U.S. Markets open in 1 hr 52 mins

Edited Transcript of TIF earnings conference call or presentation 22-Mar-19 12:30pm GMT

Q4 2018 Tiffany & Co Earnings Call

New York Mar 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Tiffany & Co earnings conference call or presentation Friday, March 22, 2019 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Alessandro Bogliolo

Tiffany & Co. - CEO & Director

* Mark J. Erceg

Tiffany & Co. - Executive VP & CFO

* Mark L. Aaron

Tiffany & Co. - VP of IR

================================================================================

Conference Call Participants

================================================================================

* Brian William Nagel

Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

* Dana Lauren Telsey

Telsey Advisory Group LLC - CEO & Chief Research Officer

* Erwan Rambourg

HSBC, Research Division - Global Co-Head of Consumer & Retail Equity Research and MD

* Francesca Di Pasquantonio

Deutsche Bank AG, Research Division - Research Analyst

* Irwin Bernard Boruchow

Wells Fargo Securities, LLC, Research Division - MD and Senior Specialty Retail Analyst

* Kimberly Conroy Greenberger

Morgan Stanley, Research Division - MD

* Laurent Andre Vasilescu

Macquarie Research - Consumer Analyst

* Lorraine Corrine Maikis Hutchinson

BofA Merrill Lynch, Research Division - MD in Equity Research and Consumer Sector Head in Equity Research

* Marni Shapiro

The Retail Tracker - Co-Founder

* Matthew Robert Boss

JP Morgan Chase & Co, Research Division - MD and Senior Analyst

* Michael Charles Binetti

Crédit Suisse AG, Research Division - Research Analyst

* Oliver Chen

Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst

* Paul Lawrence Lejuez

Citigroup Inc, Research Division - MD and Senior Analyst

* Robert Scott Drbul

Guggenheim Securities, LLC, Research Division - Senior MD

* Rosalie M. Frazier

Goldman Sachs Group Inc., Research Division - Business Analyst

* Simeon Avram Siegel

Nomura Securities Co. Ltd., Research Division - Executive Director & Senior Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, everyone, and welcome to the Tiffany & Co. Fourth Quarter 2018 Conference Call. Today's call is being recorded.

Participating on today's call is Mr. Mark Aaron, Vice President of Investor Relations; Mr. Mark Erceg, Tiffany's Executive Vice President and Chief Financial Officer; and Mr. Alessandro Bogliolo, Tiffany's Chief Executive Officer.

At this time, I'd like to turn the call over to Mr. Mark Aaron. Please go ahead.

--------------------------------------------------------------------------------

Mark L. Aaron, Tiffany & Co. - VP of IR [2]

--------------------------------------------------------------------------------

Thank you. Thank you, everyone, for joining us on today's call. Earlier today, we issued Tiffany's fourth quarter and full year results with the news release and the filing of our annual report on Form 10-K. I hope you've had a chance to review at least some of the results.

Following some comments from Alessandro and Mark, we'll 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-K filed earlier today with the Securities and Exchange Commission as well as the news release filed today under cover of Form 8-K. Those filings can be found on Tiffany's website, https://investor.tiffany.com, by selecting financial information.

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

--------------------------------------------------------------------------------

Alessandro Bogliolo, Tiffany & Co. - CEO & Director [3]

--------------------------------------------------------------------------------

Thanks, Mark, and hello, everyone. Mark Erceg and I will address these results in a broad sense and as they pertain to our key-strategic priorities. And then we will allow plenty of time for your questions.

The specific details of our financial results can be found in today's news release and 10-K filing.

Broadly speaking, I'm pleased with Tiffany's annual results in 2018 and with what our global team accomplished. For the full year, sales rose in the Americas, Asia Pacific, Japan and Europe and increased in most product categories, and we were encouraged to experience higher sales attributed to local customers in the full year, even though sales attributed to foreign tourists were volatile.

As you know, our sales growth decelerated in the second half. We can talk about external factors that benefited us in the first half and then went against us in the second half. But I believe it is more productive to focus on the journey that we started exactly 1 year ago when we presented to you our 6 strategic priorities as well as our decision to increase investment spending in several areas to support sustainable long-term growth. And we made substantial progress in the past year and a lot is going to happen in 2019.

Our strategy to amplify and evolve the brand message was highlighted with bolder messaging in the BELIEVE IN LOVE, "Believe in Dreams" and holiday campaigns. These campaigns came as a pleasant surprise to our audience and signaled that something new and exciting was starting to happen at Tiffany.

I am pleased that as a result, sales growth in 2018 came from our existing customer base as well as from new customers and former customers who have not shopped at Tiffany in a number of years.

Then since January 2019, we have strengthened our message on diamonds. A #ATiffanyDiamondADay campaign on social media. Our leading innovation of providing to customers the country or region of origin of our individually registered diamonds and the enormous visibility of the legendary 128 carat Tiffany Yellow Diamond with Lady Gaga at the Oscars are a synchronized assertion of the beauty, traceability and glamor of our superlative Tiffany diamonds.

Another strategy is to renew our product offerings, at a faster pace, and in 2018 we unveiled the PAPER FLOWERS jewelry line, introduced numerous extensions of existing collections, made a significant investment in high jewelry inventory to build a more powerful assortment in some of our key locations around the world. And we began to offer expansive jewelry customizations through the Make It My Tiffany program.

For holiday 2018, we launched in the U.S. a limited assortment of the TIFFANY TRUE collection. We are now excited to roll out the launch of the TIFFANY TRUE solitaire and the boldly designed jewelry in all the regions and with increasing new styles throughout 2019.

For our priority to deliver an exciting customer experience, in 2018 we expanded Tiffany's store presence with the opening of 10 stores in high potential markets around the world while relocating a number of existing stores and closing 4 stores for a net increase of 6 stores.

And of course, we announced the bold initiative to transform our New York flagship store into an exciting 21st century retail experience by the end of 2021.

In 2019, we will have some important openings in key cities. We just completed the relocation of our most important store in Australia, a significant market for Tiffany. It's a beautiful store in Sydney at the corner of Pitt and King Street that has surprised customers, press and the entire industry for its stylish esthetics, imposing size and refined experience. And next week, we will celebrate the grand opening of our newest location in the U.S., the first -- our first store in Washington, D.C. In CityCenterDc, a new luxury destination for local customers and tourists.

We plan to announce other important new stores in key markets, such as in Greater China, during the course of the year. In addition to opening new stores, we are also evolving our presentations within existing stores through our fresh and innovative global display announcement initiatives in North America, which we are now pleased to extend in 2019 to the rest of the world.

In terms of delivering a more exciting omnichannel experience, we are now upgrading our websites globally, which provides a number of benefits to both the consumer experience and Tiffany's ability to innovate. We are offering a rich, blended experience of content and commerce, elevating the brand, while reducing the friction in the user's journey as much as possible. The enhancements give Tiffany more agility in testing, personalizing and content optimization.

For example, on our U.S. website, we have just begun offering for sale select love and engagement diamond rings online. U.S. clients can now filter available inventory for purchase on tiffany.com in addition to consulting a diamond expert to find the perfect ring.

In recent years, Tiffany has been accepting phone orders for diamond rings from customers who live beyond our store distribution, so we believe this is a natural and complementary expansion of our in-store experience for the love and engagement category. And we look forward to a process of continuous improvement in our digital capabilities going forward, including plans to introduce a company-operated, e-commerce-enabled website in China later this year.

In summary, we are still in the early stages of the long and exciting journey that I referred to 1 year ago. The Tiffany brand is increasingly recognized and desired, our talented organization is aligned with our strategic priorities and is getting more proactive and agile every day.

I believe that the long-term outlook is very promising. I will now turn the call over to Mark Erceg.

--------------------------------------------------------------------------------

Mark J. Erceg, Tiffany & Co. - Executive VP & CFO [4]

--------------------------------------------------------------------------------

Thanks, Alex. From a financial perspective, fiscal 2018 results are consistent with what we hoped to achieve when just a little over 1 year ago, we shared our 6 strategic priorities and declared that in order to properly fund those priorities, fiscal 2018 would be an investment year.

Since Alex has already commented on our sales performance, let me say just a few words about earnings from operations, diluted net earnings per share and free cash flow.

You will recall us stating that fiscal 2018 operating earnings were expected to be flat to slightly down in order to fund meaningful investments across a number of areas we felt were essential to support sustainable, long-term, mid-single-digit sales growth. Consistent with that, earnings from operations came in at $790 million versus $809 million during fiscal 2017, a decline of approximately 2%.

We also passed along significant benefits associated with U.S. tax reform. Specifically, we started the year expecting an overall 2018 effective tax rate somewhere in the high 20s and as more information became available and we completed our analysis, we ultimately ended the year just a fraction over 21%.

While our 2018 effective tax rate did include some onetime benefits not directly associated with the lower U.S. statutory tax rate, a lower effective tax rate was the primary driver that allowed us to finish the year with diluted net EPS at $4.75 per share, which was towards the higher end of the last guidance range we provided of $4.65 to $4.80 per share, and well above our initial fiscal 2018 guidance of being somewhere between $4.25 to $4.45 per share.

Finally, we started the year projecting approximately $380 million of free cash flow and after revising our projections to account for higher inventory levels, including for high jewelry and increased cash payments from income taxes related to U.S. tax reform, we ended the year at $250 million of free cash flow.

So in total, and across our key financial performance indicators of sales growth, operating earnings, net earnings and free cash flow, I think it is fair to say we delivered what we set out to achieve.

From a balance sheet perspective, we finished the year with $855 million of cash, cash equivalents and short-term investments versus roughly $1 billion of total short-term and long-term debt. This means that after spending more than $400 million to repurchase shares of our common stock and after increasing our quarterly dividend rate by 10%, which was the 17th increase in the past 16 years, our balance sheet remains a major source of strength and flexibility.

In terms of our outlook for 2019, we are maintaining the preliminary guidance we provided on January 18 when we reported holiday sales results. Low single-digit sales growth for the full year as reported and slightly higher on a constant exchange rate basis and a mid-single-digit increase in diluted EPS.

It's worth noting that our forecast for mid-single EPS growth and our expectation of modest operating margin expansion includes a number of unique factors. First, incremental SG&A expense related to the New York flagship store project, which was $0.07 per share in 2018 is expected to be $0.10 to $0.15 per share in each of 2019, 2020 and 2021. Second, our 2019 forecast accounts for the fact that we will no longer be able to recognize an $8 million a year deferred gain on previous sale leasebacks due to a new accounting standard. Finally, we expect an all-in effective income tax rate of approximately 23% in 2019, which is roughly 200 basis points higher than fiscal 2018.

From a timing standpoint and consistent with January results, while we expect full year reported sales to grow by a low single-digit percentage, we expect sales in the first half to be adversely affected by several factors. A meaningful FX headwind, lower foreign tourist spending and a difficult comparison to strong base period comps. In addition to these items, first half earnings will also be negatively affected by incremental strategic investment spending that began in the second quarter of 2018 and has not yet fully annualized.

We anticipate that these pressures will lessen throughout the year and as additional new products are introduced, our marketing message continues to resonate and our in-store experience becomes even stronger, we expect reported sales growth to strengthen and earnings growth to resume in the second half of the year.

That wraps up my brief remarks. So I'll turn the call back over to Mark.

--------------------------------------------------------------------------------

Mark L. Aaron, Tiffany & Co. - VP of IR [5]

--------------------------------------------------------------------------------

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question will come from Michael Binetti with Crédit Suisse.

--------------------------------------------------------------------------------

Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

Mark, could you speak to some of the puts and takes on the gross margin in the fourth quarter? I'm -- I guess, I'm looking at it on a multiyear basis, just trying to see if I understand why the leverage slowed a bit as the comps got easier there. Maybe you could help us with some of the puts and takes? And then I also was curious why the SG&A -- maybe a little help on why the SG&A growth rate slowed fairly significantly? I think when we talked previously, you kind of said the big break point in that growth rate would be middle of this year to your comments about anniversarying some of the step up for the investments?

--------------------------------------------------------------------------------

Mark J. Erceg, Tiffany & Co. - Executive VP & CFO [3]

--------------------------------------------------------------------------------

Yes, sure. I think on the gross margin point, I think the bigger story in 2018 is the fact that our gross margin was up 70 basis points for the full year. As far as what happens in any given quarter on gross margin, I don't think that's overly helpful to unpack. There's always mix effects, there is any number of things that can fall within that. And of course, our sales growth in the fourth quarter was lower than balance of the year, and so there's going to be less fixed cost leverage even through the COGS line. As far as SG&A is concerned, I think one of the things that we've talked about a lot in the past is the need to ensure that our cost takeout programs are robust and strong and that takes a little bit of time to gear up, so to the extent that SG&A growth in the fourth quarter was lower than you might have seen throughout the year, I think that's a positive indicator. And as we think about the guidance we provided for 2019, we're basically saying that we're going to get operating margin expansion on low single-digit sales growth. So I think, again, our cost takeout programs continue to ramp up, and I think you're seeing some of that in the fourth quarter at this point.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

And next we will hear from Paul Lejuez with Citi.

--------------------------------------------------------------------------------

Paul Lawrence Lejuez, Citigroup Inc, Research Division - MD and Senior Analyst [5]

--------------------------------------------------------------------------------

I'm curious what you might be able to point to that makes you feel confident that the amplification of the brand message is working and that you just hit a macro speed bump? Anything you could share with us that you're looking at, any data that you can provide? Also curious if you think about what was the biggest disappointment to you this quarter relative to what you were thinking before it started? And also curious if there were any positive surprises?

--------------------------------------------------------------------------------

Alessandro Bogliolo, Tiffany & Co. - CEO & Director [6]

--------------------------------------------------------------------------------

Thank you, Paul, for your question. Well, about the messaging, it was a big change in 2018, and we are pleased to see that sales, both to existing customers as well as new customers, are increasing. And so we are happy with it and we have seen also in the last quarter, even if it was softer, a nice result in terms of sales to existing customers, which is reassuring that the new message is not putting away customers from our brand, but on the contrary, bringing them back. Now in terms of disappointment, well, of course, the last quarter, I think it was a mix of external factors, we have seen it also in general in the industry, especially in our luxury, that the last quarter has not been as fantastic as the first part of the year, so Tiffany was affected by this. But on the other side, there were surely internal factors because we are really at the first year of our transformative journey, and we are working very hard on it, but we are far from having all the pieces of the puzzle put together. So we are working on it, going ahead, but we were not perfect. We have done a lot, a lot of new things. Also things where we have made some mistakes and we are learning and we are addressing it. So I will say it's a mix of external but also reasonably expected internal factors.

--------------------------------------------------------------------------------

Paul Lawrence Lejuez, Citigroup Inc, Research Division - MD and Senior Analyst [7]

--------------------------------------------------------------------------------

Alex, anything you can share on those internal factors? What you would have done better?

--------------------------------------------------------------------------------

Alessandro Bogliolo, Tiffany & Co. - CEO & Director [8]

--------------------------------------------------------------------------------

Well, for example, I would have started the holiday campaign 3 weeks earlier, to give you an example. I mean, many other detailed things that -- it's the life -- the operational life of the company. And I think that this is all good experience because it was a year of innovation. And so we are -- the most important thing for us is that we have a very good analysis of the sales results of our fourth quarter, and we have adjusted plans in order to keep on surprising customers when it comes to communications, so for example, the communication that you have seen in 2018, I think it was appropriate because it was communicating that something big and new was happening at Tiffany. Now don't expect the same communication in 2019 because we want to keep on surprising our customers and this is one example among many others.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

And now we will hear from Oliver Chen with Cowen and Company.

--------------------------------------------------------------------------------

Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [10]

--------------------------------------------------------------------------------

Alessandro, I would love your thoughts on balancing innovation at lower price points versus higher price points and how that intersects with what you're thinking for the collections. And also the in-store experience, what are your hypotheses about what needs to happen just in order to make sure that you appeal to new generations, are experiential and really leverage your human and digital talent? And Mark, a modeling question, as we think about e-commerce over time, how did those margins compare and what are the key priorities in terms of blending the channels and managing inventory between e-com and thinking about digital plus physical?

--------------------------------------------------------------------------------

Alessandro Bogliolo, Tiffany & Co. - CEO & Director [11]

--------------------------------------------------------------------------------

Thank you, Oliver. Well, for your first question, this is a puzzle with many, many different things because there is the new communication, there is an introduction of new product, there is all these efforts that we are making on the e-commerce to upgrade, elevate and innovate, et cetera, et cetera. So now all these things to be put together will take time, we said that 1 year ago. But we decided not to pause for 3 years to work on everything and then to have a big unveiling. We decided every day to do a step and in different areas, for example, I would've loved to have the new website that we unveiled literally yesterday, I would've loved to have it in October or November in preparation of the holiday season, but it takes time to do things. So it's really a matter of a run that we are having in the entire company in order to improve, innovate, be faster, be more distinctive, be more innovative, and all these things we will see the benefits the more we go along the way when all these parts come together, yes.

--------------------------------------------------------------------------------

Mark J. Erceg, Tiffany & Co. - Executive VP & CFO [12]

--------------------------------------------------------------------------------

Relative to the balance of your questions, I think we could offer that. Our e-com business this past year grew at roughly twice the rate of our overall business, and we would expect that trend to continue at least for the next several years. As for the profitability, as you could imagine, the cost of running an e-com portal is less than that of running a brick-and-mortar operation, and if you look at the products that we tend to sell on e-com, they tend to be lower priced items, more silver items that have higher margins associated with them, you're not going to sell a whole lot of high jewelry pieces off your website. So I think it's fair to say that e-com is more profitable than brick-and-mortar, but again, we don't necessarily look at it that way, we're running a business and we want to serve our customers however they choose to shop, which kind of gets to your question on inventory as well. What we're driving towards is a seamless inventory model whereby we can get the product to our customers in any market, at any time, any way that they would choose to receive it. And we just talked about the new digital platform that we've put up across our e-com sites, but Alex also alluded to the fact that we're going to be standing up in our China e-com website later this year, which we're very excited about and we've talked in the past about the need to put in the right structure inventory management systems, order management systems, distribution systems, in order to enable that and clearly, that's what we've been doing.

--------------------------------------------------------------------------------

Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [13]

--------------------------------------------------------------------------------

Okay, Mark. And just a last question on inventory. As we model that ahead, how will you expect that to trend relative to sales? And then, Mark, on the information systems side, customer relationship management was a theme and opportunity, if you could just highlight what's ahead in your road map with the information system innovation? That would be great.

--------------------------------------------------------------------------------

Mark J. Erceg, Tiffany & Co. - Executive VP & CFO [14]

--------------------------------------------------------------------------------

I think as it relates to inventory, I guess, all I would say at this point is, we've said very clearly that our goal is to grow inventory at a rate below that of sales, and this past year we made a deliberate choice to invest more in our high jewelry offering, which we've seen work and work well for us. And then beyond that, the systems as I discussed will be allowing us to manage the entirety of our network better and more efficiently.

--------------------------------------------------------------------------------

Mark L. Aaron, Tiffany & Co. - VP of IR [15]

--------------------------------------------------------------------------------

(Operator Instructions)

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

And next we will hear from Brian Nagel with Oppenheimer.

--------------------------------------------------------------------------------

Brian William Nagel, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [17]

--------------------------------------------------------------------------------

Yes, first off, I do want to congratulate you on a substantial amount of progress you made this year, so congratulations. With regard to the question of -- to heed in Mark's request, I'll shove 2 questions in 1. But first off, just go back on someone earlier asked about gross margin, and Mark, I understand there's a lot of moving pieces in your gross margin but the trajectory in year-on-year change has moderated meaningfully since earlier this year. So as we look, if you could help us understand better, maybe the puts and takes that did happen in Q4, and how should we thinking about gross margins as we move into 2019? And then the second question I have is on the sales side. Now I understand, January is not necessarily a representative month but some of the macro pressures are likely impacted, Tiffany around the holidays did begin to have -- should have abated through the month of January. So the question I was -- did we see any type of underlying strengthening in the business that may not have been reflective in the final Q4 results that you reported today?

--------------------------------------------------------------------------------

Mark J. Erceg, Tiffany & Co. - Executive VP & CFO [18]

--------------------------------------------------------------------------------

Well, with respect to gross margin, I think we've talked about it a number of times. And over the last 5, 6 years there's been a very, very favorable commodity cycle that has allowed us to rapidly expand gross margins. We've talked about the fact that those commodity inputs had been flattening out and that we expect those frankly, going forward, to continue to moderate, and therefore, we're going to have to drive gross margins through a combination of our cost takeout, through our jewelry design and innovation workshop, our rapid costing tools. Obviously, when we introduce new products, we typically try and engineer and price those in a way that they're accretive to margin as well. We've talked about in the past, us having pricing power, we continue to believe we have pricing power and we plan to be taking modest pricing in the current fiscal year. So we have laid out a long-term algorithm that we believe will allow us to grow our sales mid-single digit and our EPS high single digits and some form of gross margin expansion is obviously part of that -- as part of that algorithm going forward.

--------------------------------------------------------------------------------

Brian William Nagel, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [19]

--------------------------------------------------------------------------------

And then with regard to the sales?

--------------------------------------------------------------------------------

Alessandro Bogliolo, Tiffany & Co. - CEO & Director [20]

--------------------------------------------------------------------------------

You mean the sales...

--------------------------------------------------------------------------------

Mark J. Erceg, Tiffany & Co. - Executive VP & CFO [21]

--------------------------------------------------------------------------------

What about it?

--------------------------------------------------------------------------------

Brian William Nagel, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [22]

--------------------------------------------------------------------------------

Oh, sorry, well, I'll repeat it. So in January, I guess, I'm making the assumption that some of the macro pressures, the broader pressures that impacted Tiffany through the holiday might have abated. Did you see that? I mean, just specifically the market -- financial markets are less volatile, the government shutdown, it's...

--------------------------------------------------------------------------------

Alessandro Bogliolo, Tiffany & Co. - CEO & Director [23]

--------------------------------------------------------------------------------

Well, actually -- yes, well, actually the timing we saw in the sales in January is by and large a similar to the one that we saw in -- during the holiday, and the 2 months that we reported. Of course, there was a little bit of an uptick in China because of the Chinese New Year but this is the normal course of business. So I would say nothing different than what we had reported for holiday.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

And next we will hear from Matthew Boss with JPMorgan.

--------------------------------------------------------------------------------

Matthew Robert Boss, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [25]

--------------------------------------------------------------------------------

Maybe just to elaborate on your view that the turnaround is in early stages today, And as we dig into the 6 strategic priorities, how best to think about the time line and P&L performance that we should expect to see from each of the strategy?

--------------------------------------------------------------------------------

Alessandro Bogliolo, Tiffany & Co. - CEO & Director [26]

--------------------------------------------------------------------------------

Well, it's -- our 6 strategic priorities basically encompass the entire -- our entire business. So communication has been the first one, we have been active there last year and we will continue with different approach this year. What you will see more this year, more intense, is the launch of new products with the beginning now of TIFFANY TRUE engagement ring and the jewelry, but then other innovations, new launches during the year. And so towards the end of the year, we are working in order to have a critical month for the holiday. When you start seeing the work on the network, like I referred that this year we have several important stores that are opening, that of course are the result of the last 1.5 year of negotiation of renovations, et cetera. And this is why I mentioned in my remarks, Sydney, Washington, D.C. and there is [important] more to come. And the -- I think it is important also to remark the work that we have started doing, since the beginning, on efficiency that it didn't show for several quarters because as you know efficiencies take a lot to be achieved, but you started seeing a sign of that in the fourth quarter and this is something we committed to. So a lot of things going on. Honestly, how much we achieved, well, I think we are probably at the -- we are for sure at the beginning of our plan. Then probably in the first third of our plan. And there is a crescendo, there is a critical month that will be reached going forward. So we are very excited for all the things we are doing. We are confident and we are fighting for it.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

And our next question will come from Kimberly Greenberger with Morgan Stanley.

--------------------------------------------------------------------------------

Kimberly Conroy Greenberger, Morgan Stanley, Research Division - MD [28]

--------------------------------------------------------------------------------

I just wanted to follow-up on Matt's question about the sequencing of the impact of your strategic priorities. And Alessandro, I'm wondering if there is a sort of ideal time in the future when you think that product innovation, your message evolution, your cost efficiency program, basically your -- the aggregate of your 6 strategic priorities, is there a year where you believe that the sort of vast majority of these strategies will be fully implemented and impacting your financial results that we could say, all right, there is -- this is a journey, it's a 3-year journey, it's a 5-year journey, it's a 2-year journey. How do you think about the ultimate end goal? And of course, I'm sure there will be evolutions of the strategies over time, but just help us understand how long does it take for all of the strategies to culminate and really work their way fully through your business?

--------------------------------------------------------------------------------

Alessandro Bogliolo, Tiffany & Co. - CEO & Director [29]

--------------------------------------------------------------------------------

Well, thank you, Kimberly. Well, for the security of my job and one of my colleagues, I hope that this journey will never finish because we will keep on innovating for the next 182 years. But to answer to your question about this specific strategic plan we have put in place, it's hard to say, which is exactly the date when everything will be done and completed and especially [productive]. But I mean, it's quite typical that a -- I mean, a project like this has a 3-year horizon. So we started it exactly 1 year ago, and I would say 2021 is when we should really get the most out of it. But for me, I mean, it's not a matter of -- and I have been very clear about this and this is why we started increasing investment spending last year, it's not that we do all this work and then we have a big unveiling, we will do this for the flagship store but not for our day-to-day business, where every day we want to improve and add things even if the benefit of it is not fully ripe. So short answer your question, I would say 2021.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

And next we will hear from Dana Telsey with the Telsey Advisory Group.

--------------------------------------------------------------------------------

Dana Lauren Telsey, Telsey Advisory Group LLC - CEO & Chief Research Officer [31]

--------------------------------------------------------------------------------

As you think about foreign tourism, how are you planning that going forward? How are you planning it this year? And then as you think about jewelry collections, engagement and designer jewelry, pace of newness for 2019, any new collections that we should be looking forward to?

--------------------------------------------------------------------------------

Alessandro Bogliolo, Tiffany & Co. - CEO & Director [32]

--------------------------------------------------------------------------------

Thank you, Dana. Well, tourism has been the more volatile and the more difficult part of our business. We have been affected by a negative trend in tourism sales, notably to Chinese tourists, but in general, for example, the very strong U.S. dollar towards the end of the year didn't help not only with Chinese but also with the South American tourists and others. That is definitely an area of concern that affects our results on -- but what we are doing is to keep on working and investing on domestic customers. And we are seeing sales to domestic customers across geographies growing nicely, very strongly in China, less so in the U.S., but still positive and growing. And we believe that the best way to develop our tourist business [is to be] strong with domestic customers when they are home. And your second question...

--------------------------------------------------------------------------------

Dana Lauren Telsey, Telsey Advisory Group LLC - CEO & Chief Research Officer [33]

--------------------------------------------------------------------------------

Jewelry collections, engagement and designer jewelry.

--------------------------------------------------------------------------------

Alessandro Bogliolo, Tiffany & Co. - CEO & Director [34]

--------------------------------------------------------------------------------

Jewelry collection. So, yes. So we will have important newness. That doesn't mean entirely totally different design, but definitely very distinctive newness in love and engagement and it's already started with the launch of Tiffany T TRUE, and that is both -- it's very innovative because it's an engagement ring with the new setting with T, but it's also a set of very boldly designed jewelry that now we launch already a wedding band that goes with it but there is much more coming in the rest of the year. So this is for the engagement area. I will say the answer is, Tiffany T TRUE. Then several important innovations in collections. The collections remain -- existing collections in gold and platinum with and without diamond. As for designers, by definition, for the nature of the designer business, there is less innovation there because it's more of a product that has been originally designed in the past case and so it is the area of the innovation.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

And next we will hear from Erwan Rambourg with HSBC.

--------------------------------------------------------------------------------

Erwan Rambourg, HSBC, Research Division - Global Co-Head of Consumer & Retail Equity Research and MD [36]

--------------------------------------------------------------------------------

I just wanted to follow-up on Chinese consumption. Recently you've had a strengthening of the renminbi and at the same time I think that your Chinese administration is looking to repatriate growth within Mainland China. So I'm just wondering if you could comment on what you're seeing in terms of Chinese tourists in the Asian region relative to growth within Mainland China. Have you seen any inflection recently that would be linked to the renminbi strength? And then linked to Chinese consumption, I was just wondering if you could give us more details about the e-commerce footprint. So you -- I think you mentioned in your prepared remarks that you are looking to launch a commercial website in China, I'm wondering what your footprint is with potential existing platforms or partners to sell online in China today.

--------------------------------------------------------------------------------

Alessandro Bogliolo, Tiffany & Co. - CEO & Director [37]

--------------------------------------------------------------------------------

Thank you, Erwan. Well, as for sales of Chinese customers abroad, so tourists, we have not seen in the recent -- in the quarter, also in January, a different pattern than before. For sure, we have seen keeping a very positive trend in China during holidays but continued also into January. As for the website, for us it is an important step that finally, also in China, we will have a Tiffany-owned dedicated website. And so we plan to do it ourselves independently as we have in the most important markets in the world. So it will be a company-operated e-commerce website. Then of course, as you know very well, there are many other -- there are many social media in China where we can -- that we can use in order to push traffic from Chat, et cetera, into our website as we do in the rest of the world. So we are very excited about it. I would say, hopefully, for sales but especially for giving visibility of the brand to Chinese customers that can learn more about the brand, adding a full-fledged website with the products that can be purchased so they can explore the assortment, learn more and then, hopefully, to buy maybe online and for sure on -- in the stores.

--------------------------------------------------------------------------------

Erwan Rambourg, HSBC, Research Division - Global Co-Head of Consumer & Retail Equity Research and MD [38]

--------------------------------------------------------------------------------

And just to clarify, so you will skew the traffic to your own selling website, but will you offer some products to partner websites and to third-party platforms?

--------------------------------------------------------------------------------

Alessandro Bogliolo, Tiffany & Co. - CEO & Director [39]

--------------------------------------------------------------------------------

Yes, we have. As we have done already in the past, we will keep doing activities like pop-up stores and in different of -- I mean, other activities also with third parties. But now the good thing is that we will have our own.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

And now we will hear from Francesca Di Pasquantonio with Deutsche Bank.

--------------------------------------------------------------------------------

Francesca Di Pasquantonio, Deutsche Bank AG, Research Division - Research Analyst [41]

--------------------------------------------------------------------------------

Can I please ask 2 questions, one is a follow-up? The first one is on domestic U.S. consumers. There is a clear divide in the year between first half and second half and PAPER FLOWERS were launched in mid-2018, and you have been through a lot of marketing, branding, in-store experience, remodeling. So I was wondering what your incremental, let's say, comments could be in terms of how to drive growth irrespective of favorable top-down trends given that so much had been done with impact in the second half rather than the first half. And the second question is a follow-up on SG&A. The fact that leverage seems to be so much better and the combination of efficiencies and gross margin seem to be affecting some of what we thought were going to be higher investment needs, is this leaving you in a comfortable position when the luxury framework is becoming very competitive in using deep pockets to fuel the visibility of the competing brands? And within the SG&A, if the expected increase coming from the New York store remodeling is also including some assumptions on potential sales disruptions that you may be facing?

--------------------------------------------------------------------------------

Alessandro Bogliolo, Tiffany & Co. - CEO & Director [42]

--------------------------------------------------------------------------------

So Francesca, thank you for your question. Well, about PAPER FLOWERS, the collection met our expectations. In the U.S., it's true, we had the deceleration of demand by also domestic customers, that was very strong in the first part of the year, and it was softer, especially, in the last quarter, in the fourth quarter. Now, I don't associate this to any specific product because we saw it affecting all different product categories and price points. So that I really see it more linked to something bigger and more to do with the consumer confidence of the U.S. in [this] quarter. Don't forget that the stock price, the stock market, did very poorly, exactly in the -- in November and December, and there were several factors that for sure affected our kind of consumers that of course, are related also with the macroeconomic environment.

--------------------------------------------------------------------------------

Mark J. Erceg, Tiffany & Co. - Executive VP & CFO [43]

--------------------------------------------------------------------------------

As far as the balance of your questions, you asked about SG&A efficiency, and again, that's something that we've been clearly focused on, that's one of the 6 key priorities that we've laid out. We try not to distinguish, again, a whole lot between gross margin expansion and SG&A margin expansion. At the end of the day, it's all about operating margin expansion. In this past year, we clearly stated that we expect operating margin to be down and it was for the year that we just provided guidance for, we expect it to be up modestly., And then our long-term algorithms still would suggest that we would expect to see about a 50 basis point improvement in margin thereafter and that's still what we're working against. As far as your question on the flagship store, this past year we had about $0.07 of dilution related to that, we said for next year, it would be somewhere between $0.10 to $0.15. It's not driven by an expectation of sales disruption, it really comes down to a number of things, it's the incremental rent for the temporary space, it's the accelerated depreciation associated with the project itself because now that we're transforming elements of the existing store, we need to depreciate and accelerate the depreciation over now and when the project will go live. And then there are certain expense dollars related to some consultants and others that really can't be capitalized. Those are the 3 elements principally that come into play as it relates to that. But we don't expect a sales disruption in that map.

--------------------------------------------------------------------------------

Alessandro Bogliolo, Tiffany & Co. - CEO & Director [44]

--------------------------------------------------------------------------------

And also just to be clear, during 2019, while we will be working, we are already working now at the temporary store in 57th Street. In the meantime, for the full year, the flagship store will keep operating as it is, so it will not be impacted by the works.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

And our next question will come from Bob Drbul Guggenheim Securities.

--------------------------------------------------------------------------------

Robert Scott Drbul, Guggenheim Securities, LLC, Research Division - Senior MD [46]

--------------------------------------------------------------------------------

I was just wondering, Mark, can you talk about the biggest technology and systems investments and projects you're working on this year and what milestones we should really keep an eye out for.

--------------------------------------------------------------------------------

Mark J. Erceg, Tiffany & Co. - Executive VP & CFO [47]

--------------------------------------------------------------------------------

Yes, absolutely. We've talked in the past about 3 different large buckets. One is, what we call the foundational systems, that's where we're standing up a common order management system, a common financial tube. It's letting us bring on Coupa, which is an indirect procurement module. It also is going to give us one common inventory management system. We stood that up this past year in China and 7 other Asia Pacific countries. As I intimated earlier, that's one of the reasons that we can now support a Chinese Tiffany-enabled website because we now have the ability to provide that product to the customers through those new portals. We're going to continue to stand up additional geographies as we go forward as it relates to that endeavor. It will continue to take a number of years though between now and when we get the entire world stood up on that system. Second thing we always talked about was our digital replatforming, and if you get a chance to go take a look at our new website, which we just stood up this week, I think you'll see a dramatic step forward in the capabilities of the site. We've, obviously, done very well in the past with our e-commerce portals. We've won a lot of awards, though a lot of that frankly was through sheer just force of will and just the dedication of the teams here, but they didn't have the proper tools to really allow them to do a lot of the things that we'll now be able to do from a clientele and from an outreach standpoint, from an AB testing standpoint. And so we're now well on our way on our digital replatforming, and once we get the China e-com site up later this year that'll be another big step forward. And then we're looking at a lot of the work that we need to do in order to put together the data hub so we can do a lot of predictive work and get a lot of analytical packages in place. We've also been working on advance planning systems for our production teams, and obviously, we've been also working on a lot of the CAD/CAM elements related to the JDIW, which is our Jewelry Design and Innovation Workshop. So there's a lot of big elements associated with our transformation of our IT systems that will continue.

--------------------------------------------------------------------------------

Operator [48]

--------------------------------------------------------------------------------

And next we will hear from Lorraine Hutchinson with Bank of America Merrill Lynch.

--------------------------------------------------------------------------------

Lorraine Corrine Maikis Hutchinson, BofA Merrill Lynch, Research Division - MD in Equity Research and Consumer Sector Head in Equity Research [49]

--------------------------------------------------------------------------------

I wanted to follow-up on the decline in Engagement Jewelry in the fourth quarter. Was just wondering, were trends better in the U.S. and do you think the global launch of TIFFANY TRUE could turn that business into positive territory in 2019.

--------------------------------------------------------------------------------

Alessandro Bogliolo, Tiffany & Co. - CEO & Director [50]

--------------------------------------------------------------------------------

Yes, well, first of all, the deceleration we have seen in sales has been across all product categories. And actually, if you look at the deceleration between the -- of the fourth quarter compared to the rest of the year, it's really spread across different categories, so I don't see anything specific about engagement rings. Now of course, out of TIFFANY TRUE, we expect an improvement in our sales in engagement rings, but consider that what we did in the U.S. has been a prelaunch, very limited, I'll just give you an example, in terms of carat stone, it was limited to the 1 carat, 1.5 carat stone that is a pretty expensive part of the assortment and also the jewelry that goes with it, and this really part of the concept will be just launched from now going onwards in the year. So I think it's still early to assess, also because, especially for diamond rings and engagement rings, the decision process of the customer is very long. Typically, it takes several months and several interactions with that brand on the website in the stores, et cetera, before making a decision. So it's not really an impulse kind of purchase, but we are very confident with it..

--------------------------------------------------------------------------------

Operator [51]

--------------------------------------------------------------------------------

And next we will hear from Laurent Vasilescu with Macquarie.

--------------------------------------------------------------------------------

Laurent Andre Vasilescu, Macquarie Research - Consumer Analyst [52]

--------------------------------------------------------------------------------

Regarding investments, I wanted to follow-up on the employee count detail in this morning's 10-K. You've grown your employee count by approximately 20% over the last 2 years compared to a -- what, 3% increase in your store count. Where were these investments and talents? Were they around supply chain, digital or any other functions? And then should we expect that pace of employee growth to continue for 2019?

--------------------------------------------------------------------------------

Mark J. Erceg, Tiffany & Co. - Executive VP & CFO [53]

--------------------------------------------------------------------------------

Principally, what you're seeing there is either in the retail space where we're continuing to add a little bit of square footage, but principally it's on the manufacturing side. As we know, we believe it's a competitive advantage for us to basically cut and polish our own stones because we do it to our exacting standards. And that is a very large operation with several thousands of individuals and we have continued to add additional capacity in that regard. So that's really what you're seeing and of course, we do that at a competitive cost, we benchmark all of our internal productions versus external purchases, and we're confident that we're actually margin accretive through bringing that effectively in-house and we end up with a better product as well.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

Our next question will come Ike Boruchow with Wells Fargo.

--------------------------------------------------------------------------------

Irwin Bernard Boruchow, Wells Fargo Securities, LLC, Research Division - MD and Senior Specialty Retail Analyst [55]

--------------------------------------------------------------------------------

Mark, I just wanted to kind of maybe dig into the guidance a little bit more. So an EPS decline in the first half, I think we all appreciate that. But is it possible to break apart 1Q versus 2Q a little bit in greater detail, only because, to your point earlier in the call, a lot of your investment spend really started in Q2, so it seems like it's a bigger headwind in Q1, and not to mention it seems like tourism and currencies are also likely larger headwinds? So any way you could comment on the magnitude of the decline in Q1 versus Q2?

--------------------------------------------------------------------------------

Mark J. Erceg, Tiffany & Co. - Executive VP & CFO [56]

--------------------------------------------------------------------------------

The only thing I would want to say, because we don't want to start getting into the game of providing quarterly guidance. We do think that the first half will be below the rates that you'll see in the second half of the year. Two things that I think are fair for me to point out specifically though, one relates to FX, so if you sit here today and you take spot, what you would see is that we're going to have 3-point headwind in the first quarter versus the prior period, by the second quarter that becomes roughly a 1-point headwind based on spot right now, by the third quarter it's a push and by the time you get to the fourth quarter it's maybe a 50 basis point help. So that's one element. The other thing I would say and you addressed it yourself, we said we won't be annualizing the full rate of our spend until we get to second quarter. So those 2 factors are indicative of what I probably could share.

--------------------------------------------------------------------------------

Operator [57]

--------------------------------------------------------------------------------

Next we will hear from Alexandra Walvis with Goldman Sachs.

--------------------------------------------------------------------------------

Rosalie M. Frazier, Goldman Sachs Group Inc., Research Division - Business Analyst [58]

--------------------------------------------------------------------------------

This is Rosalie Frazier on for Alex. We want to dig a little bit into some of the store and experience improvements you've been making this year. What's working there the most? Is this displays or changing -- changes in staff training? Or what's working there?

--------------------------------------------------------------------------------

Alessandro Bogliolo, Tiffany & Co. - CEO & Director [59]

--------------------------------------------------------------------------------

Thank you, Alexandra. It's -- well, it's a mix of things. As for -- and the -- actually to really have the full benefit of it, we will have to add all these things together because, for example, the new displays have been implemented in North America, not yet in the rest of the world, though we are rolling it out now literally in the rest of the world. As for the training, there has been a renewed training in diamonds in order to elevate the education of our sales professional to the Tiffany diamonds and the expertise we have, the fact that we buy the -- mainly for solitaires, the diamond in rough. All the provenance initiative with that I'm sure you're aware that we made public early in January, where we share with customers now uniquely among the luxury brands, the origin or country of origin of our diamonds. So all this has been part of the training. Now all these factors are very important, are very time consuming because it's [national] people to train. And -- but surely, we are seeing the benefits of it. Difficult now to say for each single activity how much percentage of increase sales it's driving, but it's definitely the right thing to do.

--------------------------------------------------------------------------------

Operator [60]

--------------------------------------------------------------------------------

We will now hear from Marni Shapiro with Retail Tracker.

--------------------------------------------------------------------------------

Marni Shapiro, The Retail Tracker - Co-Founder [61]

--------------------------------------------------------------------------------

I'm wondering if you could talk a little bit more about the Chinese consumer. They seem to be buying closer to home, which I believe is a good thing for you guys. But how is their buying different when they buy at home versus when they travel? Because I've read, over the years, many reports about when people travel and they're on vacation they tend to spend a little bit more loosely. Could you just contrast your local Chinese consumer spend versus your broader tourist spend from that same consumer?

--------------------------------------------------------------------------------

Alessandro Bogliolo, Tiffany & Co. - CEO & Director [62]

--------------------------------------------------------------------------------

Sure. Well, Chinese consumers, they have, in Tiffany but I think in general, a higher average spend compared to consumers in the rest of the world. They are big lovers of gold and platinum, especially, with diamonds, engagement rings is very strong with them. For example, the sterling silver is not a strong category with Chinese customers because there is not a big tradition there, it's more an Anglo-Saxon tradition. So all this brings the average purchase of the Chinese customer higher, much higher than the equivalent American or European one. Now about the difference between the purchase of Chinese in Mainland China versus when they are traveling around the world is not really material. It depends more on the destination, in the sense that there are destinations that are more for customers that come from second-, third-tier cities with a smaller budget, there are destinations that are more -- for more affluent customers. So it has more to do with that than really the nature of the customer because at the end of the day, the customer is the same when he's at home or abroad.

--------------------------------------------------------------------------------

Marni Shapiro, The Retail Tracker - Co-Founder [63]

--------------------------------------------------------------------------------

So a second-tier city customer shopping in Shanghai or Japan might spend less than a customer who is shopping to Paris or New York, is what you're saying there?

--------------------------------------------------------------------------------

Alessandro Bogliolo, Tiffany & Co. - CEO & Director [64]

--------------------------------------------------------------------------------

Yes. I mean generally speaking, you have cases like this.

--------------------------------------------------------------------------------

Operator [65]

--------------------------------------------------------------------------------

And next we will hear from Simeon Siegel with Nomura Instinet.

--------------------------------------------------------------------------------

Simeon Avram Siegel, Nomura Securities Co. Ltd., Research Division - Executive Director & Senior Analyst [66]

--------------------------------------------------------------------------------

Recognizing the increase in marketing rate this year, any -- where you'd see marketing as a percent of sales in '19 and maybe the right level longer term. And then just, you've been calling out the reduced sale of wholesale diamonds, how large is that at this point? Maybe how much more room do you see to reduce those levels and any margin impact from that?

--------------------------------------------------------------------------------

Alessandro Bogliolo, Tiffany & Co. - CEO & Director [67]

--------------------------------------------------------------------------------

Well, as far as marketing investment expense is concerned, we evolved from a 6%, 7% of -- of our total sales that was in the past years, our rate of spending in marketing to the 8% to 9%. And I think that this current rate is the right one for a brand like Tiffany. And so this is what we look at going forward.

--------------------------------------------------------------------------------

Mark J. Erceg, Tiffany & Co. - Executive VP & CFO [68]

--------------------------------------------------------------------------------

Yes, and as far as the wholesale sale of the diamonds is concerned, I mean, obviously, by its very nature it's something that is a little bit volatile. This past year, it was roughly $35 million, something to that effect. And for modeling purposes, at this point, I'd be expecting something similar in 2019.

--------------------------------------------------------------------------------

Operator [69]

--------------------------------------------------------------------------------

And that does conclude our question-and-answer session. I'd like to turn the call back over to Mr. Mark Aaron for any additional or closing remarks.

--------------------------------------------------------------------------------

Mark L. Aaron, Tiffany & Co. - VP of IR [70]

--------------------------------------------------------------------------------

Thank you. Before concluding, we want to express our appreciation to all of you for participating on today's call. As always, please feel free to contact me with any additional questions or comments. Please note on your calendars that we expect to report first quarter results on June 4 before the market opens and host the conference call. Operator, I think we can now wrap up the call.

--------------------------------------------------------------------------------

Operator [71]

--------------------------------------------------------------------------------

Thank you. This does conclude our conference for today. Thank you for your participation. You may now disconnect.