UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended January 31, 2009

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934

 

Commission file no. 1-9494

 

 

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code: (212)755-8000

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated filer x                                                                           Accelerated filer o

 

Non-Accelerated filer o  (Do not check if a smaller reporting company)   Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o No x

 

As of July 31, 2008, the aggregate market value of the registrant’s voting and non-voting stock held by non-affiliates of the registrant was approximately $4,294,118,626 using the closing sales price on this day of $37.79. See Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

As of March 23, 2009, the registrant had outstanding 123,925,208 shares of its common stock, $.01 par value per share.

 

DOCUMENTS INCORPORATED BY REFERENCE.

 

The following documents are incorporated by reference into this Annual Report on Form 10-K: Registrant’s Proxy Statement Dated April 9, 2009 (Part III).

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K, including documents incorporated herein by reference, contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 concerning the Registrant’s goals, plans and projections with respect to store openings, sales, retail prices, gross margin, expenses, effective tax rate, net earnings and net earnings per share, inventories, capital expenditures, cash flow and liquidity. In addition, management makes other forward-looking statements from time to time concerning objectives and expectations. One can identify these forward-looking statements by the fact that they use words such as “believes,” “intends,” “plans” and “expects,” and other words and terms of similar meaning and expression in connection with any discussion of future operating or financial performance. One can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Such forward-looking statements are based on management’s current expectations and involve inherent risks, uncertainties, and assumptions that could cause actual outcomes to differ materially from current expectations. The Registrant has included important factors in the cautionary statements included in this Annual Report, particularly under “Item 1A. Risk Factors,” that the Registrant believes could cause actual results to differ materially from any forward-looking statement.

 

Although the Registrant believes it has been prudent in its plans and assumptions, no assurance can be given that any goal or plan set forth in forward-looking statements can or will be achieved, and readers are cautioned not to place undue reliance on such statements which speak only as of the date this Annual Report on Form 10-K was first filed with the Securities and Exchange Commission. The Registrant undertakes no obligation to update any of the forward-looking information included in this document, whether as a result of new information, future events, changes in expectations or otherwise.

 

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PART I

 

 

a) General history of business.

 

The Registrant (also referred to as Tiffany & Co. or the “Company”) is the parent corporation of Tiffany and Company (“Tiffany”). Charles Lewis Tiffany founded Tiffany’s business in 1837. He incorporated Tiffany in New York in 1868. The Registrant acquired Tiffany in 1984 and completed the initial public offering of the Registrant’s Common Stock in 1987. The Registrant is a holding company and conducts all business through its subsidiary corporations. Through those subsidiaries, the Company sells fine jewelry and other items that it manufactures or has made by others to its specifications.

 

b) Financial information about industry segments.

 

Effective with the first quarter of 2008, the Company changed segment reporting to reflect operating results for the following regions: the Americas, Asia-Pacific and Europe. Prior year results have been revised to reflect this change. The Company has expanded its global reach and management has determined that it is more meaningful to assess performance separately for those three distinct regions.

 

The Registrant’s segment information for the fiscal years ended January 31, 2009, 2008 and 2007 is reported in “Item 8. Financial Statements and Supplementary Data — Note Q. Segment Information.”

 

c) Narrative description of business.

 

As used in this report, the terms “Fiscal 2008,” “Fiscal 2007” and “Fiscal 2006” refer to the fiscal years ended on January 31, 2009, 2008 and 2007.

 

DISTRIBUTION AND MARKETING

 

Maintenance of the TIFFANY & CO. Brand

 

The TIFFANY & CO. brand (the “Brand”) is the single most important asset of Tiffany and, indirectly, of the Registrant. The strength of the Brand goes beyond trademark rights (see TRADEMARKS below) and is inherent in consumer perceptions of the Brand. Management monitors the strength of the Brand through focus groups and survey research.

 

Management believes that consumers associate the Brand with high-quality gemstone jewelry, particularly diamond jewelry; excellent customer service; an elegant store and online environment; upscale store locations; “classic” product positioning; distinctive and high-quality packaging materials (most significantly, the TIFFANY & CO. blue box); and sophisticated style and romance.

 

Tiffany’s business plan includes many expenses and strategies to maintain the strength of the Brand. Stores must be staffed with knowledgeable professionals to provide excellent service. Elegant store and online environments increase capital and maintenance costs. Display practices require sufficient store footprints and lease budgets to enable Tiffany to showcase fine jewelry in a retail setting consistent with the Brand’s positioning. Stores in the best “high street” and luxury mall locations are more expensive and difficult to secure, but reinforce the Brand’s luxury connotations through association with other luxury brands. By the same token, over-proliferation

 

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of stores, or stores that are located in second-tier markets, can diminish the strength of the Brand. The classic positioning of Tiffany’s product line supports the Brand, but limits the display space that can be afforded to fashion jewelry. Tiffany’s packaging practices support consumer expectations with respect to the Brand and are more expensive. Some advertising is done primarily to reinforce the Brand’s association with luxury, sophistication, style and romance, while other advertising is primarily intended to increase demand for particular products. Maintaining its position within the high-end of the jewelry market requires Tiffany to invest significantly in diamond and gemstone inventory and accept reduced overall gross margins; it also causes some consumers to view Tiffany as beyond their price range.

 

 

All of the foregoing demand that management make tradeoffs between business initiatives that might generate incremental sales and profits and Brand maintenance objectives. This is a dynamic process. To the extent that management deems that product, advertising or distribution initiatives will unduly and negatively affect the strength of the Brand, such initiatives have been and will be curtailed or modified appropriately. At the same time, Brand maintenance suppositions are regularly questioned by management to determine if the tradeoff between sales and profit is truly worth the positive effect on the Brand. At times, management has determined, and will in the future determine, that the strength of the Brand warranted, or that it will permit, more aggressive and profitable distribution and marketing initiatives.

 

REPORTABLE SEGMENTS

 

Americas

 

Retail Sales. Consists of sales transacted in TIFFANY & CO. stores in the U.S. (76), Mexico (6), Canada (2) and Brazil (2).

 

Internet and Catalog Sales. Tiffany distributes a selection of its products in the U.S. and Canada through its websites at www.tiffany.com and www.tiffany.ca. Tiffany also distributes catalogs of selected merchandise to its proprietary list of customers in the U.S. and to mailing lists rented from third parties. SELECTIONS^® catalogs are published four times per year, supplemented by other targeted catalogs.

 

The following table sets forth certain data with respect to Internet, mail and telephone order operations for the periods indicated:

 

 

Business-to-Business Sales. Business sales executives call on business clients, selling products drawn from the retail product line and items specially developed for the business market, including trophies and items designed for the particular customer. Most of such sales occur in the U.S. Price allowances are given to business account holders for certain purchases. Business customers have

 

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typically made purchases for gift giving, employee service and achievement recognition awards, customer incentives and other purposes. Products and services are marketed through a sales organization, through advertising in newspapers and business periodicals and through the publication of special catalogs. Business account holders may make gift purchases through the Company’s website at http://business.tiffany.com.

 

Wholesale Distribution. Selected TIFFANY & CO. merchandise is sold to independent distributors for resale in markets in the Central/South American, Caribbean and Canadian regions. Such sales represented less than 1% of the Registrant’s net sales in Fiscal 2008.

 

Asia-Pacific

 

Retail Sales. Consists of sales transacted in TIFFANY & CO. locations in Japan (57), China (8), Korea (8), Hong Kong (7), Taiwan (5), Australia (4), Singapore (3), Macau (2) and Malaysia (2).

 

Business with Department Stores in Japan. In Fiscal 2008, 2007 and 2006, total net sales in Japan of TIFFANY & CO. merchandise represented 19%, 17% and 19% of the Registrant’s net sales.

 

The Registrant does business in Japan through its wholly-owned subsidiary, Tiffany & Co. Japan, Inc. (“Tiffany-Japan”). 79% of Tiffany-Japan’s net sales in Fiscal 2008 were transacted in boutiques within Japanese department stores. Tiffany-Japan also operates four freestanding stores outside the scope of its Japanese department store operations. In 2008, Mitsukoshi and Isetan department stores merged to form the company Isetan Mitsukoshi Holdings Ltd. (“Isetan Mitsukoshi”), making it the largest department store group in Japan. The establishment of Isetan Mitsukoshi realigned Japan’s department store sector. It is now dominated by four department store groups: Isetan Mitsukoshi; J. Front Retailing Co. (Daimaru and Matsuzakaya department stores); Takashimaya; and Millennium Retailing Co. (Sogo and Seibu department stores).

 

At the end of Fiscal 2008, Tiffany-Japan was operating TIFFANY & CO. boutiques in locations controlled by the major department store groups as follows: Isetan Mitsukoshi (18), J. Front Retailing Co. (9), Takashimaya (9), and Millennium Retailing Co. (3). Tiffany-Japan was also operating 14 boutiques in stores controlled by other Japanese companies.

 

With 18 of 53 TIFFANY & CO. department store boutiques, Isetan Mitsukoshi is the single largest department store operator housing TIFFANY & CO. boutiques in Japan. Sales recorded in retail locations operated within Isetan Mitsukoshi accounted for 6%, 6% and 8% of the Registrant’s net sales in Fiscal 2008, 2007 and 2006.

 

Tiffany-Japan and the department store operators have distinct responsibilities and risks in the operation of TIFFANY & CO. boutiques in Japan.

 

The department store operator:

 

 

Tiffany-Japan:

 

 

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Tiffany-Japan provides retail staff and bears the risk of inventory loss in concession boutiques (47 locations) and the department store operator provides retail staff and bears the risk of inventory loss in standard boutiques (6 locations).

 

In return for its services and use of its facilities, the department store operator retains a portion (the basic portion) of net retail sales made in TIFFANY & CO. boutiques. The basic portion varies depending on the type of boutique and the retail price of the merchandise involved, with the fees generally varying from store to store. The highest basic portion available to any department store is 23% and the lowest is 14%.

 

In recent years, Tiffany-Japan has, with the agreement of the involved department store operators, closed underperforming boutiques and relocated the boutiques to other department store locations in order to improve sales growth and profitability. Management expects to continue to evaluate boutique locations to assess their potential for growth and profitability.

 

Internet Sales. The Company offers a selection of TIFFANY & CO. merchandise for purchase in Japan and Australia through its websites at www.tiffany.co.jp and www.tiffany.com/au.

 

Business-to-Business Sales. Consists of products drawn from the retail product line and items specifically developed and sold to business customers.

 

Wholesale Distribution. Selected TIFFANY & CO. merchandise is sold to independent distributors for resale in Asia-Pacific markets, predominantly in the Middle Eastern region. Such sales represented 1% of the Registrant’s net sales in Fiscal 2008.

 

Europe

 

Retail Sales. Consists of sales transacted in TIFFANY & CO. stores in the United Kingdom (7), Germany (5), Italy (4), France (3), Austria (1), Switzerland (1), Belgium (1), Spain (1) and Ireland (1).

 

Internet Sales. The Company offers a selection of TIFFANY & CO. merchandise for purchase in England, Wales, Northern Ireland and Scotland through its website at www.tiffany.com/uk.

 

Business-to-Business Sales. Consists of products drawn from the retail product line and items specifically developed and sold to business customers.

 

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Wholesale Distribution. Selected TIFFANY & CO. merchandise is sold to independent distributors for resale predominantly in Russia. Such sales represented less than 1% of the Registrant’s net sales in Fiscal 2008.

 

Other

 

Other sales are those made in all non-reportable segments of the Registrant’s business. Sales in Other consist primarily of wholesale sales of diamonds. Other also includes sales made by businesses operated under trademarks or trade names other than TIFFANY & CO., such as IRIDESSE, and earnings received from a licensing agreement with Luxottica Group for the distribution of TIFFANY & CO. brand eyewear. Expected earnings received from a licensing agreement with The Swatch Group Ltd. (the “Swatch Group”) for TIFFANY & CO. brand watches will be included in Other when received.

 

Wholesale Diamond Sales. The Company sells diamonds to third parties that are found to be unsuitable for Tiffany’s needs. The Company regularly purchases parcels of rough diamonds for further processing, but not all rough diamonds so purchased are suitable for Tiffany’s needs. In addition, not all polished diamonds are suitable for Tiffany jewelry. The Company’s objective from such sales is to recoup its original costs, thereby earning minimal, if any, gross margin on those transactions.

 

Iridesse, Inc. The Company operates a retail subsidiary, under the name Iridesse, Inc. (“Iridesse”), which engages exclusively in the design and retail sale of pearl jewelry in the U.S. At the end of Fiscal 2008, there were 16 IRIDESSE retail stores. In January 2009, management committed to a plan to close all IRIDESSE stores after agreements are reached with landlords and inventory is sold.

 

Little Switzerland, Inc. In 2007, the Company sold 100% of the stock of Little Switzerland, Inc. (“Little Switzerland”) to an unaffiliated third party for net proceeds of $32,870,000, subject to a contractual post-closing balance sheet adjustment. Little Switzerland’s results have been reclassified to discontinued operations. The Company agreed to distribute TIFFANY & CO. merchandise for resale in TIFFANY & CO. boutiques maintained in certain LITTLE SWITZERLAND stores post-closing. In 2007, the Company recorded a $54,260,000 pre-tax charge due to the sale of Little Switzerland.

 

Expansion of Operations

 

Management regularly evaluates potential markets for new TIFFANY & CO. stores with a view to the demographics of the area to be served, consumer demand and the proximity of other luxury brands and existing TIFFANY & CO. locations. Management recognizes that over-saturation of any market could diminish the distinctive appeal of the Brand, but believes that there are a significant number of locations remaining in the Americas, Asia-Pacific and Europe that meet the requirements of a TIFFANY & CO. location.

 

In 2008, Tiffany opened a 2,600 gross square foot store in the U.S. that offers a selected product assortment which excludes engagement and high-end jewelry. Management anticipates that Tiffany will open additional locations in this smaller format, while continuing to open full assortment stores

as well. The selection allows the store to concentrate higher-margin products in a smaller space. Management believes that this new format will be highly efficient and will give the Company the opportunity to open stores in affluent, albeit smaller, U.S. cities and to better serve larger markets where the Company already operates full assortment stores.

 

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The following chart details the growth in worldwide TIFFANY & CO. retail locations operated by Registrant’s subsidiary companies since Fiscal 1993:

 

 

The Company plans to moderate the rate of store openings, net of store closings, from 22 in 2008 to 13 stores in 2009. Management anticipates opening five stores in the Americas, seven stores in Asia-Pacific and one store in Europe in 2009.

 

Management also anticipates continued expansion of its Internet, business-to-business and wholesale operations around the world.

 

Products

 

The Company’s principal product category is jewelry. It also sells timepieces, sterling silver goods (other than jewelry), china, crystal, stationery, fragrances and personal accessories.

 

Tiffany offers an extensive selection of TIFFANY & CO. brand jewelry at a wide range of prices. In Fiscal 2008, 2007 and 2006, approximately 87%, 85% and 85% of the Registrant’s net sales were attributable to TIFFANY & CO. brand jewelry. Designs are developed by employees, suppliers, independent designers and independent “name” designers (see “Designer Licenses” below). In Fiscal 2008, 2007 and 2006, the remaining 13%, 15% and 15% of the Registrant’s net sales were attributable to TIFFANY & CO. brand non-jewelry merchandise and sales from businesses operated under trademarks or trade names other than TIFFANY & CO.

 

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Sales by Reportable Segment of TIFFANY & CO. Jewelry by Category

 

 

 

 

 

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In addition to jewelry, the Company sells TIFFANY & CO. brand merchandise in the following categories: timepieces and clocks; sterling silver merchandise, including flatware, hollowware (tea and coffee services, bowls, cups and trays), trophies, key holders, picture frames and desk accessories; stainless steel flatware; crystal, glassware, china and other tableware; custom engraved stationery; writing instruments; eyewear and fashion accessories. Fragrance products are sold under the trademarks TIFFANY, PURE TIFFANY and TIFFANY FOR MEN. Tiffany also sells other brands of timepieces and tableware in its U.S. stores. None of these categories individually represents 10% or more of net sales.

 

ADVERTISING AND PROMOTION

 

The Registrant regularly advertises, primarily in newspapers and magazines, and periodically conducts product promotional events. In Fiscal 2008, 2007 and 2006, the Registrant spent approximately $189 million (6.6% of net sales), $174 million (5.9% of net sales) and $162 million (6.3% of net sales) on worldwide advertising, which includes costs for media, production, catalogs, promotional events and other related items. Management currently anticipates a decline in advertising spending in 2009.

 

PUBLIC RELATIONS

 

Public Relations (promotional) activity is a significant aspect of the Registrant’s business. Management believes that Tiffany’s image is enhanced by a program of charity sponsorships, grants and merchandise donations. Donations are also made to The Tiffany & Co. Foundation, a private foundation organized to support 501(c)(3) charitable organizations with efforts concentrated in environmental conservation and support for the decorative arts. Tiffany also engages in a program of retail promotions and media activities to maintain consumer awareness of the Company and its products. Each year, Tiffany publishes its well-known Blue Book which showcases jewelry and other merchandise. The Registrant considers these and other promotional efforts important in maintaining Tiffany’s image.

 

TRADEMARKS

 

The designations TIFFANY^® and TIFFANY & CO.^® are the principal trademarks of Tiffany, as well as serving as trade names. Through its subsidiaries, the Company has obtained and is the proprietor of trademark registrations for TIFFANY and TIFFANY & CO., as well as the TIFFANY BLUE BOX^® and the color TIFFANY BLUE^® for a variety of product categories in the U.S. and in other countries.

 

Tiffany maintains a program to protect its trademarks and institutes legal action where necessary to prevent others either from registering or using marks which are considered to create a likelihood of confusion with the Company or its products.

 

Tiffany has been generally successful in such actions and management considers that its U.S. trademark rights in TIFFANY and TIFFANY & CO. are strong. However, use of the designation TIFFANY by third parties (often small companies) on unrelated goods or services, frequently transient in nature, may not come to the attention of Tiffany or may not rise to a level of concern warranting legal action.

 

Tiffany actively pursues those who produce or sell counterfeit TIFFANY & CO. goods through civil action and cooperation with criminal law enforcement agencies. However, counterfeit TIFFANY & CO. goods remain available in many markets and the cost of enforcement is expected to continue

 

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to rise. In recent years, there has been an increase in the availability of counterfeit goods, predominantly silver jewelry, in various markets by street vendors and small retailers and on the Internet. As Internet counterfeiting continues to become increasingly prolific, Tiffany has responded by engaging investigators and outside counsel to monitor the Internet and take various actions, including litigating through the Internet’s Uniform Dispute Resolution Policy, to stop infringing activity.

 

In July 2004, Tiffany initiated a civil proceeding against eBay, Inc. in the Federal District Court for the Southern District of New York, alleging direct and contributory trademark infringement, unfair competition, false advertising and trademark dilution. Tiffany sought damages and injunctive relief stemming from eBay’s alleged assistance and contribution to the offering for sale, advertising and promotion, in the U.S., of counterfeit TIFFANY jewelry and any other jewelry or merchandise which bears the TIFFANY trademark and is dilutive or confusingly similar to the TIFFANY trademarks. In November 2007, the case was tried as a bench trial and the Court found in favor of eBay. The Company has appealed the decision in the Second Circuit and is awaiting a hearing date.

 

Despite the general fame of the TIFFANY and TIFFANY & CO. name and mark for the Company’s products and services, Tiffany is not the sole person entitled to use the name TIFFANY in every category in every country of the world; third parties have registered the name TIFFANY in the U.S. in the food services category, and in a number of foreign countries in respect of certain product categories (including, in a few countries, the categories of food, cosmetics, jewelry, clothing and tobacco products) under circumstances where Tiffany’s rights were not sufficiently clear under local law, and/or where management concluded that Tiffany’s foreseeable business interests did not warrant the expense of litigation.

 

DESIGNER LICENSES

 

Tiffany has been the sole licensee for jewelry designed by Elsa Peretti, Paloma Picasso and Frank Gehry, respectively, since Fiscal 1974, 1980 and 2005.

 

Ms. Peretti and Ms. Picasso retain ownership of copyrights for their designs and of their trademarks and exercise approval rights with respect to important aspects of the promotion, display, manufacture and merchandising of their designs. Tiffany is required by contract to devote a portion of its advertising budget to the promotion of their respective products; each is paid a royalty by Tiffany for jewelry and other items designed by them and sold under their respective names. Written agreements exist between Ms. Peretti and Tiffany and between Ms. Picasso and Tiffany, but each may be terminated by either party following six months notice to the other party. No arrangements are currently in place to continue the sale of designs following the death or disability of either Ms. Peretti or Ms. Picasso. Tiffany is the sole retail source for merchandise designed by Ms. Peretti worldwide; however, she has reserved by contract the right to appoint other distributors in markets outside the U.S., Canada, Japan, Singapore, Australia, Italy, the U.K., Switzerland and Germany.

 

The designs of Ms. Peretti accounted for 11%, 11% and 12% of the Company’s net sales in Fiscal 2008, 2007 and 2006. Merchandise designed by Ms. Picasso accounted for 3%, 3% and 4% of the Company’s net sales in Fiscal 2008, 2007 and 2006. The Gehry collection was made available for retail sale in Fiscal 2006. Merchandise designed by Mr. Gehry accounted for 1% of the Company’s net sales in Fiscal 2008, and 2% in 2007 and 2006. The Registrant’s operating results could be adversely affected were it to cease to be a licensee of these designers or should its degree of exclusivity in respect of their designs be diminished.

 

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MERCHANDISE PURCHASING, MANUFACTURING AND RAW MATERIALS

 

The Company’s manufacturing facilities produce approximately 55%-60% of Tiffany merchandise sold. The balance, including almost all non-jewelry items, is purchased from third parties.

 

Tiffany produces jewelry and silver goods in Rhode Island and New York and silver hollowware in New Jersey. Other subsidiaries of the Company process, cut and polish diamonds at facilities outside the U.S.

 

It is not expected that Tiffany will ever manufacture all of its needs. Factors to be considered in its decision to outsource manufacturing include product quality, gross margin, access to or mastery of various jewelry-making skills and technology, support for alternative capacity and the cost of capital investments.

 

Purchases of Polished Gemstones and Precious Metals. Gemstones and precious metals used in making Tiffany’s jewelry are purchased from a variety of sources. Most purchases are from suppliers with which Tiffany enjoys long-standing relationships.

 

The Company does not enter into long-term supply or requirements arrangements with its polished gemstone and precious metal vendors, but does enter into purchase orders for fixed quantities with nearly all of these vendors. These relationships may be terminated at any time by the Company without penalty; such termination would not discharge the Company’s obligations under unfulfilled purchase orders placed prior to the termination.

 

Products containing one or more diamonds of varying sizes, including diamonds used as accents, side-stones and center-stones, accounted for approximately 47%, 48% and 46% of Tiffany’s net

sales in Fiscal 2008, 2007 and 2006. Products containing one or more diamonds of one carat or larger accounted for 10%, 11% and 10% of net sales in each of those years.

 

Tiffany purchases polished diamonds principally from nine key vendors. Were trade relations between Tiffany and one or more of these vendors to be disrupted, the Company’s sales could be adversely affected in the short term until alternative supply arrangements could be established. In the current economic environment of reduced retail and wholesale demand, the world’s available diamond supply appears to management to exceed demand, and wholesale prices for all polished diamonds have declined. The potential exists for continued wholesale price declines in polished diamonds in the short term.

 

Some, but not all, of Tiffany’s suppliers are Diamond Trading Company (“DTC”) sightholders (see “The DTC” below), and it is estimated that a significant portion of the diamonds that Tiffany has purchased have had their source with the DTC. The Company is a DTC sightholder for rough diamonds through its joint ventures (see below).

 

Except as noted above, Tiffany believes that there are numerous alternative sources for gemstones and precious metals and that the loss of any single supplier would not have a material adverse effect on its operations.

 

Purchases of Rough Diamonds. The Company has established diamond processing operations that purchase, sort, cut and/or polish rough diamonds for use by Tiffany. The Company now has such operations in Belgium, South Africa, Botswana, Namibia, China, Mauritius and Vietnam. Operations in South Africa, Botswana and Namibia are conducted through joint ventures with third parties.

 

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The Company has invested in the operations in South Africa, Botswana and Namibia in order to increase its opportunity to buy rough “conflict-free” diamonds (see “Conflict Diamonds” below) and may invest in additional opportunities that will potentially lead to additional sources of such diamonds. However, management does not foresee a shortage of conflict-free diamonds in the short term.

 

In Fiscal 2008, approximately 40% of the polished diamonds acquired by Tiffany for use in jewelry were produced from rough diamonds purchased by the Company. The balance of Tiffany’s needs for polished diamonds were purchased from third parties (see above). The Company expects to increase its purchases of rough diamonds in the future. In conducting these activities, it is the Company’s intention to supply Tiffany’s needs for cut/polished diamonds to as great an extent as possible.

 

In order to acquire rough diamonds, the Company must purchase mixed assortments of rough diamonds. It is thus necessary to purchase some rough diamonds that cannot be cut to meet Tiffany’s quality standards and that must be sold to third parties; such sales have been conducted through the Other non-reportable segment. To make such sales, the Company must charge a market price and is unable to earn any significant profit above its original cost. Sales of rough diamonds in the Other non-reportable segment have had and will continue to have the effect of reducing the Company’s overall gross margins.

 

The Company has a diamond purchase agreement with Harry Winston Diamond Corporation (formerly known as Aber Diamond Corporation) whereby the Company has the obligation to purchase a minimum of $50,000,000 of rough diamonds, subject to availability and the Company’s quality standards, per year for a 10-year period ending in 2013. The Company has not entered into long-term supply arrangements with its other significant rough diamond vendors.

 

The DTC. The supply and price of rough and polished diamonds in the principal world markets have been and continue to be influenced by the DTC, an affiliate of De Beers S.A., the Luxembourg-based holding company of the De Beers Group. Although the role of the DTC has diminished, the DTC will continue to affect traditional channels of supply in the markets for rough and cut diamonds. The DTC continues to supply a significant portion of the world market for rough, gem-quality diamonds, notwithstanding that its historical ability to control worldwide production supplies has been significantly diminished due to changing policies in diamond-producing countries and revised contractual arrangements with other diamond mine operators.

 

The DTC continues to exert influence on the demand for polished diamonds through advertising and marketing efforts throughout the world and through the requirements it imposes on those who purchase rough diamonds from the DTC (“sightholders”).

 

Worldwide Availability of Diamonds. The availability and price of diamonds to the DTC, Tiffany and Tiffany’s suppliers may be, to some extent, dependent on the political situation in diamond-producing countries, the opening of new mines and the continuance of the prevailing supply and marketing arrangements for rough diamonds. As a consequence of changes in the sightholder system and increased demand in the retail diamond trade, diamond prices increased significantly in the years leading up to 2008. During 2008, as global demand for rough diamonds waned, diamond prices began to decrease.

 

Sustained interruption in the supply of rough diamonds, an overabundance of supply or a substantial change in the marketing arrangements described above could adversely affect Tiffany and the retail jewelry industry as a whole. Changes in the marketing and advertising policies of the DTC and its direct purchasers could affect consumer demand for diamonds.

 

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Conflict Diamonds. Increasing media attention has been focused in recent years on the issue of “conflict” diamonds. Conflict diamonds are extracted from war-torn geographic regions and sold by rebel forces to fund insurrection. Allegations have been made that diamond trading is used as a source of funds to further terrorist activities. Concerned participants in the diamond trade, including Tiffany and non-government organizations, such as the Council for Responsible Jewellery Practices, of which Tiffany is a member, seek to exclude such diamonds, which represent a small fraction of the world’s supply, from legitimate trade through an international system of certification and legislation. It is expected that such efforts will not substantially affect the supply of diamonds.

 

Manufactured Diamonds. Manufactured diamonds have become available in small quantities. Although significant questions remain as to the ability of producers to produce manufactured diamonds economically within a full range of sizes and natural diamond colors, and as to consumer acceptance of manufactured diamonds, it is possible that manufactured diamonds may become a factor in the market. Should manufactured diamonds come into the market in significant quantities at prices significantly below those for natural diamonds of comparable quality, the price for natural diamonds may fall unless consumers are willing to pay a premium for natural diamonds. Such a price decline could affect the price that Tiffany is able to obtain for its products. Also, a significant decline in the price of natural diamonds may affect the economics of diamond mining, causing some mining operations to become uneconomic; this, in turn, could lead to shortages in natural diamonds.

 

Finished Jewelry. Finished jewelry is purchased from approximately 80 manufacturers, most of which have long-standing relationships with Tiffany. However, Tiffany does not enter into long-term supply arrangements with its finished goods vendors. Tiffany does enter into written blanket purchase order agreements with nearly all of its finished goods vendors. These relationships may be terminated at any time by Tiffany without penalty; such termination would not discharge Tiffany’s obligations under unfulfilled purchase orders placed prior to termination. The blanket purchase order agreements establish non-price terms by which Tiffany may purchase and by which vendors may sell finished goods to Tiffany. These terms include payment terms, shipping procedures, product quality requirements, merchandise specifications and vendor social responsibility requirements. Tiffany believes that there are alternative sources for most jewelry items; however, due to the craftsmanship involved in certain designs, Tiffany would have difficulty finding readily available alternatives in the short term.

 

Watches. In 2007, the Company entered into a 20-year license and distribution agreement with The Swatch Group Ltd. for the manufacture and distribution of TIFFANY & CO. brand watches. Under the agreement, the Swatch Group has incorporated a new watchmaking company in Switzerland for the design, engineering, manufacturing, marketing, distribution and service of TIFFANY & CO. brand watches. The new company is authorized to use certain trademarks owned by the Company and operate under the TIFFANY & CO. name. The distribution of TIFFANY & CO. watches will be made through the Swatch Group distribution network via Swatch Group affiliates, Swatch Group retail facilities and third-party distributors as well as through TIFFANY & CO. stores, all of which is

expected to commence in 2009. Watch sales by the Company in Fiscal 2008 constituted approximately 2% of net sales.

 

COMPETITION

 

Tiffany & Co. encounters significant competition in all product lines. Some competitors specialize in just one area in which Tiffany is active. Many competitors have established worldwide, national or local reputations for style, quality, expertise and customer service similar to Tiffany and compete on the basis of that reputation. Other jewelers and retailers compete primarily through

 

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advertised price promotion, which has recently increased due to challenging economic conditions and decreased consumer demand. Tiffany competes on the basis of its reputation for high-quality products, brand recognition, customer service and distinctive value-priced merchandise and does not engage in price promotional advertising.

 

Competition for engagement jewelry sales is particularly and increasingly fierce. Tiffany’s price for diamonds reflects the rarity of the stones it offers and the rigid parameters it exercises with respect to the cut, clarity and other quality factors which increase the beauty of Tiffany diamonds, but which also increase Tiffany’s cost. Tiffany competes in this market by stressing quality.

 

SEASONALITY

 

As a jeweler and specialty retailer, the Company’s business is seasonal in nature, with the fourth quarter typically representing at least one-third of annual net sales and approximately one-half of annual net earnings. Management expects such seasonality to continue.

 

EMPLOYEES

 

As of January 31, 2009, the Registrant’s subsidiary corporations employed an aggregate of approximately 9,000 full-time and part-time persons. Of those employees, approximately 5,600 are employed in the United States. Approximately 40 of the total number of the Registrant’s subsidiary’s employees in South Africa are represented by unions and approximately 520 of the total number of Registrant’s subsidiary’s employees in Vietnam are represented by unions. None of Registrant’s unionized employees are employed in the United States. The Registrant believes that relations with its employees and these unions are good.

 

Subsequent to January 31, 2009, the total number of full-time and part-time persons employed by the Registrant decreased by approximately 10% due to participation in a voluntary early retirement program announced in the third quarter of 2008 and by involuntary terminations.

 

AVAILABLE INFORMATION

 

The Company files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information statements and amendments to reports filed or furnished pursuant to Sections 13(a), 14 and 15(d) of the Securities Exchange Act of 1934, as amended. The public may read and copy these materials at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding Tiffany & Co. and other companies that file materials with the SEC electronically. You may also obtain copies of the Company’s annual reports on Form 10-K, Forms 10-Q and Forms 8-K, free of charge, on the Company’s website at http://investor.tiffany.com/financials.cfm.

 

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As is the case for any retailer, the Registrant’s success in achieving its objectives and expectations is dependent upon general economic conditions, competitive conditions and consumer attitudes. However, certain factors are specific to the Registrant and/or the markets in which it operates. The following “risk factors” are specific to the Registrant; these risk factors affect the likelihood that the Registrant will achieve the financial objectives and expectations communicated by management:

 

(i) Risk: that challenging global economic conditions and related low levels of consumer confidence continue or worsen over a prolonged period of time and adversely affect the Registrant’s sales.

 

As a retailer of goods which are discretionary purchases, the Registrant’s sales results are particularly sensitive to changes in economic conditions and consumer confidence. Consumer confidence is affected by general business conditions; changes in the market value of securities and real estate; inflation; interest rates and the availability of consumer credit; tax rates; and expectations of future economic conditions and employment prospects.

 

Consumer spending for discretionary goods generally declines during times of falling consumer confidence, which negatively affects the Registrant’s earnings because of its cost base and inventory investment.

 

Many of the Registrant’s competitors may continue to react to falling consumer confidence by reducing their retail prices; such reductions and/or inventory liquidations can have a short-term adverse effect on the Company’s sales.

 

In addition, some observers believe that the short-term attractiveness of “luxury” goods may have waned in certain markets, thus reducing demand. This could adversely affect the Registrant’s sales and margins.

 

Uncertainty surrounding the current global economic environment makes it more difficult for the Registrant to forecast operating results. The Registrant’s forecasts employ the use of estimates and assumptions. Actual results could differ from forecasts, and those differences could be material.

 

(ii) Risk: that sales will decline or remain flat in the Registrant’s fourth fiscal quarter, which includes the holiday selling season.

 

The Registrant’s business is seasonal in nature, with the fourth quarter typically representing at least one-third of annual net sales and approximately one-half of annual net earnings. Poor sales results during the Registrant’s fourth quarter will have a material adverse effect on the Registrant’s sales and profits.

 

(iii) Risk: that regional instability and conflict will disrupt tourist travel.

 

Unsettled regional and global conflicts or crises which result in military, terrorist or other conditions creating disruptions or disincentives to, or changes in the pattern, practice or frequency of tourist travel to the various regions where the Registrant operates retail stores could adversely affect the Registrant’s sales and profits.

 

(iv) Risk: that foreign currencies will weaken against the U.S. dollar and require the Registrant to raise prices or shrink profit margins in locations outside of the U.S.

 

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The Registrant operates retail stores and boutiques in various countries outside of the U.S. and, as a result, is exposed to market risk from fluctuations in foreign currency exchange rates. The Registrant’s sales in those countries represented 46% of its net sales, of which Japan represented 19% of net sales, in Fiscal 2008. A substantial weakening of foreign currencies against the U.S. dollar would require the Registrant to raise its retail prices or reduce its profit margins in various locations outside of the U.S. Consumers in those markets may not accept significant price increases on the Registrant’s goods; thus there is a risk that a substantial weakening of foreign currencies will result in reduced sales or profit margins.

 

(v) Risk: that the Registrant will be unable to continue to offer merchandise designed by Elsa Peretti or Paloma Picasso.

 

The Registrant’s long-standing right to sell the jewelry designs of Elsa Peretti and Paloma Picasso and use their trademarks is responsible for a substantial portion of the Registrant’s revenues. Merchandise designed by Ms. Peretti and by Ms. Picasso accounted for 11% and 3% of Fiscal 2008 net sales. Tiffany has exclusive license arrangements with Ms. Peretti and Ms. Picasso; these arrangements are subject to royalty payments as well as other requirements. Each license may be terminated by Tiffany or the designer on six months notice, even in the case where no default has occurred. Also, no agreements have been made for the continued sale of the designs or use of the trademarks ELSA PERETTI or PALOMA PICASSO following the death of either designer. Loss of either license would materially adversely affect the Registrant’s business through lost sales and profits.

 

(vi) Risk: that changes in prices of diamonds and precious metals or reduced supply availability might adversely affect the Registrant’s ability to produce and sell products at desired profit margins.

 

Most of the Registrant’s jewelry and non-jewelry offerings are made with diamonds, gemstones and/or precious metals. A significant change in the prices of these commodities could adversely affect the Registrant’s business, which is vulnerable to the risks inherent in the trade for such commodities. A substantial increase in the price of raw materials and/or high-quality rough and polished diamonds within the quality grades, colors and sizes that customers demand could lead to decreased customer demand and lost sales and/or reduced gross profit margins. Conversely, a decrease in the prices of raw materials could have a disruptive effect, negatively or positively, on sales demand and short-term margins.

 

Acquiring diamonds for the engagement business has, at times, been difficult because of supply limitations; Tiffany may not be able to maintain a comprehensive selection of diamonds in each retail location due to the broad assortment of sizes, colors, clarity grades and cuts demanded by customers. A substantial increase or decrease in the supply of raw materials and/or high-quality rough and polished diamonds within the quality grades, colors and sizes that customers demand could lead to decreased customer demand and lost sales and/or reduced gross profit margins.

 

If trade relationships between the Registrant and one or more of its significant vendors were disrupted, the Registrant’s sales could be adversely affected in the short-term until alternative supply arrangements could be established.

 

(vii) Risk: that the value of the TIFFANY & CO. trademark will decline due to the sale of counterfeit merchandise by infringers.

 

The TIFFANY & CO. trademark is an asset which is essential to the competitiveness and success of the Registrant’s business and the Registrant takes appropriate action to protect it.

 

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Tiffany actively pursues those who produce or sell counterfeit TIFFANY & CO. goods through civil action and cooperation with criminal law enforcement agencies. However, the Registrant’s enforcement actions have not stopped the imitation and counterfeit of the Registrant’s merchandise or the infringement of the trademark, and counterfeit TIFFANY & CO. goods remain available in many markets. In recent years, there has been an increase in the availability of counterfeit goods, predominantly silver jewelry, in various markets by street vendors and small retailers, as well as on the Internet. The continued sale of counterfeit merchandise could have an adverse effect on the TIFFANY & CO. brand by undermining Tiffany’s reputation for quality goods and making such goods appear less desirable to consumers of luxury goods. Damage to the brand would result in lost sales and profits.

 

(viii) Risk: that the Registrant will be unable to lease sufficient space for its retail stores in prime locations.

 

The Registrant, positioned as a luxury goods retailer, has established its retail presence in choice store locations. If the Registrant cannot secure and retain locations on suitable terms in prime and desirable luxury shopping locations, its expansion plans, sales and profits will be jeopardized.

 

In Japan, many of the retail locations are located in department stores. TIFFANY & CO. boutiques located in department stores in Japan represented 79% of net sales in Japan and 15% of consolidated net sales in Fiscal 2008. In recent years, the Japanese department store industry has, in general, suffered declining sales and there is a risk that such financial difficulties will force further consolidations or store closings. Should one or more Japanese department store operators elect or be required to close one or more stores now housing a TIFFANY & CO. boutique, the Registrant’s sales and profits would be reduced while alternate premises were being obtained. The Registrant’s commercial relationships with department stores in Japan, and their abilities to continue as leading department store operators, have been and will continue to be substantial factors in the Registrant’s continued success in Japan.

 

(ix) Risk: that the Registrant’s business is dependent upon the distinctive appeal of the TIFFANY & CO. brand.

 

The TIFFANY & CO. brand’s association with quality, luxury and exclusivity is integral to the success of the Registrant’s business. The Registrant’s expansion plans for retail and direct selling operations and merchandise development, production and management support the brand’s appeal. Consequently, poor maintenance, promotion and positioning of the TIFFANY & CO. brand, as well as market over-saturation, may adversely affect the business by diminishing the distinctive appeal of the TIFFANY & CO. brand and tarnishing its image. This would result in lower sales and profits.

 

(x) Risk: that the current volatile global economy may have a material adverse effect on the Registrant’s liquidity and capital resources.

 

U.S. and global credit and equity markets have recently undergone significant disruption, making it difficult for many businesses, including the Registrant, to obtain financing on acceptable terms. A prolonged downturn in the economy, extending further than those included in management’s projections, could have an effect on the Registrant’s cost of borrowing, could diminish its ability to service or maintain existing financing, and could make it more difficult for the Registrant to obtain additional financing or to refinance existing long-term obligations. In addition, increased disruption in the markets could lead to the failure of financial institutions. If any of the banks participating in the Registrant’s revolving credit facility were to declare bankruptcy, the Registrant would no longer have access to those committed funds.

 

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Further deterioration in the stock market could continue to negatively impact the valuation of pension plan assets and result in increased minimum funding requirements.

 

 

NONE

 

 

The Registrant leases its various store premises (other than the New York Flagship store) under arrangements that generally range from two to 10 years. The following table provides information on the number of locations and square footage of Company-operated TIFFANY & CO. stores and boutiques as of January 31, 2009:

 

 

The Company expects future store openings to be within the current gross square footage ranges for each region.

 

NEW YORK FLAGSHIP STORE

 

The Company owns the building housing the Flagship store at 727 Fifth Avenue, which was designed to be a retail store for Tiffany and is believed to be well located for this function. Currently, approximately 42,000 gross square feet of this 124,000 square foot building are devoted to retail sales, with the balance devoted to administrative offices, certain product services, jewelry manufacturing and storage. Tiffany’s New York Flagship store accounts for a significant portion of the Company’s net sales and is the focal point for marketing and public relations efforts. Approximately 10% of total Company net sales for Fiscal 2008, 2007 and 2006 were attributable to the New York Flagship store’s retail sales.

 

TOKYO GINZA STORE

 

In August 2007, the Company sold the land and multi-tenant building housing the TIFFANY & CO. store in Tokyo’s Ginza shopping district and leased back only 12,000 gross square feet of the property (the portion that was occupied by Tiffany-Japan immediately prior to the transaction). The

 

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lease expires in 2032; however, the Company has options to terminate the lease in 2022 and 2027 without penalty.

 

LONDON OLD BOND STREET STORE

 

In October 2007, the Company sold the land and single-tenant building housing the TIFFANY & CO. store on London’s Old Bond Street and simultaneously entered into a 15-year lease with two 10-year renewal options. The Company completed a renovation and reconfiguration of the store in Fiscal 2006 which increased its gross square footage from 15,200 to 22,400.

 

IRIDESSE STORES

 

In Fiscal 2008, Iridesse leased and operated 16 retail locations in the U.S. totaling approximately 23,000 gross square feet devoted to retail selling and operations. Iridesse retail stores range from approximately 1,200 to 1,700 gross square feet with an average retail store size of approximately 1,400 gross square feet. Iridesse rents its retail store locations under standard shopping mall leases, which may contain minimum rent escalations, for an average term of 10 years. Some Iridesse leases are guaranteed by Tiffany. In January 2009, management committed to a plan to close the Iridesse stores as agreements are reached with landlords and inventory is sold.

 

RETAIL SERVICE CENTER

 

The Company’s Retail Service Center (“RSC”), located in Parsippany, New Jersey, comprises approximately 370,000 square feet. Approximately half of the building is devoted to office and computer operations, and half to warehousing, shipping, receiving, light manufacturing, merchandise processing and other distribution functions. The RSC receives merchandise and replenishes retail stores. In September 2005, Tiffany sold the RSC and entered into a long-term lease which expires in 2025, subject to Tiffany’s option to renew for two sequential 10-year periods. The Registrant believes that the RSC has been properly designed to handle worldwide distribution functions and that it is suitable for that purpose.

 

CUSTOMER FULFILLMENT CENTER

 

Tiffany is party to a ground lease for the Company’s Customer Fulfillment Center (“CFC”) in Whippany, New Jersey. The CFC is approximately 266,000 square feet and is primarily used for warehousing merchandise and processing direct-to-customer orders. The lease expires in 2032 and the Company has the right to renew the lease for an additional 20-year term.

 

MANUFACTURING FACILITIES

 

Tiffany owns and operates manufacturing facilities in Cumberland, Rhode Island and in Mount Vernon, New York. The facilities total approximately 122,000 square feet and are used for the manufacture of jewelry.

 

Tiffany is party to a lease for an approximately 44,500 square foot manufacturing facility in Pelham, New York. The lease expires June 30, 2013.

 

 

 

The Registrant and Tiffany are from time to time involved in routine litigation incidental to the conduct of Tiffany’s business, including proceedings to protect its trademark rights, litigation with parties claiming infringement of their intellectual property rights by Tiffany, litigation instituted by persons alleged to have been injured upon premises within the Registrant’s control and litigation

 

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with present and former employees and customers. Although litigation with present and former employees is routine and incidental to the conduct of Tiffany’s business, as well as for any business employing significant numbers of U.S.-based employees, such litigation can result in large monetary awards when a civil jury is allowed to determine compensatory and/or punitive damages for actions claiming discrimination on the basis of age, gender, race, religion, disability or other legally protected characteristic or for termination of employment that is wrongful or in violation of implied contracts. However, the Registrant believes that litigation currently pending to which it or Tiffany is a party or to which its properties are subject will be resolved without any material adverse effect on the Registrant’s financial position, earnings or cash flows.

 

On or about July 1, 2004, both Tiffany and the landlord of Tiffany’s Customer Fulfillment Center (“River Park”) requested arbitration of the parties’ continuing dispute over their respective obligations surrounding completion of River Park’s site work (Tiffany and Company v. River Park Business Center, Inc., American Arbitration Association). In the arbitration, Tiffany asserts River Park’s continuing breach of its obligations to complete Landlord’s Work by the close of Fiscal 2001, as originally required under the Ground Lease, and to obtain timely site plan approval from the Township of Hanover. Tiffany seeks damages stemming from River Park’s continuous delays in completing its obligations, which damages Tiffany contends are in excess of $1,000,000. In its arbitration complaint, River Park seeks an unspecified amount in damages alleging entitlement to reimbursement of grading costs and excess installation costs of the landfill gas venting system. The arbitration commenced in November 2008. Due to scheduling conflicts, the hearing was adjourned and will resume in mid-April 2009.

 

See “Item 1. Business” under “TRADEMARKS” for disclosure on Tiffany and Company v. eBay, Inc.

 

 

No matters were submitted to a vote of the Company’s security holders during the fourth quarter of the fiscal year ended January 31, 2009.

 

Executive Officers of the Registrant. See Item 13. Certain Relationships and Related Transactions, and Director Independence for information on the section titled “EXECUTIVE OFFICERS OF THE COMPANY” as incorporated by reference from the Registrant’s Proxy Statement dated April 9, 2009.

 

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PART II

 

Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

The Registrant’s Common Stock is traded on the New York Stock Exchange. In consolidated trading, the high and low selling prices per share for shares of such Common Stock for Fiscal 2008 were:

 

 

On March 23, 2009, the high and low selling prices quoted on such exchange were $23.40 and $20.76. On March 23, 2009, there were 13,805 holders of record of the Registrant’s Common Stock.

 

In consolidated trading, the high and low selling prices per share for shares of such Common Stock for Fiscal 2007 were:

 

 

It is the Registrant’s policy to pay a quarterly dividend on the Registrant’s Common Stock, subject to declaration by the Registrant’s Board of Directors. In Fiscal 2008, a dividend of $0.15 per share of Common Stock was paid on April 10, 2008, and a dividend of $0.17 per share of Common Stock was paid on July 10, 2008, October 10, 2008 and January 12, 2009. In Fiscal 2007, a dividend of $0.10 per share of Common Stock was paid on April 10, 2007, a dividend of $0.12 per share of Common Stock was paid on July 10, 2007 and dividends of $0.15 per share of Common Stock were paid on October 10, 2007 and January 10, 2008.

 

In calculating the aggregate market value of the voting stock held by non-affiliates of the Registrant shown on the cover page of this Annual Report on Form 10-K, 11,548,687 shares of the Registrant’s Common Stock beneficially owned by the executive officers and directors of the Registrant (exclusive of shares which may be acquired on exercise of employee stock options) were excluded, on the assumption that certain of those persons could be considered “affiliates” under the provisions of Rule 405 promulgated under the Securities Act of 1933.

 

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The following table contains the Company’s stock repurchases of equity securities in the fourth quarter of Fiscal 2008:

 

Issuer Purchases of Equity Securities

 

 

In March 2005, the Company’s Board of Directors approved a stock repurchase program (“2005 Program”) that authorized the repurchase of up to $400,000,000 of the Company’s Common Stock through March 2007 by means of open market or private transactions. In August 2006, the Company’s Board of Directors extended the expiration date of the Company’s 2005 Program to December 2009, and authorized the repurchase of up to an additional $700,000,000 of the Company’s Common Stock. In January 2008, the Company’s Board of Directors extended the expiration date of the 2005 Program to January 2011 and authorized the repurchase of up to an additional $500,000,000 of the Company’s Common Stock.

 

During the third quarter of 2008, the Company announced that its Board of Directors had suspended share repurchases, and no repurchases were made during the fourth quarter of 2008 in order to preserve cash. Such suspension continued as of the date this Annual Report on Form 10-K was first filed with the Securities and Exchange Commission.

 

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Item 6.    Selected Financial Data.

 

The following table sets forth selected financial data, certain of which have been derived from the Company’s consolidated financial statements for fiscal years 2004-2008:

 

 

All references to years relate to the fiscal year that ends on January 31 of the following calendar year. All prior year amounts have been revised to reflect a change in inventory accounting from the LIFO method to the average cost method (see “Item 8. Financial Statements and Supplementary Data — Note B. Summary of Significant Accounting Policies”).

 

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NOTES TO SELECTED FINANCIAL DATA

 

Financial information for 2008 includes the following amounts, totaling $121,143,000 of net pre-tax expense ($74,241,000 net after-tax expense, or $0.59 per diluted share after tax):

 

 

Financial information for 2007 includes the following amounts, totaling $41,934,000 of net pre-tax expense ($12,667,000 net after-tax expense, or $0.09 per diluted share after tax):

 

 

Financial information for 2005 includes a $22,588,000 income tax benefit, or $0.16 per diluted share, related to the American Jobs Creation Act of 2004 which created a temporary incentive for U.S. companies to repatriate accumulated foreign earnings.

 

Financial information for 2004 includes the following amounts totaling $168,597,000 of net pre-tax income ($110,179,000 net after-tax income, or $0.74 per diluted share after tax):

 

 

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The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and related notes. All references to years relate to the fiscal year that ends on January 31 of the following calendar year.

 

KEY STRATEGIES

 

The Company’s key strategies are:

 

 

Management intends to expand distribution by adding stores in both new and existing markets. Management recognizes that over-saturation of any market could diminish the distinctive appeal of the TIFFANY & CO. brand, but believes that there are a significant number of locations remaining worldwide that meet the requirements of a TIFFANY & CO. location.

 

 

Over the years, the Company has opened smaller size stores which have contributed to higher store productivity. In addition, the Company is focused on growing sales per square foot by increasing consumer traffic and the conversion rate (the percentage of shoppers who actually purchase) through targeted advertising, ongoing sales training and customer-focused initiatives.

 

 

Management’s long-term objective is to improve gross margin (gross profit as a percentage of net sales) through greater product manufacturing/sourcing efficiencies (including increased direct rough-diamond sourcing and internal manufacturing) and increased use of distribution center capacity. Management also intends to improve the ratio of selling, general and administrative expenses to net sales by controlling expenses and enhancing productivity so that sales growth can generate a higher rate of earnings growth.

 

 

The TIFFANY & CO.  brand (the “Brand”) is the single most important asset of the Company and is inherent in consumer aspirations for the Brand. Management will continue to invest in marketing and public relations programs designed to increase customer awareness of the Brand and will continue to monitor the strength of the Brand through market research.

 

 

The Company continues to invest in product development in order to introduce new collections and add new and innovative products to existing lines.

 

 

The Company’s diamond processing operations purchase, sort, cut and/or polish rough diamonds for use in Company merchandise. The Company will continue to seek additional sources of diamonds which, combined with its internal manufacturing operations, are intended to secure adequate product supplies and favorable costs.

 

 

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Maintaining the strength of the Brand requires that the Company make superior customer service a top priority, which it achieves by employing highly qualified sales and customer service professionals and maintaining ongoing training programs.

 

2008 SUMMARY

 

 

 

 

 

NON-GAAP MEASURES

 

The Company’s reported sales reflect either a translation-related benefit from strengthening foreign currencies or a detriment from a strengthening U.S. dollar.

 

The Company reports information in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). Internally, management monitors its sales performance on a non-GAAP basis that eliminates the positive or negative effects that result from translating international sales into U.S. dollars (“constant-exchange-rate basis”). Management believes this constant-exchange-rate

 

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measurement provides a more representative assessment of the sales performance and provides better comparability between reporting periods.

 

The Company’s management does not, nor does it suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. The Company presents such non-GAAP financial measures in reporting its financial results to provide investors with an additional tool to evaluate the Company’s operating results. The following table reconciles sales percentage increases (decreases) from the GAAP to the non-GAAP basis versus the previous year:

 

 

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RESULTS OF OPERATIONS

 

In the first quarter of 2008, the Company changed its method of accounting for inventories held by its U.S. subsidiaries and foreign branches from the last-in, first-out (“LIFO”) method to the average cost method. The average cost method is now used worldwide by the Company. All prior periods have been revised. See “Item 8. Financial Statements and Supplementary Data — Note B. Summary of Significant Accounting Policies.”

 

Certain operating data as a percentage of net sales were as follows:

 

 

Net Sales

 

Effective with the first quarter of 2008, management has changed segment reporting to reflect operating results for the following regions: the Americas, Asia-Pacific and Europe (see “Item 8. Financial Statements and Supplementary Data — Note A. Nature of Business”). Net sales were as follows:

 

 

Comparable Store Sales. Reference will be made to comparable store sales below. Comparable store sales include only sales transacted in company-operated stores and boutiques. A store’s sales are included in comparable store sales when the store has been open for more than 12 months. In markets other than Japan, sales for relocated stores are included in comparable store sales if the relocation occurs within the same geographical market. In Japan (included in the Asia-Pacific segment), sales for a new store or boutique are not included if the store or boutique was relocated from one department store to another or from a department store to a free-standing

 

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location. In all markets, the results of a store in which the square footage has been expanded or reduced remain in the comparable store base.

 

Americas. The Americas segment includes sales transacted in TIFFANY & CO. stores in the U.S., Canada and Latin/South America, as well as sales of TIFFANY & CO. products in certain of those markets through business-to-business, Internet, catalog and wholesale operations.

 

The following table presents the Americas and its components as a percentage of worldwide net sales:

 

 

Total sales in the Americas decreased $173,232,000, or 10%, in 2008 due to a decline in the number of units sold. This decrease included a 16%, or $220,999,000, decline in U.S. comparable store sales, partly offset by $58,065,000 of sales in U.S. non-comparable stores. The U.S. comparable store sales decline consisted of a 9% decrease in New York Flagship store sales and a 16% decline in comparable branch store sales. During the year, especially in the first half, the New York Flagship store benefited from increased sales to foreign tourists. In 2008, the Company opened six stores in the Americas. Internet and catalog sales in the U.S. decreased $18,655,000, or 10%, in 2008 due to a decrease in the number of orders shipped.

 

Total sales in the Americas increased $182,124,000, or 12%, in 2007 equally due to an increase in the average sales amount per unit and in the number of units sold. This increase included a 7%, or $94,451,000, sales increase in comparable U.S. retail stores and $51,478,000 of non-comparable U.S. stores. The U.S. comparable store sales increase in 2007 consisted of a 21% increase in New York Flagship store sales and a 4% increase in comparable branch store sales. In 2007, the Company opened eight stores and closed one in the Americas. Internet and catalog sales in the U.S. increased $8,049,000, or 5%, in 2007 due to an increase in the number of orders shipped.

 

Asia-Pacific. The Asia-Pacific segment includes sales transacted in TIFFANY & CO. stores in that region, as well as sales of TIFFANY & CO. products in certain markets through business-to-business, Internet and wholesale operations. The following table presents Asia-Pacific and its components as a percentage of worldwide net sales:

 

 

Total sales in Asia-Pacific increased $68,229,000, or 8%, in 2008 due to an increase in the average sales amount per unit. This increase included comparable store sales growth of 4%, or $28,485,000, and non-comparable store sales of $33,178,000. On a constant-exchange-rate

 

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basis, Asia-Pacific sales increased 1% in 2008, while comparable store sales decreased 4% due to a 10% decline in Japan partly offset by a 5% increase in other countries. In 2008, the Company opened 10 stores and closed one in Asia-Pacific.

 

Total sales in Asia-Pacific increased $105,755,000, or 14%, in 2007 due to an increase in the average sales amount per unit. This increase included comparable store sales growth of 7%, or $45,221,000, and non-comparable store sales of $50,633,000. On a constant-exchange-rate basis, Asia-Pacific sales increased 12% in 2007 and comparable store sales increased 5% due to a 26% increase in countries other than Japan, partly offset by a 5% decline in Japan. In 2007, the Company opened 10 stores and closed three in Asia-Pacific.

 

Europe. The Europe segment includes sales transacted in TIFFANY & CO. stores in that region, as well as sales of TIFFANY & CO. products in certain markets through business-to-business, Internet

and wholesale operations. Europe represented 10%, 8% and 7% of worldwide net sales in 2008, 2007 and 2006. The United Kingdom represents approximately half of European sales.

 

Total sales in Europe increased $41,051,000, or 17%, in 2008 due to an increase in the number of units sold. This increase included non-comparable store sales of $34,910,000. On a constant-exchange-rate basis, sales in Europe increased 25% in 2008 and comparable store sales rose by 6%, reflecting growth in the United Kingdom and most Continental European markets. In 2008, the Company opened seven stores in Europe.

 

Total sales in Europe in 2007 increased $58,181,000, or 31%, due to an increase in the number of units sold. This increase included comparable store sales growth of 22%, or $32,634,000, and non-comparable store sales of $13,542,000. On a constant-exchange-rate basis, sales in Europe increased 22% in 2007 and comparable store sales rose 13%, reflecting strong growth in all markets. In 2007, the Company opened three stores in Europe.

 

Other. Other includes all non-reportable segments. Sales in Other consist primarily of wholesale sales of diamonds obtained through bulk purchases that were subsequently deemed not suitable for the Company’s needs. In addition, Other includes worldwide sales made by businesses operated under trademarks or trade names other than TIFFANY & CO., such as IRIDESSE, and earnings received from third-party licensing agreements. In January 2009, management committed to a plan to close IRIDESSE stores as agreements are reached with landlords and as inventory is sold (see “Item 8. Financial Statements and Supplementary Data — Note C. Dispositions”).

 

Other sales declined $14,822,000, or 18%, in 2008 and increased $31,977,000, or 64%, in 2007. The decrease in sales in 2008 was attributed to lower wholesale sales of diamonds that were deemed not suitable for the Company’s needs, while the converse occurred in 2007. Wholesale diamond sales were $54,083,000 in 2008, $70,407,000 in 2007 and $39,848,000 in 2006.

 

Store Data. Gross square footage of Company-operated TIFFANY & CO. stores increased 9% to 935,000 in 2008, following a 9% increase to 860,000 in 2007. Sales per gross square foot generated by those stores were $2,603 in 2008, $2,890 in 2007 and $2,746 in 2006.

 

Gross Margin

 

Gross margin (gross profit as a percentage of net sales) improved 1.1 percentage points in 2008 and declined 1.1 percentage points in 2007. The primary components of the net increase in 2008 were: (i) a 0.7 percentage point improvement due to a $19,212,000 pre-tax charge in the prior year related to management’s decision to discontinue certain watch models; (ii) a 0.3 percentage point improvement due to decreased low-margin wholesale sales of diamonds; and (iii) the benefit from the Company’s precious metals hedging program. The primary components of the net decline in

 

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2007 were: (i) a 0.7 percentage point decline due to the previously-mentioned charge to discontinue certain watch models; (ii) a 0.6 percentage point decline due to increased low-margin wholesale sales of diamonds; which was partially offset by (iii) a 0.2 percentage point improvement due to the leverage effect of fixed product-related costs, which includes costs associated with merchandising and distribution.

 

The Company adjusts its retail prices from time to time to address specific market conditions, product cost increases and longer-term changes in foreign currencies/U.S. dollar relationships. Among the market conditions that the Company addresses is consumer demand for the product category involved. Consumer demand is influenced by consumer confidence and competitive pricing conditions. Management has made no determination to reduce or increase prices across all merchandise categories or across the jewelry category, but will continue to address product pricing on a case-by-case basis, as it did in 2008 when it reduced prices on diamond engagement rings in the U.S. The Company uses a limited number of derivative instruments to mitigate foreign exchange and precious metal price exposures (see “Item 8. Financial Statements and Supplementary Data — Note J. Financial Instruments”).

Other Operating Income

 

In 2007, the Company entered into a sale-leaseback arrangement for the land and multi-tenant building housing a TIFFANY & CO. store in Tokyo’s Ginza shopping district. The Company secured a long-term lease and is leasing back the portion of the property that it occupied immediately prior to the transaction. The transaction resulted in a pre-tax gain of $105,051,000 and a deferred gain of $75,244,000, which will be amortized in selling, general and administrative expenses over a 15-year period. The pre-tax gain represents the profit on the sale of the property in excess of the present value of the minimum lease payments. The lease is accounted for as an operating lease. The lease expires in 2032; however, the Company has options to terminate the lease in 2022 and 2027 without penalty.

 

Restructuring Charges

 

To address the continuing economic downturn, the Company has implemented various cost reduction initiatives, one of which was a reduction of approximately 10% of the Company’s total employee base, primarily in the U.S. The Company believes these reductions more closely align staffing with anticipated sales levels. Associated with this reduction, the Company recorded a pre-tax charge of $97,839,000. This charge included $63,005,000 related to pension and postretirement medical benefits, $33,166,000 related to severance costs and $1,668,000 primarily related to stock-based compensation. See “Item 8. Financial Statements and Supplementary Data — Note D. Restructuring Charges.”

 

Selling, General and Administrative (“SG&A”) Expenses

 

SG&A expenses decreased $32,398,000, or 3%, in 2008 and increased $194,236,000, or 19%, in 2007. SG&A expenses in those years are not comparable due to several nonrecurring charges recorded in those periods.

 

SG&A expenses in 2008 included the following nonrecurring items:

 

 

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SG&A expenses in 2007 included the following nonrecurring items:

 

 

Excluding the nonrecurring charges noted above, SG&A expenses in 2008 and 2007 would have been $1,156,899,000 and $1,131,477,000. This increase of $25,422,000, or 2%, was primarily due to increased depreciation and occupancy expenses of $22,792,000 and labor and benefits costs of $19,020,000, both of which were largely due to new and existing stores, and marketing expenses of

$15,477,000, partly offset by a $37,645,000 decrease in management incentive and stock-based compensation.

 

Excluding the nonrecurring charges noted above, SG&A expenses increased $120,723,000, or 12%, in 2007 primarily due to increased labor and benefit costs of $42,136,000 and increased depreciation and store occupancy expenses of $37,805,000, both of which were largely due to new and existing stores, as well as an increase of $12,287,000 in marketing expenses.

 

The Company’s SG&A expenses are largely fixed in nature. Variable costs (which include items such as variable store rent, sales commissions and fees paid to credit card companies) represent approximately one-fifth of total SG&A expenses.

 

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Earnings from Continuing Operations

 

 

*Percentages represent earnings (losses) from continuing operations as a percentage of each segment’s net sales.

 

Earnings from continuing operations decreased 33% in 2008. On a segment basis, the ratio of earnings (losses) from continuing operations to each segment’s net sales in 2008 compared with 2007 was as follows:

 

 

Earnings from continuing operations rose 21% in 2007. On a segment basis, the ratio of earnings (losses) from continuing operations to each segment’s net sales in 2007 compared with 2006 was as follows:

 

 

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Unallocated corporate expenses include costs related to administrative support functions which the Company does not allocate to its segments. Such unallocated costs include those for information technology, finance, legal and human resources. Unallocated corporate expenses in 2007 include a $10,000,000 contribution to The Tiffany & Co. Foundation.

 

Restructuring charges represents a $97,839,000 pre-tax charge associated with the Company’s staffing reduction initiatives. See “Item 8. Financial Statements and Supplementary Data – Note D. Restructuring Charges” for further information.

 

Other operating income in 2007 represents the $105,051,000 pre-tax gain on the sale-leaseback of the land and multi-tenant building housing a TIFFANY & CO. store in Tokyo’s Ginza shopping district.

 

Other operating expenses in 2008 represent a pre-tax impairment charge related to the Company’s investment in Target Resources plc. See “Liquidity and Capital Resources” below for further details. Other operating expenses in 2007 include the $47,981,000 impairment charge on the note receivable from Tahera (see “Liquidity and Capital Resources” below for further information) and the $19,212,000 pre-tax charge related to management’s decision to discontinue certain watch models (see “Item 8. Financial Statements and Supplementary Data – Note F. Inventories” for further details).

 

Interest Expense and Financing Costs

 

Interest expense increased $4,267,000 in 2008 primarily due to increased borrowings. Interest expense decreased $1,345,000 in 2007 primarily due to reduced borrowings under the revolving credit facility and repayments of long-term debt obligations.

 

Other Income, Net

 

Other income, net includes interest income, gains/losses on investment activities and foreign currency transactions, and minority interest income/expense. Other income, net decreased $16,516,000 in 2008 primarily due to (i) a $5,673,000 change in foreign currency gains/losses associated with the settlement of foreign payables, (ii) a $4,300,000 charge related to the unrealized gains and interest receivable associated with interest rate swaps that the Company determined were impaired (see “Item 8. Financial Statements and Supplementary Data – Note J. Financial Instruments”) and (iii) a decline in interest income. Other income, net increased $1,012,000 in 2007.

 

Provision for Income Taxes

 

The effective income tax rate was 36.4% in 2008, compared with 36.1% in 2007 and 36.3% in 2006.

 

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Loss from Discontinued Operations, Net of Tax

 

The Company sold Little Switzerland, Inc. in 2007 and recorded in discontinued operations a $54,260,000 pre-tax impairment charge ($22,602,000 after tax) due to the sale. The loss from discontinued operations in 2006 included a pre-tax charge of $6,893,000 related to the impairment

of goodwill for the Little Switzerland business as a result of store performance and cash flow projections. See “Item 8. Financial Statements and Supplementary Data – Note C. Dispositions.”

 

2009 Outlook

 

The turmoil in the current retail environment has made it more difficult to predict with certainty when the global economy will stabilize and recover or when consumer sentiment with respect to jewelry purchases will improve. In order to plan the Company’s expenditures, management’s financial performance objectives are based on the following assumptions, which may or may not prove valid, and which should be read in conjunction with “Item 1A. Risk Factors” on page K-16:

 

 

 

 

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

The global credit and equity markets have also undergone significant disruption, making it difficult for many businesses to obtain financing on favorable terms. To that end, the Company has taken steps to address these new challenges. First, as noted in the 2009 Outlook section above, the Company has implemented cost reduction initiatives to better align the Company’s expenses with

 

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the expected sales decline. Secondly, the Company secured $350,000,000 of long-term debt, which included $250,000,000 entered into in February 2009 (see “Recent Borrowings and Contractual Cash Obligations and Commercial Commitments” below) to: (i) refinance debt obligations that have come due or are expected to mature over the next year; (ii) use the funds for general corporate purposes; and (iii) provide for financial flexibility in the event that disruptions in the economy or credit markets continue or worsen.

 

The Company is party to a multibank, multicurrency, committed $450,000,000 unsecured revolving credit facility (“Credit Facility”), and has the option to increase the committed amount to $500,000,000. The Credit Facility is intended for working capital and other corporate purposes. There was $140,834,000 outstanding under the Credit Facility at January 31, 2009. The Credit Facility expires in July 2010 and the Company intends to renew the facility.

 

Management believes that the additional sources of funding that the Company recently secured, cash on hand, internally-generated cash flows and the funds available under its revolving Credit Facility are sufficient to support the Company’s planned worldwide business expansion, debt service, capital expenditures, working capital needs and dividends for the foreseeable future. Based on the Company’s business plan for 2009, management expects the Company to generate free cash flow (cash flow from operating activities minus capital expenditures) in excess of $400,000,000.

 

The following table summarizes cash flows from operating, investing and financing activities:

 

 

Operating Activities

 

The Company had net cash inflows from operating activities of $133,224,000 in 2008, $391,395,000 in 2007 and $239,036,000 in 2006. The decrease in 2008 from 2007 primarily resulted from increased income tax payments largely associated with the sale-leasebacks of TIFFANY & CO. stores in Tokyo’s Ginza shopping district and on London’s Old Bond Street and increased inventory purchases. The increase in 2007 from 2006 primarily resulted from increased net earnings from continuing operations and smaller growth in inventories. Taxes payable also increased in 2007 due to the increase in net earnings.

 

Working Capital. Working capital (current assets less current liabilities) and the corresponding current ratio (current assets divided by current liabilities) were $1,446,812,000 and 3.4 at January 31, 2009, compared with $1,337,454,000 and 3.3 at January 31, 2008.

 

Accounts receivable, less allowances, at January 31, 2009 were 15% lower than at January 31, 2008 primarily due to a decline in sales. Changes in foreign currency exchange rates had an

 

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insignificant effect on the change in accounts receivable. On a 12-month rolling basis, accounts receivable turnover was 17 times in 2008 and 18 times in 2007.

 

Inventories, net at January 31, 2009 were 17% above January 31, 2008 reflecting weaker sales trends particularly in the fourth quarter. Combined raw material and work-in-process inventories increased 13% which also reflected expanded diamond sourcing operations, as well as higher gemstone costs. Finished goods inventories increased 18% which also reflected store openings, increased product costs and broadened product assortments. Changes in foreign currency exchange rates had an insignificant effect on the change in inventories, net.

 

Investing Activities

 

The Company had a net cash outflow from investing activities of $161,690,000 in 2008, a net cash inflow of $335,170,000 in 2007 and a net cash outflow of $197,137,000 in 2006. Investing activities in 2007 included proceeds from the sale of assets.

 

Proceeds from Sale of Assets. In 2007, the Company received total proceeds of $509,035,000 which consisted of the following transactions:

 

 

Capital Expenditures. Capital expenditures were $154,409,000 in 2008, $185,608,000 in 2007 and $174,551,000 in 2006, representing 5%, 6% and 7% of net sales in those respective years. In all three years, expenditures were primarily related to the opening, renovation and expansion of stores and distribution facilities and ongoing investments in new systems.

 

Marketable Securities. The Company invests excess cash in short-term investments and marketable securities. The Company had (net purchases of) or net proceeds from investments in marketable securities and short-term investments of ($1,543,000), $13,182,000 and ($13,063,000) during 2008, 2007 and 2006.

 

Financing Activities

 

The Company had net cash outflows from financing activities of $39,708,000 in 2008, $664,408,000 in 2007 and $248,871,000 in 2006, largely reflecting share repurchase activity.

 

Dividends. Cash dividends on the Company’s Common Stock have been increased for six consecutive years, and twice in 2007. The Company’s Board of Directors declared quarterly dividends which totaled $0.66, $0.52 and $0.38 per common share in 2008, 2007 and 2006. Cash

 

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dividends paid were $82,258,000 in 2008, $69,921,000 in 2007 and $52,611,000 in 2006. The dividend payout ratio (dividends as a percentage of net earnings) was 37% in 2008, 22% in 2007 and 19% in 2006.

 

Stock Repurchases. In January 2008, the Company’s Board of Directors amended the existing share repurchase program to extend the expiration date of the program to January 2011 and to authorize the repurchase of up to an additional $500,000,000 of the Company’s Common Stock. The timing of repurchases and the actual number of shares to be repurchased depend on a variety of discretionary factors such as price, cash availability forecasts and other market conditions.

 

The Company’s stock repurchase activity was as follows:

 

 

At January 31, 2009, there remained $402,427,000 of authorization for future repurchases.

 

At least annually, the Company’s Board of Directors reviews its policies with respect to dividends and share repurchases with a view to actual and projected earnings, cash flow and capital requirements. The Company suspended share repurchases during the third quarter of 2008 in order to conserve cash.

 

Recent Borrowings. In October 2008, the Company entered into a short-term unsecured facility agreement for ¥6,500,000,000 ($66,001,000 at issuance) due March 2009. In December 2008, the Company repaid ¥2,300,000,000 ($25,473,000 at repayment). ¥4,200,000,000 ($46,721,000) remains outstanding at January 31, 2009. The facility was used for working capital and general corporate purposes. The weighted-average interest rate at January 31, 2009 was 1.90%.

 

In November 2008, the Company entered into a short-term note agreement for $50,000,000 due March 2009, bearing interest at a rate of 4.50% payable monthly in arrears. These funds were used for working capital and general corporate purposes.

 

In December 2008, the Company entered into a long-term note agreement for $100,000,000 due December 2015, bearing interest at a rate of 9.05%. The proceeds will be used to refinance existing indebtedness and for general corporate purposes.

 

In 2008, the Company repaid $60,000,000 of its 6.90% Series A Senior Notes and $13,483,000 of certain outstanding term loans.

 

The ratio of total debt (short-term borrowings, current portion of long-term debt and long-term debt) to stockholders’ equity was 45% and 26% at January 31, 2009 and 2008. The increase in the ratio as of January 31, 2009 largely reflects substantial share repurchase activity during the first three quarters of 2008 and increased borrowings.

 

At January 31, 2009, the Company was in compliance with all debt covenants.

 

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Contractual Cash Obligations and Commercial Commitments

 

The following is a summary of the Company’s contractual cash obligations at January 31, 2009:

 

 

 

The summary above does not include the following items:

 

 

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The following is a summary of the Company’s outstanding borrowings and available capacity under the Credit Facility and other lines of credit at January 31, 2009:

 

 

*This facility matures in July 2010 and the capacity may be increased to $500,000,000.

 

In addition, the Company had letters of credit and financial guarantees of $16,389,000 at January 31, 2009, of which $15,627,000 expires within one year.

 

The Company invested $12,533,000 in Target Resources plc (“Target”), a mining and exploration company operating in Sierra Leone, consisting primarily of common stock, notes receivable and prepaid inventory. In addition, the Company entered into an agreement with Target to purchase, market and sell all diamonds extracted, produced or otherwise recovered from mining operations controlled by Target or its affiliates. As of January 31, 2009, all commitments associated with these investments were fully funded and no further amounts remain available to Target. In recent months, Target has been experiencing operational and financial difficulties in meeting its forecasts, and the current global economic conditions, specifically in the fourth quarter, have caused rough diamond prices to decline sharply which has also negatively affected Target’s financial results. As a result of these events, management believes there is uncertainty in Target’s ability to meet its future financial projections and, therefore, determined that the recoverability of the Company’s investments is not probable. During the fourth quarter of 2008, the Company recorded impairment charges of $11,062,000 within SG&A expenses and $1,311,000 in other income, net in the consolidated statement of earnings.

 

The Company was party to a CDN$35,000,000 ($35,423,000 at January 31, 2008) credit facility and a CDN$8,000,000 ($8,097,000 at January 31, 2008) working capital loan commitment (collectively the “Commitment”) to Tahera, a Canadian diamond mining and exploration company. In consideration of the Commitment, the Company was granted the right to purchase or market all diamonds mined at the Jericho mine. This mine had been developed and constructed by Tahera in Nunavut, Canada (the “Project”). Indebtedness under the Commitment is secured by certain assets of the Project. Although the Project had been operational, Tahera continued to experience financial losses as a result of production problems, appreciation of the Canadian dollar versus the U.S. dollar, the rise of oil prices and other costs relative to declining diamond prices. Due to the financial difficulties, in January 2008, Tahera filed for protection from creditors pursuant to the provisions of the Companies’ Creditors Arrangement Act (“CCAA”) in Canada and had to cease operations of the Project. The Company considered the value of the assets of the Project that secured the Commitment and determined that the assets were closely associated with the underlying Project and, therefore, in order to retain their value, the assets must be part of a fully operational mine. As a result, in the fourth quarter of 2007, the Company’s management determined that collectibility of the outstanding Commitment and realization upon the liens securing the Commitment was not probable. Therefore, in 2007, the Company recorded an impairment charge of $47,981,000, within SG&A expenses, for the full amount outstanding including accrued interest under the Commitment. Further, during the fourth quarter of 2008, the Commitment and the liens were assigned for a nominal value to an unrelated third party in exchange for the right to participate in future profits, if any, derived from the exploitation of the assets. These events will not have a material impact on the Company’s future operations, as the Tahera mine was never a significant source of rough diamonds for the Company.

 

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Seasonality

 

As a jeweler and specialty retailer, the Company’s business is seasonal in nature, with the fourth quarter typically representing at least one-third of annual net sales and approximately one-half of annual net earnings. Management expects such seasonality to continue.

 

CRITICAL ACCOUNTING ESTIMATES

 

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require management to make certain estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. Actual results could differ from those estimates, and the differences could be material. Periodically, the Company reviews all significant estimates and assumptions affecting the financial statements and records any necessary adjustments.

 

The development and selection of critical accounting estimates and the related disclosures below have been reviewed with the Audit Committee of the Company’s Board of Directors. The following critical accounting policies that rely on assumptions and estimates were used in the preparation of the Company’s consolidated financial statements:

 

Inventory. The Company writes down its inventory for discontinued and slow-moving products. This write-down is equal to the difference between the cost of inventory and its estimated market value, and is based on assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs might be required. The Company has not made any material changes in the accounting methodology used to establish its reserve for discontinued and slow-moving products during the past three years. At January 31, 2009, a 10% change in the reserve for discontinued and slow-moving products would have resulted in a change of $4,396,000 in inventory and cost of sales. The Company’s inventories are valued using the average cost method. Fluctuation in inventory levels, along with the costs of raw materials, could affect the carrying value of the Company’s inventory.

 

Long-lived assets. The Company’s long-lived assets are primarily property, plant and equipment. The Company reviews its long-lived assets for impairment when management determines that the carrying value of such assets may not be recoverable due to events or changes in circumstances. Recoverability of long-lived assets is evaluated by comparing the carrying value of the asset with estimated future undiscounted cash flows. If the comparisons indicate that the value of the asset is not recoverable, an impairment loss is calculated as the difference between the carrying value and the fair value of the asset and the loss is recognized during that period. The Company recorded impairment charges of $15,532,000 in 2007 and did not record any material impairment charges in 2008 or 2006 (see “Item 8. Financial Statements and Supplementary Data – Note B. Summary of Significant Accounting Policies”).

 

Goodwill. The Company performs its annual impairment evaluation of goodwill during the fourth quarter of its fiscal year or when circumstances otherwise indicate an evaluation should be performed. The evaluation, based upon discounted cash flows, requires management to estimate future cash flows, growth rates and economic and market conditions. The Company recorded impairment charges of $6,893,000 in 2006 within loss from discontinued operations (see “Item 8. Financial Statements and Supplementary Data – Note C. Dispositions”). The 2008 and 2007 evaluations resulted in no impairment charges.

 

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Income taxes. The Company is subject to income taxes in both the U.S. and foreign jurisdictions. The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across the Company’s global operations. Significant judgments and estimates are required in determining the consolidated income tax expense. The Company’s income tax expense, deferred tax assets and liabilities and reserves for uncertain tax positions reflects management’s best assessment of estimated future taxes to be paid.

 

Foreign and domestic tax authorities periodically audit the Company’s income tax returns. These audits often examine and test the factual and legal basis for positions the Company has taken in its tax filings with respect to its tax liabilities, including the timing and amount of deductions and the allocation of income among various tax jurisdictions (“tax filing positions”). Management believes that its tax filing positions are reasonable and legally supportable. However, in specific cases, various tax authorities may take a contrary position. In evaluating the exposures associated with the Company’s various tax filing positions, management records reserves using a more-likely-than-not recognition threshold for income tax positions taken or expected to be taken in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.” Earnings could be affected to the extent the Company prevails in matters for which reserves have been established or is required to pay amounts in excess of established reserves.

 

In evaluating the Company’s ability to recover its deferred tax assets within the jurisdiction from which they arise, management considers all available evidence. The Company records valuation allowances when management determines it is more likely than not that deferred tax assets will not be realized in the future.

 

Employee benefit plans. The Company maintains several pension and retirement plans, as well as provides certain postretirement health-care and life insurance benefits for retired employees. The Company makes certain assumptions that affect the underlying estimates related to pension and other postretirement costs. Significant changes in interest rates, the market value of securities and projected health-care costs would require the Company to revise key assumptions and could result in a higher or lower charge to earnings.

 

The Company used a discount rate of 6.50% to determine its 2008 pension and postretirement expense for all U.S. plans. Holding all other assumptions constant, a 0.5% increase in the discount rate would have decreased 2008 pension and postretirement expenses by $2,477,000 and $355,000. A decrease of 0.5% in the discount rate would have increased the 2008 pension and postretirement expenses by $3,927,000 and $223,000. The discount rate is subject to change each year, consistent with changes in the yield on applicable high-quality, long-term corporate bonds. Management selects a discount rate at which pension and postretirement benefits could be effectively settled based on (i) an analysis of expected benefit payments attributable to current employment service and (ii) appropriate yields related to such cash flows.

 

The Company used an expected long-term rate of return of 7.50% to determine its 2008 pension expense. Holding all other assumptions constant, a 0.5% change in the long-term rate of return would have changed the 2008 pension expense by $1,044,000. The expected long-term rate of return on pension plan assets is selected by taking into account the average rate of return expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation. More specifically, consideration is given to the expected rates of return (including reinvestment asset return rates) based upon the plan’s current asset mix, investment strategy and the historical performance of plan assets.

 

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For postretirement benefit measurement purposes, a 9.00% annual rate of increase in the per capita cost of covered health care was assumed for 2009. The rate was assumed to decrease gradually to 5.00% by 2016 and remain at that level thereafter. A one-percentage-point change in the assumed health-care cost trend rate would not have a significant effect on the aggregate service and interest cost components of the 2008 postretirement expense.

 

NEW ACCOUNTING STANDARDS

 

See “Item 8. Financial Statements and Supplementary Data – Note B. Summary of Significant Accounting Policies.”

 

OFF-BALANCE SHEET ARRANGEMENTS

 

The Company does not have any off-balance sheet arrangements.

 

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TIFFANY & CO.

K - 44

 

 

The Company is exposed to market risk from fluctuations in foreign currency exchange rates and precious metal prices, which could affect its consolidated financial position, earnings and cash flows. The Company manages its exposure to market risk through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. The Company uses derivative financial instruments as risk management tools and not for trading or speculative purposes, and does not maintain such instruments that may expose the Company to significant market risk.

 

Foreign Currency Risk

 

The Company uses yen put options to minimize the potential effect of a weakening Japanese yen on U.S. dollar-denominated transactions over a maximum term of 12 months. The fair value of yen put options is sensitive to changes in yen exchange rates. If the market yen exchange rate at the time of an option’s expiration is stronger than the contracted exchange rate, the Company allows the option to expire, limiting its loss to the cost of the option contract. The cost of outstanding option contracts at January 31, 2009 and 2008 was $3,320,000 and $3,369,000. At January 31, 2009 and 2008, the fair value of outstanding yen put options was $920,000 and $863,000. The fair value of the options was primarily determined using quoted market prices for these instruments. At January 31, 2009 and 2008, a 10% appreciation in yen exchange rates (i.e. a strengthening yen) from the prevailing market rates would have resulted in a fair value of $473,000 and $230,000. At January 31, 2009 and 2008, a 10% depreciation in yen exchange rates (i.e. a weakening yen) from the prevailing market rates would have resulted in a fair value of $4,622,000 and $7,786,000.

 

The Company also uses foreign exchange forward contracts to protect against changes in local currencies. Gains or losses on these forward contracts substantially offset losses or gains on the assets, liabilities and transactions being hedged. The maximum term of the outstanding forward contracts as of January 31, 2009 was six months. The fair value was primarily determined using quoted market prices for these instruments. At January 31, 2009, the fair value of the Company’s outstanding foreign exchange forward contracts was $3,938,000. At January 31, 2009, a 10% appreciation in the hedged foreign exchange rates (i.e. strengthening foreign currencies) from the prevailing market rates would have resulted in a fair value of ($5,111,000). At January 31, 2009, a 10% depreciation in the hedged foreign exchange rates (i.e. weakening foreign currencies) from the prevailing market rates would have resulted in a fair value of $5,323,000. The fair value of the outstanding foreign exchange forward contracts at January 31, 2008 was not significant.

 

Precious Metal Price Risk

 

The Company uses a combination of call and put option contracts in net-zero-cost collar arrangements (“collars”) as hedges of a portion of forecasted purchases of platinum and silver for internal manufacturing. If the price of the precious metal at the time of the expiration of the collar is within the call and put price, the collar would expire at no cost to the Company. The maximum term over which the Company is hedging its exposure to the variability of future cash flows for all forecasted transactions is 12 months. The fair value was primarily determined using quoted market prices for these instruments. The fair value of the outstanding collars was ($6,637,000) and $6,435,000 at January 31, 2009 and 2008. In 2008, the Company experienced an unrealized loss on its hedging instruments due to sharp declines in the price of precious metals subsequent to the period in which the collars were entered into. At January 31, 2009 and 2008, a 10% appreciation in precious metal prices from the prevailing market rates would have resulted in a fair value of ($4,964,000) and $11,000,000. At January 31, 2009 and 2008, a 10% depreciation in precious metal prices from the prevailing market rates would have resulted in a fair value of ($7,379,000) and $2,954,000.

 

TIFFANY & CO.

K - 45

 

 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and Board of Directors of Tiffany & Co.:

 

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, of stockholders’ equity and comprehensive earnings, and of cash flows present fairly, in all material respects, the financial position of Tiffany & Co. and its subsidiaries (the “Company”) at January 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2009 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

As discussed in Note B to the consolidated financial statements, the Company changed the manner in which it accounts for inventories in 2008.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized

 

TIFFANY & CO.

K - 46

acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ PricewaterhouseCoopers LLP

New York, New York

March 30, 2009

 

TIFFANY & CO.

K - 47

 

CONSOLIDATED BALANCE SHEETS

		January 31,
(in thousands, except per share amounts)		2009				2008
ASSETS
Current assets:
Cash and cash equivalents		$	160,445			$	246,654
Accounts receivable, less allowances of $9,934 and $9,712			164,447				193,974
Inventories, net			1,601,236				1,372,397
Deferred income taxes			13,640				20,218
Prepaid expenses and other current assets			108,966				89,072
Total current assets			2,048,734				1,922,315
Property, plant and equipment, net			741,048				748,210
Deferred income taxes			166,517				158,579
Other assets, net			145,984				171,800
		$	3,102,283			$	3,000,904
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings		$	242,966			$	44,032
Current portion of long-term debt			40,426				65,640
Accounts payable and accrued liabilities			223,566				203,622
Income taxes payable			27,653				203,611
Merchandise and other customer credits			67,311				67,956
Total current liabilities			601,922				584,861
Long-term debt			425,412				343,465
Pension/postretirement benefit obligations			200,603				79,254
Deferred gains on sale-leasebacks			133,641				145,599
Other long-term liabilities			152,334				131,610
Commitments and contingencies
Stockholders’ equity:
Preferred Stock, $0.01 par value; authorized 2,000 shares, none issued and outstanding			—				—
Common Stock, $0.01 par value; authorized 240,000 shares, issued and outstanding 123,844 and 126,753			1,238				1,268
Additional paid-in capital			687,267				632,671
Retained earnings			971,299				1,037,663
Accumulated other comprehensive (loss) gain, net of tax:
Foreign currency translation adjustments			(26,238	)			42,117
Deferred hedging (loss) gain			(8,984	)			889
Unrealized loss on marketable securities			(6,140	)			(621	)
Net unrealized (loss) gain on benefit plans			(30,071	)			2,128
Total stockholders’ equity			1,588,371				1,716,115
		$	3,102,283			$	3,000,904