conference over to Mr. Mark Aaron. Please go ahead.

Mark L. Aaron -- Vice President of Investor Relations

Thank you everyone for joining us on today's call. We issued Tiffany's first quarter results earlier today with a news release and with the filing of our quarterly report on Form 10-Q. I hope you've had a chance to look at the financial results, which were close to what we expected. Following comments from Alessandro and Mark, we will be pleased to take your questions, and then following the Q&A session, Jason and I will wrap up the call with some closing remarks.

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 cover of Form 8-K. Those filings can be found on Tiffany's Investor website https://investor.tiffany.com by selecting Financials.

I'll now turn the call over to Alessandro.

Alessandro Bogliolo -- Chief Executive Officer

Thanks, Mark, and hello everyone. There are many positive and exciting initiatives taking place at Tiffany that should further our ability to generate healthy long-term growth. And I'm pleased to have this opportunity to provide you a brief update.

I will first state the obvious. Tiffany's results in recent quarters have not been up to the long-term growth standards we have set for ourselves. Regional results in the first quarter were slightly softer than what we expected. Worldwide sales declined 3%, following a strong 15% increase in last year's first quarter. However, worldwide sales on a constant exchange rate basis were equal to the prior year with sales growth in Asia-Pacific and Europe on that same basis offset by a decline in the Americas and unchanged results in Japan.

We believe that external pressures had a significant impact on sales. For example, we believe that the strong dollar had a meaningful impact on first quarter retail sales attributed to foreign tourists in the Americas. Our internal estimates indicate that those tourist sales represent a low double-digit percentage of our American retail sales. Those sales were down approximately 25% from a year ago with sharper declines among Chinese tourists, which in fact were even more pronounced than declines in the second half of last year.

However, our internal estimates also indicate that constant currency retail sales to local customers, which we believe are much more -- much better indicator of underlying brand strength and our future growth potential, were up by approximately 3% on a global basis during the first quarter with strong growth in Mainland China being particularly noteworthy. This is why we remain focused on the strategic priorities which are within our control and that identify and are aggressively pursuing numerous ways we can enhance the excitement and relevance of this amazing brand. We strongly believe that effectively executing our strategic priorities, first and foremost, will be what takes this company to new heights of success.

Let me give you a few examples. Our strategy to renew our product offerings continues to gain momentum. After successfully launching the platinum and diamond based Paper Flower collection last year, we are continuing to add new design to this collection. Another major collection we recently introduced is the Tiffany True collection, featuring an innovative modern engagement ring design with a new diamond cut in a gold or platinum setting as well as with accompanying band rings.

Finally, on a smaller scale, we have recently introduced Tiffany Love Bugs that complements our Return to Tiffany collection. Importantly, we have also included a gold version of Return to Tiffany Love Bugs in addition to silver, which is consistent with our strategy to continue driving higher the average transaction value across all of our product categories.

And I can tell you that we have a substantial amount of newness planned for the second half of the year with additions to the Tiffany T and HardWear collections among others. And I'm also pleased that we now have even greater visibility into our product innovation pipeline for the next several years, and I'm excited about what is being developed.

We are also steadily progressing with our strategy to amplify and evolve brand message. Focused on our most iconic collections and especially Tiffany T, the current campaign showcases beautiful Tiffany jewels worn by a cast of some of the most recognizable and richly diverse fashion models in the world. The brand's unique, joyful attitude and iconic blue color makes the campaign unmistakably Tiffany. Importantly, the campaign is truly a digital first campaign with most of the investments and assets directed toward social and other digital media.

I should also highlight the publicity we received and substantial impressions that were made in social media after Lady Gaga appeared at the Academy Awards in late February wearing the legendary 128-carat Tiffany diamond, and we are making substantial progress to enhance our in-store presentations. We launched our global display enhancement initiative last year to add fresh and innovative elements of visual merchandise into our stores in North America and we are now on track to complete the rollout of that initiative through all stores globally by this fall.

We have also added some new stores in the first quarter. We opened our first store in Washington D.C. in the new CityCenterDC luxury complex. We also completed the relocation of our most important store in Australia when we opened the magnificent new store at the corner of Pitt and King Streets in Sydney.

We are continuing our exciting development in Mainland China this year and total sales continued to grow by a double-digit rate in local currency in the first quarter. Our recent initiatives included relocating our store in Beijing's China World to an exceptional location with a rare design 6,000 square foot format, showcasing an innovative and distinctive retail experience that encourages interaction and self-expression. Also, we opened a concept store in Japan on Tokyo's Cat Street. Located in Harajuku, the experiential design for Tiffany at Cat Street showcases the wit, creativity and timeliness of the brand. From jewelry to home and accessories, the store offers a thematically curated selection and presentation of iconic designs and even houses a cafe at the top floor.

In term of our project to transform the New York flagship store into a 21st century experience, construction has begun on the adjacent space with an anticipated completion of that temporary space by year-end. Once completed, we will shift most of our retailing space to that adjacent location for 2020 and 2021. Complementing the store base, we relaunched all of our global websites in the first quarter, which going forward will allow us to offer a blended experience of content and commerce with enhancements that we expect will enable us to more effectively test, personalize, and optimize content and ultimately ensure a better customer experience in the long term. In addition, for the first time, customers in the US can now order online from a select assortment of diamond engagement rings.

While we are understandably excited about these new capabilities, we did make the conscious decision to suspend digital marketing for a portion of the first quarter to ensure that our newly revamped websites could handle the load balances associated with the complete digital replatforming and we believe that decision, while prudent, negatively impacted the first quarter sales, although e-commerce sales still grew faster than total company sales. It is probably also worth a second to mention that we are getting closer to introducing an e-commerce enabled website in China, which we believe will further strengthen our business in this important market.

So in closing, we are pursuing a substantial number of initiatives to benefit our customers and drive sales and earnings growth as we move forward on this long journey. We certainly do not believe that first quarter results are indicative of our longer-term earnings power and the recent external pressures will not sway us from the growth opportunities available to us.

And now Mark Erceg has a few comments before we open up the call to all the questions.

Mark J. Erceg -- Executive Vice President and Chief Financial Officer

Thanks, Alex. As Alex indicated, first quarter reported sales results were slightly lower than anticipated, but broadly in keeping with our overall guidance for the year, which called for a soft first half due to a very strong base period, lower foreign tourists spending and meaningful FX headwinds, followed by stronger second half results as year-over-year comparisons get easier, foreign exchange pressures lessen, and the bulk of our 2019 new product launches and associated marketing support reaches the market.

Since we expected first quarter sales to be under pressure and we knew that the incremental strategic investment spending, which began during the second quarter of 2018, needed to be fully annualized, we correctly anticipated downward earnings pressure in the first quarter, which is consistent with the results we just released.

Gross margin was below last year, which reflected negative sales leverage on fixed costs that are included in cost of sales as well as shifts in sales mix, including an increase in higher price point jewelry, that earns a lower gross margin and an increase in wholesale sales of diamonds that earn little at any gross margin, partly offset by lower product related costs.

SG&A expense growth was restrained in the quarter through tight expense management, including cost savings from our global procurement program, labor cost reductions through organizational efficiencies, and of course, variable cost savings tied directly to sales.

Our effective tax rate for the quarter was lower than anticipated due primarily to an increase in the estimated 2018 foreign derived intangible income benefit we realized as a result of recently issued US Treasury guidance. That said, we continue to believe that our all-in effective tax rate for the full year will be in the low 20s.

Net inventories as of April 30th were 6% above the prior year as we continue to work off higher than expected post-holiday levels, but importantly, we continue to expect minimal year-over-year growth by year-end.

Our balance sheet remains strong, having finished the quarter with $763 million of cash, cash equivalents and short-term investments, compared with just over $1 billion of total short-term and long-term debt. This enables us to reinvest in the growth of our business while also returning cash to shareholders. For example, we are spending more on capital expenditures for the next couple of years to support the transformation of our New York flagship store, while we also continue to invest in the modernization of our IT infrastructure.

At the same time that we're investing in the future of our business, we are returning cash to shareholders as evidenced by $25 million we spent during the quarter to repurchase approximately 270,000 shares of common stock. In addition, our Board of Directors has approved a 5% increase in the quarterly dividend rate, which is consistent with our stated objective to move, over time, our dividend payout ratio closer to 50%. This was the 18th dividend increase in the past 17 years.

Operationally, we are pleased with the progress being made with our IT system upgrades. Since our last earnings release, we have upgraded our e-commerce digital platforms and activated a new advanced supply chain planning system, which should enable more sophisticated load management and production scheduling across our suppliers and our vertically integrated manufacturing network.

So all in all, we've just reported an admittedly soft, but mostly anticipated and overall productive start to 2019, during which a number of strategic initiatives continued to advance. From a guidance standpoint and relative to the top line, we are being impacted by further declines in foreign tourist spending, but we continue to look for low single digit sales growth for the year. Relative to the bottom line, we implemented some modest pricing actions toward the end of the first quarter and have plans for strict cost control management throughout the balance of the year, but we are being affected by the softness in foreign tourist spending, and to a lesser extent, the recent imposition of higher tariff rates on jewelry products that we export from the US into China and our decision to not meaningfully increase our retail prices in China at the present time.

Since we are determined to properly support and protect our business in Mainland China against our principal competitors who do not have to contend with higher import costs into China based on their unique sourcing locations, and after taking everything else we've discussed today into account, we think it is prudent to modestly widen our earnings per share guidance range from mid-single-digit growth to low to mid single-digit growth. And of course, as we mentioned on our last call, we should not lose sight of the fact that EPS growth in 2019 is expected to be affected by incremental expenses tied to the New York flagship store renovation, which we estimate at $0.10 to $0.15 per share in 2019 versus $0.07 per share last year, as well as a change in accounting standards that no longer allows us to recognize approximately $8 million per year of deferred gains on previous sale leasebacks.

So with that, I'll turn the call back to Mark.

Mark L. Aaron -- Vice President of Investor Relations

Thanks, Alessandro and Mark. Before we take questions from analysts, and I know there are many of you in the queue, I will first ask everyone to please limit yourselves to one question so that we can answer as many questions as possible before ending the call by around 9:30. If there is time at the end, you can put yourselves back in the queue. Operator, we're now ready to take the first question.

Questions and Answers:

Operator

Thank you. (Operator Instructions) We will now take our first question from Paul Lejuez from Citigroup. Please go ahead. Your line is open.

Tracy Kogan -- Citigroup -- Analyst

Thanks. It's Tracy Kogan filling in for Paul. I had a couple of questions. I was hoping you could talk about your performance on some of the higher traffic periods like Valentine's Day and Mother's Day, so around those periods. And also if you could give us a little bit more detail on your local market performance by region. Thanks.

Alessandro Bogliolo -- Chief Executive Officer

Thank you for -- Tracy, for your question. Well, the first quarter -- well, of course, is not the biggest quarter in seasonality for our business. Of course, there was Valentine's Day and Mother's Day, but I would -- I mean, there is nothing really particularly noteworthy on this. I think the comments refer more to the entire quarter where our business with local customers on a global basis was positive. In constant currencies, we grew by 3% and we noticed this growth spread around the different geographies, led first and foremost by China.

Tracy Kogan -- Citigroup -- Analyst

Great. And then how about the local customers in the US? Any comment there, did it get better versus fourth quarter or did it decelerate? Thanks.

Alessandro Bogliolo -- Chief Executive Officer

In the US, the performance of local customers have been -- has been positive, but we have seen some degree of caution in the US customer.

Tracy Kogan -- Citigroup -- Analyst

Thank you. Great.

Alessandro Bogliolo -- Chief Executive Officer

Thank you.

Operator

Thank you. We will now take our next question from Lorraine Hutchinson from Bank of America. Please go ahead. Your line is open.

Lorraine Hutchinson -- Bank of America Merrill Lynch -- Analyst

Thanks. Good morning. I wanted to follow up on the second half sales opportunities. It sounds like the Chinese consumer spending has actually gotten worse in the first quarter, so maybe you could see some continued weakness as you continue to lap that through the year. What are your -- any specific product launches, marketing changes, store updates? Maybe just help us gain some confidence in that back half sales acceleration that you're expecting. Thank you.

Alessandro Bogliolo -- Chief Executive Officer

Thank you, Lorraine. We have a very busy second (technical difficulty) in terms of many initiatives. First of all, in terms of new products; then I would say marketing campaigns, enhancement in stores' visual merchandising. We have, as you mentioned, a year-over-year comparison that becomes easier, more favorable to us, and we bank on the assumption that the Chinese tourist spending will level off after the sharp decrease we registered starting from the third quarter of last year.

Having said so, we have a lot of initiatives in different areas. It goes from important store relocations and openings for the second part of the year as well as on a difficult -- on a different point, the launch after the very successful signature fragrance that we launched a couple of years ago, the launch of a new pillar fragrance in the second part of the year in the fall. So let me say the agenda is very busy; the teams are working very hard on all the different areas, and this is why we feel confident for a stronger performance in the second part of the year.

Mark L. Aaron -- Vice President of Investor Relations

Next question?

Operator

We will now take our next question from Bob Drbul from Guggenheim Securities. Please go ahead. Your line is open.

Robert Drbul -- Guggenheim Securities -- Analyst

Hi. Good morning. And Mark, I'm not sure if this is your last call with us, but thanks for everything. I don't know if you're doing the one in August. The first question I have is, around the engagement category, can you just talk about trends in engagement and sort of how you see that as a sort of underlying business metric? And then the second question that I have is, can you just talk about your ability to sort of gain new customers, bring new customers with a lot of the marketing that you're doing? Thanks very much.

Alessandro Bogliolo -- Chief Executive Officer

Thank you, Bob. I will start from the second question that is about new customer and existing customers because I think it's a very relevant point. What we have seen in local customers is a growth, overall 3% at constant exchange rate. Now, this growth has been driven both by existing customers as well as new customers. And what is very relevant to share with you is that we have just completed the regular annual health -- brand health survey that we do in the key markets, and so we are now able to compare our brand, how it is perceived now compared to when it was when the last survey that was more than one year ago, so before the new marketing campaigns that we launched last year. And I'm pleased of the results because we have seen, for example, in the US, an increase in relevance for -- and distinctiveness of our brand among consumers, especially sophisticated consumers, and we have recorded a very strong increase in brand power in China for the Tiffany brand. So I'm feeling very confident about the steps we have taken in the last 12 months in terms of new communication because in this -- at least in these two key markets, it's showing that it has strengthened the brand. And this, I think, answer to your question about both existing customers and new customers, we are seeing progress in both of them.

Mark L. Aaron -- Vice President of Investor Relations

Bob, thanks for your kind words. Next question.

Operator

Thank you. Our next question comes from Erwan Rambourg from HSBC.

Erwan Rambourg -- HSBC -- Analyst

Yeah. Hi, good morning, gentlemen. I wanted to take this opportunity also to tell Mark, thanks for all the help and insights over the years and welcome to Jason. I wanted to focus on the US and wanted to get a sense of the American consumer. What percentage of the US is local in nature? And would you attribute the 4% comp decline mostly to tourism flows or is there maybe an impact of equity markets as well on the Q1? And then maybe just related to the US, my understanding is the former NikeTown location that you are refurbishing, that'll be open for the holiday. Will the lobby of the main location also be opened at that stage? Thank you.

Alessandro Bogliolo -- Chief Executive Officer

Okay. There is a -- thank you, Erwan. There are several questions altogether. Let me answer first to the last one that is easier. For holiday, the -- not only the ground floor, but the entire flagship -- current flagship building will be opened. And now let's go to the other questions that are more articulated. So first of all is about tourists in the US. The tourists in the US represent a low double-digit percentage of our total sales in the US, and we have seen a sharp decrease to sales to tourists in the US in the range of 25%, even sharper for Chinese tourists. And this is in line, if not even a little bit stronger trend than we had seen in the past couple of quarters.

Now, this is on -- I mean, it of course has a negative impact on the comp sales in the US because double-digit percentage of sales depends on tourists, and so of course, this affects the overall. And as I said, the local -- the domestic customers were positive, but with, I would say, quite cautious. What is important for me is the relevance of the brand with Chinese customers that keeps on being confirmed by the strong performance in China.

Mark J. Erceg -- Executive Vice President and Chief Financial Officer

The one thing I would offer and add to that is we did see a little bit of a difference between what took place with respect to Chinese tourism in the US relative to non-Chinese tourism in the US. We actually saw the Chinese tourism for US retail fall off toward the latter part of the second quarter of last year, but principally into the third. But other tourism to the US really started to denigrate in the fourth quarter and has continued since that time.

Mark L. Aaron -- Vice President of Investor Relations

And to Erwan's question about whether the declining stock market might have some effect on consumer psychology.

Alessandro Bogliolo -- Chief Executive Officer

Well, referring specifically to the US customer, I think that this caution is linked to several factors. I mean, first of all, we have seen all the confidence index of the consumers in the US, that is in this first quarter of the year, is pretty low compared to exactly one year ago when it was extremely high. We have seen also brands in the -- big brands in the cosmetic industry, in the fashion industry, if you look also department stores in the US reporting soft sales in the first quarter and they are all brands that have a big presence in the entire country of United States. So it's positive, but it's very cautious.

Erwan Rambourg -- HSBC -- Analyst

Thank you. Best of luck.

Alessandro Bogliolo -- Chief Executive Officer

Thank you, Erwan.

Operator

Thank you. Our next question comes from Laurent Vasilescu from Macquarie. Please go ahead. Your line is open.

Laurent Vasilescu -- Macquarie -- Analyst

Good morning. Thank you very much for all the commentary on the US tourism decline of 25%. Mark, could you -- can you tell us a little bit about what you're contemplating for US tourism decline for the overall top line guide for this year? And then, any commentary on the shape of the gross margin curve for the year as it progresses would be very helpful.

Mark J. Erceg -- Executive Vice President and Chief Financial Officer

Thank you. I'd tell you, the tourism one is hard for us to be overly predictive, but we are a new trend taker, so to speak. Just like we take spot effects and presume that's what holds for the balance of the year, we're kind of doing the same thing here with the tourism. We are not assuming things get any better, but we're also not necessarily assuming things get any worse. Just that the trends that we have seen continue on. Now, realistically and practically, we are hoping that once we get to the third quarter, the rate of reduction that we've seen in Chinese tourism, we're hoping that that moderates because frankly it was such a swift decline, it'd be kind of hard to believe that year-over-year we could see a continuing step down of that magnitude. But at this point, we're not being overly optimistic. We don't have our second half plans predicated upon tourism suddenly coming back to us, which is something we can't control.

As for the gross margin, when you think about what happened in the first quarter, there was really three factors. One was the wholesale sale of diamonds, which we really can't be overly predictive of. We get the rough boxes in, sometimes we get to reprocess those and push them back out if it's not Tiffany quality. We also saw some negative sales leverage on fixed costs. I would expect that to continue for another quarter or so, but certainly by the second half of the year, when we are ramping back up for our second half product launches and things, we expect our factory loads to be much more balanced. So that should be kind of a temporary phenomenon.

And then as far as the mix is concerned, we talked about the fact that we sold a lot of additional higher price point items in the first quarter and that's really, at the end of the day, probably a good thing for us. So as we think about the full-year on a margin basis, we knew the first half will be tough. We expect to make up ground in the second half, and so when the dust settles out on the full year, based on the guidance we've given, we would expect operating margin to be flat to maybe slightly up as we sit here today.

Laurent Vasilescu -- Macquarie -- Analyst

Very helpful. Thank you very much.

Operator

Thank you. Our next question comes from Dana Telsey from Telsey Advisory Group.

Dana Telsey -- Telsey Advisory Group -- Analyst

Good morning, everyone. And Mark, best of luck. What a pleasure overall, the years. As you think about the guidance for the year and just the cadence of the guidance, SG&A, and also as you just commented on gross margin, new product introductions, when should we see them and how do you think about expense management during the year given the investments that are being made? Thank you.

Mark J. Erceg -- Executive Vice President and Chief Financial Officer

I'll let Alex comment on the new initiatives, which we're very excited about, but as far as expense management, I hope you did see, as you looked through the first quarter results that, the SG&A growth really was restrained, and that's a testament to the fact and the hard work that the entire organization is doing to make sure that we are really only spending money on things that can drive sales growth at the end of the day. I would expect that to continue throughout the years, our procurement programs and other initiatives that we've discussed in the past continue to take hold, but there will be very tight reins on cost so that we can fuel additional investments in growing the business.

Alessandro Bogliolo -- Chief Executive Officer

Yes. And in terms of plans for the second part of the year, we will keep on pursuing the strategy that we have started last year and I refer first and foremost to products, which is the most important thing we have because what we have been doing has been to launch, starting from Paper Flowers in platinum; then Tiffany T True in platinum and gold and the jewelry in gold. We will continue with this approach of introducing newness, mainly in gold at very accelerated pace.

And so far, even if it is only one year, we are seeing that in our results, the growth in revenues comes from the newness and especially from the newness in gold, and the higher the price, the higher the performance. So this, we find it very reassuring for the strategy we have taken, and also reinforcing the brand and clearing if anybody has a doubt that Tiffany is a luxury brand, clearing definitely this doubt, because we are seeing increasing average transaction value and strong performance in the gold and more precious categories. We believe this is positive for the brand in the short term and the long term and the launches that we are foreseeing for the second part of the year continue in this same strategy.

Dana Telsey -- Telsey Advisory Group -- Analyst

Thank you.

Alessandro Bogliolo -- Chief Executive Officer

Thank you, Dana.

Operator

Thank you. Our next question comes from Michael Binetti from Credit Suisse. Please go ahead.

Michael Binetti -- Credit Suisse -- Analyst

Hey guys, thanks for all the detail today, Alessandro and Mark. And then, Mark Aaron, let me add my congrats and thank you for all your help over the years.

Mark L. Aaron -- Vice President of Investor Relations

Thank you.

Michael Binetti -- Credit Suisse -- Analyst

I wanted to just -- thanks, Mark. So I wanted to just ask, on the SG&A, it looks -- I'm trying to think about the cadence of this year and as you stepped it up last year and second quarter, you talked about that. You'll anniversary that this quarter. But I think you mentioned managing costs in both 4Q and now 1Q. So was any of that SG&A had to be pushed out to the second half of this year perhaps to support the comp acceleration that you're looking for around the innovation pipeline? And then I guess, as we think about trying to connect that to next year, Mark, maybe you could just remind us what are the components that are allowing you to lever SG&A and a low single-digit comp this year? And do those go back into the algorithm next year as we think out to 2020?

Mark J. Erceg -- Executive Vice President and Chief Financial Officer

Yeah. Thank you for the question. So with respect to the first portion of what you asked, when you think about when we really started stepping up our investment spending profile, last year it was principally in the second quarter. So we said we needed to really lap and annualize that. (Technical Difficulty) any costs or charges or investments in the first quarter of this year that maybe slipped a little bit toward the second quarter, third quarter. And Alex commented it in our prepared remarks about the decision we took to send some digital marketing elements (Technical Difficulty) stood up our 13 global e-commerce enabled sites. So that arguably was a little bit of a push.

From this point forward, I would say that the run rate you're going to see as far as investment spending, marketing support, inflow of dollars, I think would be fairly steady and constant from Q2 through the balance of the year. And then from that point, we already have elevated and stepped up the amount of spending we think is appropriate in order to sustainably grow the business. So I think at this point, most of that is now behind us, which is important.

As far as the cost takeout efforts are concerned, however, I think I would tell you that we (Technical Difficulty) runway with respect to that. The global procurement group has been around for a number of years. They continue to do really good work. We're standing up a Source to Pay system as we speak, which will give them visibility into all of our focused spend pools, which is something they haven't had up to this point in time. We're doing a lot of work with our suppliers and our supplier enablement and putting supplier scorecards in place, doing a lot more diligent tracking, as it relates to that. The jewelry design and innovation work that we've talked about before has been a great intervention where we bring the (Technical Difficulty) and the designers and the engineering group together to let us do (Technical Difficulty) costing, build rapid prototypes, allows us to do (Technical Difficulty) modeling.

I mentioned in the prepared remarks about the advance planning system we just stood up on the manufacturing side of the house. This was a multi-million dollar project that spanned well over a year and took a lot of multi-functional participation, but it's going to allow us to optimize our inventory levels, it's going to allow us to make better make versus buy decisions, it will enable much more sophisticated capacity planning. I mean, frankly we've been managing our production loads on Excel spreadsheets up to this point in time across our factory network. So being able to do master scheduling across all of our facilities and vendors and detailed production scheduling for each manufacturer, those types of things are big enablers for us. So I could go on, but I think that should give you some sense of the things that we're working against.

Michael Binetti -- Credit Suisse -- Analyst

Okay. Thanks a lot.

Operator

Thank you. We will now take our next question from Brian Nagel from Oppenheimer. Please go ahead. Your line is open.

David Bellinger -- Oppenheimer -- Analyst

Hey, good morning. It's David Bellinger on for Brian. First of all, thanks for everything, Mark. Appreciate all your help over the years. I just wanted to follow up on the weaker sales to the foreign tourists, so estimated down 25% from last year's Q1 levels. Can you tell us how much lower that figure is versus what we saw in the later stages of 2018? And can you speak to how the trend tracked throughout Q1? Are there any indications you're -- of stabilization, you're seeing there throughout the business?

Mark J. Erceg -- Executive Vice President and Chief Financial Officer

I guess what we would say is, the sharp decline we saw in Chinese tourists of US retail really presented itself for the first time in June of last year and we have been running down significantly since that point in time. That said, the reduction that we saw in the first quarter was even more extreme than what we experienced in the third quarter of last year as well as the fourth quarter of last year. So the good news there, if there is any, is the fact that we're starting to come up upon when we should at least start lapping that in the base period.

As far as the other tourism is concerned, again, I mentioned that that is a fall-off in the fourth quarter and that has continued as well. Within the quarter itself, I'm really hesitant to say anything about month to month because, again, this is internal data. This is some work that we do from an estimation standpoint. There is not a third party to fully validate all of this. It's all internal sourcing, which we believe is good and accurate, but I wouldn't want to read much month to month. I think the quarter-to-quarter trends are probably more relevant.

Alessandro Bogliolo -- Chief Executive Officer

Yeah. Absolutely. Because consumer tour (Technical Difficulty) swings from one market to another. It's actually part of our business. But these are trends that can be read on a three, six, 12 months basis. I mean, all those happen, I mean, I don't think it's really relevant on a monthly basis. Thank you, David.

Mark L. Aaron -- Vice President of Investor Relations

Next question?

Operator

Thank you. Our next question comes from Janet Kloppenburg from JJK Research. Please go ahead.

Janet Kloppenburg -- JJK Research -- Analyst

Hi, everyone, and thank you so much to Mark. I'm really going to miss you. You changed the standards for Investor Relations and we're all benefiting from that. Lots of luck, Mark. I had a couple of questions on the breakdown of the engagement and fashion jewelry business. I think there was some deceleration in those categories in the fourth quarter, and I wondered about their performance here in the first quarter. And Mark, if you could just help us on SG&A. It sounds like there was a cutback in the marketing expense for the first quarter relating to e-com. How should we be thinking about the rate of increase of SG&A in the second quarter? Thanks so much.

Alessandro Bogliolo -- Chief Executive Officer

Thank you, Janet. So I will answer to your first question about the product categories. So in jewelry collections, we had a plus 1 -- reported plus 4% exchange -- exchange rate -- at constant exchange rate basis performance. Now, in jewelry collections, as I said before, we have seen a strong performance in our newest, most iconic and most precious lines. Of course, the 4% is made of this strong growth and also negative on silver, less expensive items, and of course, products that were older in our assortment. But while the 4% may seem just a low single-digit, actually for me strategically, it's very important, that is the average of some very strong growth in the lines, in which we really bank for for the future. So for me, that is strategically very important.

The 2% negative in engagement jewelry, actually see it a little bit as a flattish kind of situation. We have also to remember that we are comparing to last year when we grow at constant exchange rates 11% and the engagement did plus 11%. It was astonishing last year. So I see it as a performance we are benefiting of the launch of T True, but consider that T True engagement ring is now for the time being rolled out in the markets in the higher carat and not yet in smaller carat. So the reception by the market has been very positive and the result is in line with our expectations, but is not yet in its full potential.

Mark J. Erceg -- Executive Vice President and Chief Financial Officer

And then to your question, maybe I can scale up and answer it a little bit more broadly. I think what you're really asking about is just margin progression. If you think about the guidance we provided both on (technical difficulty) and on the top line (technical difficulty) imply that our margin will be in fact maybe slightly accretive year-over-year. Within that, what I would tell you is, we expect both gross margin as well as SG&A expense inclusive of marketing as a percentage of sales to be roughly flat year-over-year. So it's not only (inaudible) between those two lines within the overall flat to slightly above market.

Janet Kloppenburg -- JJK Research -- Analyst

Thank you.

Mark L. Aaron -- Vice President of Investor Relations

Okay. Next question.

Operator

Thank you. Our next question comes from Matthew Boss from JPMorgan. Please go ahead.

Matthew Boss -- JPMorgan -- Analyst

Great, thanks. So maybe higher level, and I know probably not easy to do, but if you exclude the impact from tourism, what's your view on consumer engagement with the brand, maybe by region? Particularly what are you seeing from local customers here in the US and the driver of the strength that you mentioned in Mainland China?

Alessandro Bogliolo -- Chief Executive Officer

Thank you, Matt, for your questions. So talking about local customers, we have seen a -- actually a positive performance across geographies. The strongest one has been definitely the China -- the Mainland China customers. And I have to say that also in Europe, in spite of all the difficulties that that continent has, we have seen a pretty positive performance there, totally driven by domestic customers and because also Europe, in -- France notably, but also other markets negatively affected for that tourists component.

Now, in terms of engagement, I'm looking mostly at the other factors. That is the engagement on social media. This is why I -- in my prepared remarks, I underscored how the initiative, for example, of the red carpet Lady Gaga and also the new advertising campaign where we are using very well known models like Carolyn Murphy, Mica Arganaraz, Kendall Jenner et cetera. What we are seeing is an enormous increase in engagement on social media for Tiffany by customers.

Now, this far from being an assurance of increase of sales in the near future, but for sure is very reassuring when it comes to the connection and the relevance of the brand with local customers. So of course, as I said, I was expecting slightly better results than what we have achieved, but if I look at the -- really at the fundamentals, that is performance with domestic customers, is gold and higher price product and engagement on social media, I'm really assured about the direction we have taken in terms of strategy.

Matthew Boss -- JPMorgan -- Analyst

Great. And then just a follow-up to that. On the Chinese --

Alessandro Bogliolo -- Chief Executive Officer

Yes.

Matthew Boss -- JPMorgan -- Analyst

On the Chinese consumer as a whole, I guess if we put together the spending abroad as well as the domestic spending that you just mentioned, I guess, what's your view on the overall Chinese consumer in total relative to previous quarters?

Alessandro Bogliolo -- Chief Executive Officer

Well, we have -- it's a mix of very strong performance high in growth in Mainland China and a sharp decrease in the rest. So what we are seeing is actually shifting of the mix of sales of Chinese because a few quarters ago, our sales to Chinese customers were typically split one-third in Mainland China; two-thirds in the rest of the world. Now, the component in Mainland China has increased to about 40% and sales to Chinese outside of Mainland China, including Hong Kong, US et cetera has gone down to 60%.

Matthew Boss -- JPMorgan -- Analyst

That's helpful. Thank you.

Alessandro Bogliolo -- Chief Executive Officer

Thank you.

Mark L. Aaron -- Vice President of Investor Relations

Okay. Next question.

Operator

Our next question comes from Oliver Chen from Cowen & Company.

Oliver Chen -- Cowen & Company -- Analyst

Thank you very much and best regards, Mark. Thanks for all your help and welcome, Jason. Regarding the overall operating margin on a long-term basis, what are your thoughts on dissecting the opportunity? Just a lot of our analysis relative to competitors shows a lot of good opportunity for you to improve the margin. I guess from the angle of business mix, fixed cost leverage and comp points and also supply chain and within business mix, are you thinking like-for-like or changes? Just would love color around buckets on that long-term opportunity. Thank you.

Mark J. Erceg -- Executive Vice President and Chief Financial Officer

Look, we've talked about this a number of times, and we had initially stated that after making the big investment step-up last fiscal, we expected our operating margin to expand this year. We're still hopeful that that could occur, but with the sharp reduction in tourism, we're now effectively saying it could be flat, maybe slightly up. If you look past the current year and you try and get past all these temporal effects that are affecting the business, we still are confident and believe that we should be able to, through our cost management efforts and through growing the top line in a more consistent fashion, extract margin gains of roughly 50 basis points per annum and that would over time obviously move us to a much better place. So without getting overly specific in the limited amount of time we have available for this call, I would simply say that our long-term growth algorithm, we don't view it as having been changed by these temporal effects that we're seeing right now with the tourism in particular.

Oliver Chen -- Cowen & Company -- Analyst

Okay. Thank you. Best regards.

Mark L. Aaron -- Vice President of Investor Relations

Thanks.

Operator

Thank you. Our next question comes from Edward Yruma from KeyBanc Capital Markets. Please go ahead.

Edward Yruma -- KeyBanc Capital Markets -- Analyst

Hi, good morning. Mark, thanks for all the help over the years. You've been incredibly helpful in understanding the story. I guess just two quick ones from me. First, I know it's early days, but any initial reads on diamonds on e-comm? And then second, I know you said you've had good results in Mainland China, but any negative perception would Tiffany being an American brand, are you seeing anything on social media that would indicate that you could have a problem going forward? Thank you.

Alessandro Bogliolo -- Chief Executive Officer

Thank you, Ed, for your questions. The first one, diamonds in e-commerce, you're right, it's very early. But I have to say that the reason why we decided to offer diamond rings on our online website for the time being in the US has been, first and foremost, in order to give information to our customers because we know out of research that the decision making for a purchaser of an engagement ring takes several steps; typically six, seven interactions at least with Tiffany before completing the purchase, and we believe that the ability that now a customer has to go on our website and understand what is the difference in terms of carat, color, clarity on the price is crucial and helps a lot the decision making. But typically it's an important purchase that is completed in the store. We have sold already some diamonds online, but that is not for me the measure of success. The measure of success is better information and better final sales in our stores.

Now, the second question, the negative perception of Tiffany in China. I have to say that we are not experiencing any negative sentiment by Chinese consumers toward the brand; for sure not in China where sales are increasing very strongly, but also abroad even if we see a softness in sales to Chinese tourists is totally linked out of our recollection to exchange rates and also to the push that authorities in China are making in order to increase local consumption. Don't forget that the VAT has decreased in the period in China, and accordingly, we have also decreased our price because we have transferred this decrease in VAT to consumers. So absolutely, we are not experiencing any sentiment that is against our brand and definitely about America.

Edward Yruma -- KeyBanc Capital Markets -- Analyst

Okay. Thank you.

Alessandro Bogliolo -- Chief Executive Officer

Thank you.

Mark L. Aaron -- Vice President of Investor Relations

Okay. Next question?

Operator

Thank you. Our next question comes from Alexandra Walvis from Goldman Sachs. Please go ahead. Your line is open.

Alexandra Walvis -- Goldman Sachs -- Analyst

Good morning. Thanks for taking the question, and I'll add my thanks also to Mark for all your support. My question is on the inventory. So you mentioned there was a bit of a build versus where sales growth was this quarter. You mentioned that some of that was as you worked through excess inventory from the holiday season. Is that still an impact from a build and -- in the strategy to build high jewelry in the stores? And if so, can you help us to break down those two pieces? Where are we in that high jewelry build and how are you thinking about the longer-term opportunity for inventory rationalization today?

Mark J. Erceg -- Executive Vice President and Chief Financial Officer

That's a great question and you're right. The high jewelry investment that we made and we were very public about hasn't fully annualized yet based on when the purchases did begin. So that is a component of it. And then of course because we did have softer holiday sales and frankly a slight disappointment on the top line relative to our internal going in projections with the tourism falling off so rapidly during the quarter, we ended up with little higher balances than we otherwise would have preferred. That said, we have worked very closely with all of our planning teams and we are still targeting and expecting to have inventories flat year-over-year when the dust settles out on January 31st of 2020.

Mark L. Aaron -- Vice President of Investor Relations

Okay. Next question.

Operator

Our next question comes from Omar Saad from Evercore ISI. Please go ahead.

Omar Saad -- Evercore ISI -- Analyst

Hey, thank you for taking my question. I was hoping you could talk about your fashion jewelry initiatives for this year. There's been some big initiatives in the statement in engagement businesses since last spring over holiday. Maybe you could give us some more ideas around what the innovation and newness we can see in that fashion jewelry business, which seems like it could be a pretty scalable opportunity for the company. Thanks.

Alessandro Bogliolo -- Chief Executive Officer

Thank you, Omar, and good morning. So for the second part of the year and -- but I would say also for the first part of next year, we have a pretty robust pipeline of new products. We will focus for the second part of this year on existing iconic lines like Tiffany T, like HardWear where we have a very good response by customers and where we believe there is the opportunity to injecting some newness that can be very effective. At the same time, we will launch also some new lines in very specific segments that probably are not going to be huge in terms of sales, but that are very meaningful for the brand positioning and they are totally accretive. And as soon as we will get closer to the date, we will be pleased to share which are these lines.

But let me say I feel very confident about the work we are doing, is I can imagine that in some of you, there is a sense of frustration because you hear me being positive about these introductions, and on the other side, you see sales that concentrate are basically flat. Now, the reason is that let aside the tourists -- tourism and all this, there is a factor that to modify, to evolve the assortment of a brand like Tiffany, it takes time, and we have to keep on going and add the newness. We are seeing that newness is paying back, but of course, the customer in front of the newness prefers the newness and leaves aside the existing products. So we will see -- we have to reach the critical mass in newness in order to give to the customer an option in our stores that is wider than it is now, and we are working very fast about this, but there are limits that are not just -- not really about manufacturing, but is also the marketing and the time that is required in order to introduce new lines in the market without creating a massive conscious (ph) in the customers. Thank you, Omar.

Omar Saad -- Evercore ISI -- Analyst

Thank you very much, Alessandro. Mark Aaron, best wishes.

Mark L. Aaron -- Vice President of Investor Relations

Thanks. Operator, it's now 9:28 AM, so on the interest of every one's time, we will now wrap up the Q&A session. But before ending the call, and as I think you all know, Tiffany recently decided to consolidate the IR and treasury functions. And as a result, I will be leaving the company later this year and transitioning the IR role to my colleague, Jason Wong, Tiffany's Treasurer on August 1. I hope to see many of you in the next two months and to introduce Jason to you at meetings and conferences. Jason has a few words to share.

Jason Wong -- Vice President and Treasurer

Thanks, Mark. I'm honored to have been selected to add the IR function to my responsibilities and I know I have big shoes to fill following Mark's incredible 34 years at Tiffany. Mark Aaron and I are working closely together so that we can ensure a smooth transition. I'm committed to maintaining Tiffany's reputation for clear, comprehensive, consistent, incredible communication to the financial community. And along with Mark Erceg, we look forward to working with our investors and security analysts to keep everyone informed about Tiffany's business and progress. Please feel free to contact me at jason.wong@tiffany.com.

I'll now turn the call back over to Mark.

Mark L. Aaron -- Vice President of Investor Relations

Thanks, Jason. In closing, I want to personally thank many of you on the call for your interest and support of Tiffany since our IPO in 1987 and for the engaging and productive dialog that we've had. I appreciate the relationships we have built and I look forward, as I'm sure you do to following the progress of this great company. For now, please feel free to contact me and Jason with any additional questions or comments about these results. Please note on your calendars that Tiffany expects to report its second quarter results on Wednesday, August 28, before the market opens. And we'll host the conference call. Operator we can now conclude the call.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.

Duration: 59 minutes

Call participants:

Mark L. Aaron -- Vice President of Investor Relations

Alessandro Bogliolo -- Chief Executive Officer

Mark J. Erceg -- Executive Vice President and Chief Financial Officer

Tracy Kogan -- Citigroup -- Analyst

Lorraine Hutchinson -- Bank of America Merrill Lynch -- Analyst

Robert Drbul -- Guggenheim Securities -- Analyst

Erwan Rambourg -- HSBC -- Analyst

Laurent Vasilescu -- Macquarie -- Analyst

Dana Telsey -- Telsey Advisory Group -- Analyst

Michael Binetti -- Credit Suisse -- Analyst

David Bellinger -- Oppenheimer -- Analyst

Janet Kloppenburg -- JJK Research -- Analyst

Matthew Boss -- JPMorgan -- Analyst

Oliver Chen -- Cowen & Company -- Analyst

Edward Yruma -- KeyBanc Capital Markets -- Analyst

Alexandra Walvis -- Goldman Sachs -- Analyst

Omar Saad -- Evercore ISI -- Analyst

Jason Wong -- Vice President and Treasurer

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