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EXCEL - IDEA: XBRL DOCUMENT - TIFFANY & COFinancial_Report.xls
EX-31.2 - 302 CERTIFICATION OF CFO - TIFFANY & COex31_2.htm
EX-32.2 - 906 CERTIFICATION OF CFO - TIFFANY & COex32_2.htm
EX-32.1 - 906 CERTIFICATION OF CEO - TIFFANY & COex32_1.htm
EX-31.1 - 302 CERTIFICATION OF CEO - TIFFANY & COex31_1.htm
EX-10.162 - GUARANTY AGREEMENT - TIFFANY & COex10_162.htm
EX-10.161 - NOTE PURCHASE AGREEMENT - TIFFANY & COex10_161.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________

FORM 10-Q
________________

(Mark One)

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

For the quarterly period ended July 31, 2010

OR

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

For the transition period from ________ to _____________

Commission file number: 1-9494

TIFFANY & CO.
(Exact name of registrant as specified in its charter)

Delaware
13-3228013
(State of incorporation)
(I.R.S. Employer Identification No.)
   
727 Fifth Ave. New York, NY
10022
(Address of principal executive offices)
(Zip Code)

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

Former name, former address and former fiscal year, if changed since last report _________

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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x     No ¨

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
x
Accelerated filer
¨
       
Non-accelerated filer
¨
Smaller reporting company
¨
(Do not check if a smaller reporting company)
   

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

APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: Common Stock, $.01 par value, 126,266,981 shares outstanding at the close of business on August 31, 2010.


 
 

 

TIFFANY & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JULY 31, 2010

 
PAGE
PART I – FINANCIAL INFORMATION
 
     
 
     
 
     
 
     
 
     
 
     
 
     
     
     
     
     
     
 
     
Item 1A.     
     
     
     
 
(a)     Exhibits
 
     



 
 

 

PART I.
Financial Information
Item 1.
Financial Statements

TIFFANY & CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except per share amounts)

   
July 31, 2010
   
January 31, 2010
   
July 31, 2009
 
ASSETS
                 
Current assets:
                 
Cash and cash equivalents
  $ 566,725     $ 785,702     $ 333,603  
Short-term investments
    47,949              
Accounts receivable, less allowances
of $12,326, $12,892 and $10,323
    156,708       158,706       140,025  
Inventories, net
    1,553,117       1,427,855       1,538,514  
Deferred income taxes
    16,114       6,651       12,303  
Prepaid expenses and other current assets
    76,780       66,752       99,473  
Total current assets
    2,417,393       2,445,666       2,123,918  
                         
Property, plant and equipment, net
    661,387       685,101       707,176  
Deferred income taxes
    188,014       183,825       160,492  
Other assets, net
    179,767       173,768       153,883  
    $ 3,446,561     $ 3,488,360     $ 3,145,469  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
Current liabilities:
                       
Short-term borrowings
  $ 44,221     $ 27,642     $ 40,754  
Current portion of long-term debt
    269,960       206,815        
Accounts payable and accrued liabilities
    165,757       231,913       155,659  
Income taxes payable
    16,198       67,513       18,245  
Merchandise and other customer credits
    60,546       66,390       64,607  
Total current liabilities
    556,682       600,273       279,265  
                         
Long-term debt
    467,855       519,592       710,994  
Pension/postretirement benefit obligations
    189,978       219,276       209,158  
Deferred gains on sale-leasebacks
    124,932       128,649       129,665  
Other long-term liabilities
    141,112       137,331       142,945  
                         
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 126,488, 126,326 and 124,093
    1,265       1,263       1,240  
Additional paid-in capital
    813,600       764,132       698,995  
Retained earnings
    1,182,840       1,151,109       1,010,180  
Accumulated other comprehensive loss, net of tax
    (31,703 )     (33,265 )     (36,973 )
Total stockholders’ equity
    1,966,002       1,883,239       1,673,442  
    $ 3,446,561     $ 3,488,360     $ 3,145,469  

See notes to condensed consolidated financial statements.

 
3

 

TIFFANY & CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands except per share amounts)

   
Three Months Ended July 31,
   
Six Months Ended July 31,
 
   
2010
   
2009
   
2010
   
2009
 
Net sales
  $ 668,760     $ 612,493     $ 1,302,346     $ 1,130,108  
Cost of sales
    282,008       275,041       549,616       503,437  
Gross profit
    386,752       337,452       752,730       626,671  
Selling, general and administrative expenses
    273,146       247,898       533,707       477,603  
Earnings from continuing operations
    113,606       89,554       219,023       149,068  
Interest and other expenses, net
    11,121       12,132       23,259       24,572  
Earnings from continuing operations before
income taxes
    102,485       77,422       195,764       124,496  
Provision for income taxes
    34,810       20,705       63,664       40,336  
Net earnings from continuing operations
    67,675       56,717       132,100       84,160  
Net earnings (loss) from discontinued operations
          59             (3,043 )
Net earnings
  $ 67,675     $ 56,776     $ 132,100     $ 81,117  
Earnings per share:
                               
Basic
                               
Net earnings from continuing operations
  $ 0.53     $ 0.46     $ 1.04     $ 0.68  
Net loss from discontinued operations
                      (0.03 )
Net earnings
  $ 0.53     $ 0.46     $ 1.04     $ 0.65  
Diluted
                               
Net earnings from continuing operations
  $ 0.53     $ 0.46     $ 1.03     $ 0.68  
Net loss from discontinued operations
                      (0.03 )
Net earnings
  $ 0.53     $ 0.46     $ 1.03     $ 0.65  
                                 
Weighted-average number of common shares:
                               
Basic
    126,897       124,081       126,798       124,041  
Diluted
    128,385       124,523       128,464       124,343  

See notes to condensed consolidated financial statements.

 
4

 

TIFFANY & CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE EARNINGS
(Unaudited)
(in thousands)

                Accumulated              
    Total           Other                 Additional  
    Stockholders’     Retained     Comprehensive    
Common Stock
    Paid-In  
   
Equity
   
Earnings
   
Gain (Loss)
   
Shares
   
Amount
   
Capital
 
Balances, January 31, 2010
  $ 1,883,239     $ 1,151,109     $ (33,265 )     126,326     $ 1,263     $ 764,132  
Exercise of stock options and vesting of
restricted stock units (“RSUs”)
    31,192                   1,176       12       31,180  
Tax effect of exercise of stock options and
vesting of RSUs
    4,195                               4,195  
Share-based compensation expense
    12,982                               12,982  
Issuance of Common Stock under the
Employee Profit Sharing and Retirement
Savings Plan
    5,000                   104       1       4,999  
Purchase and retirement of Common Stock
    (47,138 )     (43,239 )           (1,118 )     (11 )     (3,888 )
Cash dividends on Common Stock
    (57,130 )     (57,130 )                        
Deferred hedging gain, net of tax
    2,075             2,075                    
Unrealized gain on marketable securities, net
of tax
    636             636                    
Foreign currency translation adjustments, net
of tax
    (2,171 )           (2,171 )                  
Net unrealized gain on benefit plans,
net of tax
    1,022             1,022                    
Net earnings
    132,100       132,100                          
Balances, July 31, 2010
  $ 1,966,002     $ 1,182,840     $ (31,703 )     126,488     $ 1,265     $ 813,600  

   
Three Months Ended July 31,
   
Six Months Ended July 31,
 
   
2010
   
2009
   
2010
   
2009
 
Comprehensive earnings are as follows:
                       
Net earnings
  $ 67,675     $ 56,776     $ 132,100     $ 81,117  
Other comprehensive gain (loss), net of tax:
                               
Deferred hedging (loss) gain
    (2,733 )     1,442       2,075       3,824  
Foreign currency translation adjustments
    1,089       20,469       (2,171 )     27,718  
Unrealized (loss) gain on marketable securities
    (447 )     2,238       636       2,900  
Net unrealized gain (loss) on benefit plans
    474       (29 )     1,022       18  
Comprehensive earnings
  $ 66,058     $ 80,896     $ 133,662     $ 115,577  

See notes to condensed consolidated financial statements.

 
5

 

TIFFANY & CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

   
Six Months Ended July 31,
 
   
2010
   
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net earnings
  $ 132,100     $ 81,117  
Loss from discontinued operations, net of tax
          3,043  
Net earnings from continuing operations
    132,100       84,160  
Adjustments to reconcile net earnings to net cash (used in) provided by
operating activities:
               
Depreciation and amortization
    72,292       69,182  
Amortization of gain on sale-leaseback
    (4,927 )     (4,762 )
Excess tax benefits from share-based payment arrangements
    (3,936 )     (4 )
Provision for inventories
    14,184       16,637  
Deferred income taxes
    (19,069 )     2,134  
Provision for pension/postretirement benefits
    13,442       11,691  
Share-based compensation expense
    12,795       12,010  
Changes in assets and liabilities:
               
Accounts receivable
    5,235       26,711  
Inventories
    (133,495 )     50,058  
Prepaid expenses and other current assets
    (7,596 )     13,644  
Accounts payable and accrued liabilities
    (53,546 )     (71,155 )
Income taxes payable
    (45,058 )     (16,004 )
Merchandise and other customer credits
    (5,821 )     (3,404 )
Other, net
    (36,711 )     (11,498 )
Net cash (used in) provided by operating activities
    (60,111 )     179,400  
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Capital expenditures
    (50,760 )     (30,425 )
Purchases of marketable securities and short-term investments
    (48,461 )     (547 )
Other
          3,485  
Net cash used in investing activities
    (99,221 )     (27,487 )
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from (repayment of) credit facility borrowings, net
    17,775       (113,291 )
Repayment of short-term borrowings
          (93,000 )
Repayment of long-term debt
          (40,000 )
Proceeds from issuance of long-term debt
          300,000  
Repurchase of Common Stock
    (47,138 )      
Proceeds from exercise of stock options
    31,192       738  
Excess tax benefits from share-based payment arrangements
    3,936       4  
Cash dividends on Common Stock
    (57,130 )     (42,236 )
Financing fees
          (5,721 )
Purchase of non-controlling interests
    (7,000 )      
Net cash (used in) provided by financing activities
    (58,365 )     6,494  
Effect of exchange rate changes on cash and cash equivalents
    (1,280 )     18,287  
CASH FLOWS FROM DISCONTINUED OPERATIONS:
               
Operating activities
          (3,536 )
Net cash used in discontinued operations
          (3,536 )
Net (decrease) increase in cash and cash equivalents
    (218,977 )     173,158  
Cash and cash equivalents at beginning of year
    785,702       160,445  
Cash and cash equivalents at end of six months
  $ 566,725     $ 333,603  

See notes to condensed consolidated financial statements.

 
6

 

TIFFANY & CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying condensed consolidated financial statements include the accounts of Tiffany & Co. (the “Company”) and its subsidiaries in which a controlling interest is maintained. Controlling interest is determined by majority ownership interest and the absence of substantive third-party participating rights or, in the case of variable interest entities (“VIE”s), if the Company has the power to significantly direct the activities of a VIE, as well as the obligation to absorb significant losses of or the right to receive significant benefits from the VIE. Intercompany accounts, transactions and profits have been eliminated in consolidation. The interim statements are unaudited and, in the opinion of management, include all adjustments (which represent normal recurring adjustments) necessary to fairly state the Company's financial position as of July 31, 2010 and 2009 and the results of its operations and cash flows for the interim periods presented. The condensed consolidated balance sheet data for January 31, 2010 is derived from the audited financial statements, which are included in the Company's Annual Report on Form 10-K and should be read in connection with these financial statements. As permitted by the rules of the Securities and Exchange Commission, these financial statements do not include all disclosures required by generally accepted accounting principles.

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. Therefore, the results of its operations for the three and six months ended July 31, 2010 and 2009 are not necessarily indicative of the results of the entire fiscal year.

2.
DISCONTINUED OPERATIONS

In the fourth quarter of 2008, management concluded that it would no longer invest in its IRIDESSE business due to its ongoing operating losses and insufficient near-term growth prospects, especially in the economic environment at the time the decision was made. All IRIDESSE stores were closed in 2009. These amounts have been reclassified to discontinued operations for all periods presented. Prior to the reclassification, IRIDESSE results had been included within the Other non-reportable segment.

Summarized statement of earnings data for IRIDESSE is as follows:

 
(in thousands)
 
Three Months Ended
July 31, 2009
   
Six Months Ended
July 31, 2009
 
 
Net sales
  $ 6,743     $ 12,187  
 
Loss before income taxes
    (830 )     (5,907 )
 
Benefit from income taxes
    889       2,864  
 
Net earnings (loss) from discontinued operations
  $ 59     $ (3,043 )

3.
INVENTORIES

 
(in thousands)
 
July 31, 2010
   
January 31, 2010
   
July 31, 2009
 
 
Finished goods
  $ 978,021     $ 904,523     $ 1,068,149  
 
Raw materials
    469,804       450,966       412,720  
 
Work-in-process
    105,292       72,366       57,645  
 
Inventories, net
  $ 1,553,117     $ 1,427,855     $ 1,538,514  


 
7

 

4.
INCOME TAXES

The effective income tax rate for the second quarter of 2010 was 34.0% versus 26.7% in the prior year which had included a $5,700,000 benefit to the tax provision as a result of favorable reserve adjustments relating to the settlement of certain tax audits. The effective income tax rate for the six months ended July 31, 2010 was 32.5% versus 32.4% in the prior year. The effective income tax rate for the six months ended July 31, 2010 included the following non-recurring items recorded in the first quarter of 2010: (i) a benefit of $5,006,000 due to a change in tax status of certain subsidiaries associated with the acquisition in 2009 of additional equity interests in diamond sourcing and polishing operations and (ii) a $1,910,000 charge as a result of recent healthcare reform legislation, which eliminated the tax benefit associated with the Medicare Part D subsidy.

During the six months ended July 31, 2010, the change in the gross amount of unrecognized tax benefits and accrued interest and penalties was not significant.

The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. As a matter of course, various taxing authorities regularly audit the Company. The Company’s tax filings are currently being examined by tax authorities in jurisdictions where its subsidiaries have a material presence, including New York state (tax years 2004-2007), Japan (tax years 2003-2008) and by the Internal Revenue Service (tax years 2007-2008). Tax years from 2002-present are open to examination in U.S. Federal and various state, local and foreign jurisdictions. The Company believes that its tax positions comply with applicable tax laws and that it has adequately provided for these matters. However, the audits may result in proposed assessments where the ultimate resolution may result in the Company owing additional taxes. The Company does not anticipate any material changes to the total gross amount of unrecognized tax benefits over the next 12 months. Future developments may result in a change in this assessment.

5.
EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed as net earnings divided by the weighted-average number of common shares outstanding for the period. Diluted EPS includes the dilutive effect of the assumed exercise of stock options and unvested restricted stock units.

The following table summarizes the reconciliation of the numerators and denominators for the basic and diluted EPS computations:

     
Three Months Ended July 31,
   
Six Months Ended July 31,
 
 
(in thousands)
 
2010
   
2009
   
2010
   
2009
 
 
Net earnings for basic and
diluted EPS
  $ 67,675     $ 56,776     $ 132,100     $ 81,117  
 
Weighted-average shares for
basic EPS
    126,897       124,081       126,798       124,041  
 
Incremental shares based
upon the assumed
exercise of stock options
and unvested restricted
stock units
    1,488       442       1,666       302  
 
Weighted-average shares for
diluted EPS
    128,385       124,523       128,464       124,343  

For the three months ended July 31, 2010 and 2009, there were 487,000 and 7,126,000 stock options and restricted stock units excluded from the computations of earnings per diluted share due to their antidilutive effect. For the six months ended July 31, 2010 and 2009, there were 459,000 and 7,806,000 stock options and restricted stock units excluded from the computations of earnings per diluted share due to their antidilutive effect.


 
8

 

6.
HEDGING INSTRUMENTS

Background Information

The Company uses derivative financial instruments, including interest rate swap agreements, forward contracts, put option contracts and net-zero-cost collar arrangements (combination of call and put option contracts) to mitigate its exposures to changes in interest rates, foreign currency and precious metal prices. Derivative instruments are recorded on the consolidated balance sheet at their fair values, as either assets or liabilities, with an offset to current or comprehensive earnings, depending on whether the derivative is designated as part of an effective hedge transaction and, if it is, the type of hedge transaction.  If a derivative instrument meets certain hedge accounting criteria, the derivative instrument is designated as one of the following on the date the derivative is entered into:

 
Fair Value Hedge – A hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment. For fair value hedge transactions, both the effective and ineffective portions of the changes in the fair value of the derivative and changes in the fair value of the item being hedged are recorded in current earnings.

 
Cash Flow Hedge – A hedge of the exposure to variability in the cash flows of a recognized asset, liability or a forecasted transaction. For cash flow hedge transactions, the effective portion of the changes in fair value of derivatives are reported as other comprehensive income (“OCI”) and are recognized in current earnings in the period or periods during which the hedged transaction affects current earnings. Amounts excluded from the effectiveness calculation and any ineffective portions of the change in fair value of the derivative are recognized in current earnings.

The Company formally documents the nature and relationships between the hedging instruments and hedged items for a derivative to qualify as a hedge at inception and throughout the hedged period. The Company also documents its risk management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. Additionally, for hedges of forecasted transactions, the significant characteristics and expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction will occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss on the derivative financial instrument would be recognized in current earnings. Derivative financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period.

The Company does not use derivative financial instruments for trading or speculative purposes.

Types of Derivative Instruments

Interest Rate Swap Agreements – In the second quarter of 2009, the Company entered into interest rate swap agreements to effectively convert its fixed rate 2002 Series D and 2008 Series A obligations to floating rate obligations. Since the fair value of the Company’s fixed rate long-term debt is sensitive to interest rate changes, the interest rate swap agreements serve as a hedge to changes in the fair value of these debt instruments. The Company is hedging its exposure to changes in interest rates over the remaining maturities of the debt agreements being hedged. The Company accounts for the interest rate swaps as fair value hedges. As of July 31, 2010, the notional amount of interest rate swap agreements outstanding was $160,000,000.

Foreign Exchange Forward Contracts – The Company uses foreign exchange forward contracts to offset the foreign currency exchange risks associated with foreign currency-denominated liabilities and intercompany transactions between entities with differing functional currencies. These foreign exchange forward contracts are designated and accounted for as either cash flow hedges or economic hedges that are not designated as hedging instruments. As of July 31, 2010, the notional amount of foreign exchange forward contracts accounted for as cash flow hedges was $14,492,000 and the notional amount of foreign exchange forward contracts accounted for as undesignated hedges was $10,917,000. The term of all outstanding foreign exchange forward contracts as of July 31, 2010 ranged from one to 10 months.
 
Put Option Contracts – The Company’s wholly-owned subsidiary in Japan satisfies nearly all of its inventory


 
9

 

requirements by purchasing merchandise, payable in U.S. dollars, from the Company’s principal subsidiary. To minimize the potentially negative effect of a significant strengthening of the U.S. dollar against the Japanese yen, the Company purchases put option contracts as hedges of forecasted purchases of merchandise over a maximum term of 13 months. If the market yen exchange rate at the time of the put option contract’s expiration is stronger than the contracted exchange rate, the Company allows the put option contract to expire, limiting its loss to the cost of the put option contract. The Company accounts for its put option contracts as cash flow hedges. The Company assesses hedge effectiveness based on the total changes in the put option contracts’ cash flows. As of July 31, 2010, the notional amount of put option contracts accounted for as cash flow hedges was $103,100,000. During October 2009, the Company de-designated several of its outstanding put option contracts (notional amount of $13,000,000 outstanding at July 31, 2010) and entered into offsetting call option contracts. These put and call option contracts are accounted for as undesignated hedges. Any gains or losses on these de-designated put option contracts are substantially offset by losses or gains on the call option contracts.

Precious Metal Collars & Forward ContractsThe Company periodically hedges a portion of its forecasted purchases of precious metals for use in its internal manufacturing operations in order to minimize the effect of volatility in precious metal prices. The Company may use either a combination of call and put option contracts in net-zero-cost collar arrangements (“precious metal collars”) or forward contracts. For precious metal collars, if the price of the precious metal at the time of the expiration of the precious metal collar is within the call and put price, the precious metal collar would expire at no cost to the Company. The Company accounts for its precious metal collars and forward contracts as cash flow hedges. The Company assesses hedge effectiveness based on the total changes in the precious metal collars and forward contracts’ cash flows. The maximum term over which the Company is hedging its exposure to the variability of future cash flows for all forecasted transactions is 13 months. As of July 31, 2010, there were approximately 20,000 ounces of platinum and 140,600 ounces of silver precious metal derivative instruments outstanding.

Information on the location and amounts of derivative gains and losses in the Condensed Consolidated Statements of Earnings is as follows:

     
Three Months Ended July 31,
 
     
2010
   
2009
 
 
(in thousands)
 
Pre-Tax Gain
Recognized in
Earnings on
Derivatives
   
Pre-Tax Loss
Recognized in
Earnings on
Hedged Item
   
Pre-Tax Loss
Recognized in
Earnings on
Derivatives
   
Pre-Tax Gain
Recognized in
Earnings on
Hedged Item
 
 
Derivatives in Fair Value Hedging Relationships:
             
 
Interest rate swap
agreements a
  $ 4,441     $ (3,899 )   $ (623 )   $ 669  

     
Six Months Ended July 31,
 
     
2010
   
2009
 
 
(in thousands)
 
Pre-Tax Gain
Recognized in
Earnings on
Derivatives
   
Pre-Tax Loss
Recognized in
Earnings on
Hedged Item
   
Pre-Tax Loss
Recognized in
Earnings on
Derivatives
   
Pre-Tax Gain
Recognized in
Earnings on
Hedged Item
 
 
Derivatives in Fair Value Hedging Relationships:
             
 
Interest rate swap
agreements a
  $ 4,906     $ (4,297 )   $ (623 )   $ 669  


 
10

 


     
Three Months Ended July 31,
 
     
2010
   
2009
 
 
(in thousands)
 
Pre-Tax Loss
Recognized in
OCI (Effective
Portion)
   
Amount of
(Loss) Gain
Reclassified
from
Accumulated
OCI into
Earnings
(Effective
Portion)
   
Pre-Tax
(Loss) Gain
Recognized in
OCI (Effective
Portion)
   
Amount of Loss Reclassified
from
Accumulated
OCI Into
Earnings
(Effective
Portion)
 
                 
 
Derivatives in Cash Flow Hedging Relationships:
             
 
Foreign exchange forward
contracts a
  $ (1,968 )   $ (37 )   $ (454 )   $ (950 )
 
Put option contracts b
    (1,769 )     (692 )     (755 )     (950 )
 
Precious metal collars b
    (1 )     (466 )     587       (998 )
 
Precious metal forward
contracts b
    (1,435 )     322              
      $ (5,173 )   $ (873 )   $ (622 )   $ (2,898 )

     
Six Months Ended July 31,
 
     
2010
   
2009
 
 
(in thousands)
 
Pre-Tax
Gain (Loss)
Recognized in
OCI (Effective
Portion)
   
Amount of
(Loss) Gain
Reclassified
from
Accumulated
OCI into
Earnings
(Effective
Portion)
   
Pre-Tax
(Loss) Gain
Recognized in
OCI (Effective
Portion)
   
Amount of Loss Reclassified
from
Accumulated
OCI Into
Earnings
(Effective
Portion)
 
                 
 
Derivatives in Cash Flow Hedging Relationships:
             
 
Foreign exchange forward
contracts a
  $ 643     $ (266 )   $ (523 )   $ (1,485 )
 
Put option contracts b
    (1,416 )     (1,507 )     (104 )     (1,944 )
 
Precious metal collars b
    276       (1,178 )     2,359       (896 )
 
Precious metal forward
contracts b
    1,370       460              
      $ 873     $ (2,491 )   $ 1,732     $ (4,325 )

     
Pre-Tax (Loss) Gain Recognized in Earnings
on Derivative
 
 
(in thousands)
 
Three Months Ended
July 31, 2010
   
Three Months Ended
July 31, 2009
 
 
Derivatives Not Designated as Hedging Instruments:
           
 
Foreign exchange forward contracts a
  $ (99 )c   $ (589 )c
 
Call option contracts b
    82        
 
Put option contracts b
    (82 )      
      $ (99 )   $ (589 )


 
11

 


     
Pre-Tax (Loss) Gain Recognized in Earnings
on Derivative
 
 
(in thousands)
 
Six Months Ended
July 31, 2010
   
Six Months Ended
July 31, 2009
 
 
Derivatives Not Designated as Hedging Instruments:
           
 
Foreign exchange forward contracts a
  $ (614 )c   $ (606 )c
 
Call option contracts b
    148        
 
Put option contracts b
    (148 )      
      $ (614 )   $ (606 )

 
a
The gain or loss recognized in earnings is included within Interest and other expenses, net on the Company’s Condensed Consolidated Statement of Earnings.
 
b
The gain or loss recognized in earnings is included within Cost of Sales on the Company’s Condensed Consolidated  Statement of Earnings.
 
c
Gains or losses on the undesignated foreign exchange forward contracts substantially offset foreign exchange losses or gains on the liabilities and transactions being hedged.

There was no material ineffectiveness related to the Company’s hedging instruments for the periods ended July 31, 2010 and 2009. The Company expects approximately $1,889,000 of net pre-tax derivative gains included in accumulated other comprehensive income at July 31, 2010 will be reclassified into earnings within the next 12 months. This amount will vary due to fluctuations in foreign currency exchange rates and precious metal prices.

For information regarding the location and amount of the derivative instruments in the Condensed Consolidated Balance Sheet, refer to “Note 7. Fair Value of Financial Instruments.”

Concentration of Credit Risk

A number of major international financial institutions are counterparties to the Company’s derivative financial instruments.  The Company enters into derivative financial instrument agreements only with counterparties meeting certain credit standards (a credit rating of A/A2 or better at the time of the agreement), limiting the amount of agreements or contracts it enters into with any one party. The Company may be exposed to credit losses in the event of nonperformance by individual counterparties or the entire group of counterparties.

7.
FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. U.S. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. U.S. GAAP prescribes three levels of inputs that may be used to measure fair value:

Level 1 – Quoted prices in active markets for identical assets or liabilities. Level 1 inputs are considered to carry the most weight within the fair value hierarchy due to the low levels of judgment required in determining fair values.

Level 2 – Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3 – Unobservable inputs reflecting the reporting entity’s own assumptions. Level 3 inputs are considered to carry the least weight within the fair value hierarchy due to substantial levels of judgment required in determining fair values.


 
12

 

The Company uses the market approach to measure fair value for its mutual funds, time deposits and derivative instruments. The Company’s interest rate swap agreements are primarily valued using the 3-month LIBOR rate. The Company’s put and call option contracts, as well as its foreign exchange forward contracts, are primarily valued using the appropriate foreign exchange spot rates. The Company’s precious metal collars and precious metal forward contracts are primarily valued using the relevant precious metal spot rate. For further information on the Company’s hedging instruments and program, see “Note 6. Hedging Instruments.”

Financial assets and liabilities carried at fair value at July 31, 2010 are classified in the table below in one of the three categories described above:

           
Estimated Fair Value
       
 
(in thousands)
 
Carrying
Value
   
Level 1
   
Level 2
   
Level 3
   
Total Fair
Value
 
 
Financial Assets
                             
 
Mutual funds a
  $ 41,318     $ 41,318     $     $     $ 41,318  
 
Time deposits b
    47,949       47,949                   47,949  
                                           
 
Derivatives designated as hedging instruments:
 
 
Interest rate swap
agreements a
    6,901             6,901             6,901  
 
Put option contracts c
    856             856             856  
 
Precious metal forward
contracts c
    1,220             1,220             1,220  
 
Precious metal collars c
    151             151             151  
                                           
 
Derivatives not designated as hedging instruments:
 
 
Foreign exchange
forward contracts c
    184             184             184  
 
Total assets
  $ 98,579     $ 89,267     $ 9,312     $     $ 98,579  

           
Estimated Fair Value
       
 
(in thousands)
 
Carrying
Value
   
Level 1
   
Level 2
   
Level 3
   
Total Fair
Value
 
 
Financial Liabilities
                             
                                 
 
Derivatives designated as hedging instruments:
 
 
Foreign exchange
forward contracts d
  $ 452     $     $ 452     $     $ 452  
 
Total liabilities
  $ 452     $     $ 452     $     $ 452  


 
13

 

Financial assets and liabilities carried at fair value at July 31, 2009 are classified in the table below in one of the three categories described above:

           
Estimated Fair Value
       
 
(in thousands)
 
Carrying
Value
   
Level 1
   
Level 2
   
Level 3
   
Total Fair
Value
 
                                 
 
Financial Assets
                             
 
Mutual funds a
  $ 25,191     $ 25,191     $     $     $ 25,191  
                                           
 
Derivatives designated as hedging instruments:
 
 
Interest rate swap
agreements a
    4             4             4  
 
Put option contracts c
    1,710             1,710             1,710  
 
Precious metal collars c
    524             524             524  
                                           
 
Derivatives not designated as hedging instruments:
 
 
Foreign exchange
forward contracts c
    270             270             270  
 
Total assets
  $ 27,699     $ 25,191     $ 2,508     $     $ 27,699  

     
 
 
Financial Liabilities
 
Derivatives designated as hedging instruments:
 
Interest rate swap
agreements e
  $ 627     $     $ 627     $     $ 627  
 
Precious metal collars d
    146             146             146  
                                           
 
Derivatives not designated as hedging instruments:
                 
 
Foreign exchange forward
contracts d
    852             852             852  
 
Total liabilities
  $ 1,625     $     $ 1,625     $     $ 1,625  

 
a
This amount is included within Other assets, net on the Company’s Condensed Consolidated Balance Sheet.
 
b
This amount is included within Short-term investments on the Company’s Condensed Consolidated Balance Sheet.
 
c
This amount is included within Prepaid expenses and other current assets on the Company’s Condensed Consolidated Balance Sheet.
 
d
This amount is included within Accounts payable and accrued liabilities on the Company’s Condensed Consolidated Balance Sheet.
 
e.
This amount is included within Other long-term liabilities on the Company’s Condensed Consolidated Balance Sheet.

The fair value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximates carrying value due to the short-term maturities of these assets and liabilities. The fair value of debt with variable interest rates approximates carrying value. The fair value of debt with fixed interest rates was determined using the quoted market prices of debt instruments with similar terms and maturities. The total carrying value of short-term borrowings and long-term debt was $782,036,000 and $751,748,000 and the corresponding fair value was approximately $850,000,000 and $770,000,000 at both July 31, 2010 and 2009.

8.
COMMITMENTS AND CONTINGENCIES

In April 2010, Tiffany and Company, the Company’s principal operating subsidiary (“Tiffany”) committed to a plan to consolidate its New York headquarters staff within one location in New York City from three

 
14

 

separate locations currently leased in midtown Manhattan. The move is expected to occur in spring 2011 and will generate occupancy savings. Tiffany intends to sublease its existing properties through the end of their lease terms which run through 2015, but expects to recover only a portion of its rent obligations due to current market conditions. Accordingly, Tiffany anticipates recording expenses of approximately $30,000,000 primarily within selling, general and administrative expenses in the consolidated statement of earnings in the fiscal year ending January 31, 2012; this expense is related to the fair value of the remaining non-cancelable lease obligations reduced by the estimated sublease rental income. Additionally, Tiffany will incur expenses of approximately $18,000,000 in the fiscal year ending January 31, 2011 and $5,000,000 in the fiscal year ending January 31, 2012 primarily related to the acceleration of the useful lives of certain property and equipment and incremental rents during the transition period. Changes in market conditions may affect the total expenses ultimately recorded. The expenses recorded during the three and six months ended July 31, 2010 were $3,945,000 and $4,805,000, respectively, and are primarily included in selling, general and administrative expenses (“SG&A”). This new lease, which expires in 2026, will increase total minimum annual rental payments as disclosed in the January 31, 2010 Annual Report on Form 10-K by the following amounts:

 
(in thousands)
 
Total
   
2010
      2011-2012       2013-2014    
Thereafter
 
 
Unrecorded contractual obligations:
                                 
 
Operating leases
  $ 224,525     $     $ 25,067     $ 27,346     $ 172,112  

9.
STOCKHOLDERS’ EQUITY

Accumulated Other Comprehensive Loss

 
(in thousands)
 
July 31,
2010
   
January 31,
2010
   
July 31,
2009
 
 
Accumulated other comprehensive (loss) gain, net of tax:
                 
 
Foreign currency translation adjustments
  $ 14,341     $ 16,512     $ 1,480  
 
Deferred hedging loss
    (532 )     (2,607 )     (5,160 )
 
Unrealized loss on marketable securities
    (1,263 )     (1,899 )     (3,240 )
 
Net unrealized loss on benefit plans
    (44,249 )     (45,271 )     (30,053 )
      $ (31,703 )   $ (33,265 )   $ (36,973 )

10.
EMPLOYEE BENEFIT PLANS

The Company maintains several pension and retirement plans, as well as provides certain health-care and life insurance benefits.

Net periodic pension and other postretirement benefit expense included the following components:

     
Three Months Ended July 31,
 
     
Pension Benefits
   
Other
Postretirement Benefits
 
 
(in thousands)
 
2010
   
2009
   
2010
   
2009
 
 
Net Periodic Benefit Cost:
                       
 
Service cost
  $ 3,274     $ 2,949     $ 347     $ 268  
 
Interest cost
    5,998       5,681       696       646  
 
Expected return on plan assets
    (4,455 )     (3,726 )            
 
Amortization of prior service cost
    269       268       (165 )     (165 )
 
Amortization of net loss (gain)
    760       (74 )           (1 )
 
Net expense
  $ 5,846     $ 5,098     $ 878     $ 748  


 
15

 


     
Six Months Ended July 31,
 
     
Pension Benefits
   
Other
Postretirement Benefits
 
 
(in thousands)
 
2010
   
2009
   
2010
   
2009
 
 
Net Periodic Benefit Cost:
                       
 
Service cost
  $ 6,543     $ 5,897     $ 694     $ 536  
 
Interest cost
    11,995       11,362       1,392       1,292  
 
Expected return on plan assets
    (8,910 )     (7,452 )            
 
Amortization of prior service cost
    538       536       (330 )     (330 )
 
Amortization of net loss (gain)
    1,520       (148 )           (2 )
 
Net expense
  $ 11,686     $ 10,195     $ 1,756     $ 1,496  

11.
SEGMENT INFORMATION

Effective with the first quarter of 2010, management has changed the Company’s segment reporting in order to align with a change in its organizational and management reporting structure. Specifically, the Company is now reporting results in Japan separately from the rest of the Asia-Pacific region, and results for certain “emerging market” countries that were previously included in the Europe and Asia-Pacific segments are now included in the “Other” non-reportable segment. Prior year results have been revised to reflect this change. The Company’s reportable segments are as follows:

 
Americas includes sales in TIFFANY & CO. stores in the United States, Canada and Latin/South America, as well as sales of TIFFANY & CO. products in certain markets through business-to-business, Internet, catalog and wholesale operations;

 
Asia-Pacific includes sales in TIFFANY & CO. stores in Asia-Pacific markets (excluding Japan), as well as sales of TIFFANY & CO. products in certain markets through Internet and wholesale operations;

 
Japan includes sales in TIFFANY & CO. stores, as well as sales of TIFFANY & CO. products  through business-to-business, Internet and wholesale operations;

 
Europe includes sales in TIFFANY & CO. stores, as well as sales of TIFFANY & CO. products in certain markets through Internet and wholesale operations; and

 
Other consists of all non-reportable segments. Other consists primarily of wholesale sales of TIFFANY & CO. merchandise to independent distributors for resale in certain emerging markets (such as the Middle East and Russia) and wholesale sales of diamonds obtained through bulk purchases that were subsequently deemed not suitable for the Company’s needs. In addition, Other includes earnings received from a third-party licensing agreement.

The results of IRIDESSE are presented as a discontinued operation in the condensed consolidated financial statements for all periods presented. Prior to the reclassification, IRIDESSE results had been included within the Other non-reportable segment. Refer to “Note 2. Discontinued Operations.”


 
16

 

Certain information relating to the Company's segments is set forth below:

     
Three Months Ended July 31,
   
Six Months Ended July 31,
 
 
(in thousands)
 
2010
   
2009
   
2010
   
2009
 
 
Net sales:
                       
 
Americas
  $ 350,433     $ 324,862     $ 665,691     $ 583,856  
 
Asia-Pacific
    111,490       91,920       233,826       173,616  
 
Japan
    118,031       113,738       233,080       230,767  
 
Europe
    76,893       67,301       145,521       122,257  
 
Total reportable
segments
    656,847       597,821       1,278,118       1,110,496  
 
Other
    11,913       14,672       24,228       19,612  
      $ 668,760     $ 612,493     $ 1,302,346     $ 1,130,108  
 
Earnings (losses) from continuing
operations*:
 
 
Americas
  $ 68,970     $ 55,738     $ 123,892     $ 85,207  
 
Asia-Pacific
    24,366       19,433       56,540       36,695  
 
Japan
    31,228       29,321       62,224       60,285  
 
Europe
    16,841       11,402       31,469       18,932  
 
Total reportable
segments
    141,405       115,894       274,125       201,119  
 
Other
    862       (3,176 )     1,110       (4,400 )
      $ 142,267     $ 112,718     $ 275,235     $ 196,719  

*Represents earnings (losses) from continuing operations before unallocated corporate expenses, interest and other expenses, net and other (expense) income.

The following table sets forth a reconciliation of the segments’ earnings from continuing operations to the Company’s consolidated earnings from continuing operations before income taxes:

     
Three Months Ended July 31,
   
Six Months Ended July 31,
 
 
(in thousands)
 
2010
   
2009
   
2010
   
2009
 
 
Earnings from continuing
operations for segments
  $ 142,267     $ 112,718     $ 275,235     $ 196,719  
 
Unallocated corporate
expenses
    (24,716 )     (27,606 )     (51,407 )     (52,093 )
 
Interest and other expenses,
net
    (11,121 )     (12,132 )     (23,259 )     (24,572 )
 
Other (expense) income
    (3,945 )     4,442       (4,805 )     4,442  
 
Earnings from continuing
operations before income
taxes
  $ 102,485     $ 77,422     $ 195,764     $ 124,496  

Unallocated corporate expenses includes certain 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.

Other expense in the second quarter and first half of 2010 represents accelerated depreciation and incremental rent expense associated with Tiffany’s plan to consolidate its New York headquarters staff within one location. See “Note 8. Commitments and Contingencies.”

Other income in the three and six months ended July 31, 2009 represents income received in connection with the assignment of the Tahera Diamond Corporation commitments and liens to an unrelated third party, recorded within SG&A, which represents full settlement under the terms of the assignment agreement. The


 
17

 

Company had taken an impairment charge of $47,981,000 in the year ended January 31, 2008 associated with the Commitment.

12.
SUBSEQUENT EVENTS

On August 19, 2010, the Company’s Board of Directors declared a quarterly dividend of $0.25 per share. This dividend will be paid on October 11, 2010 to stockholders of record on September 20, 2010.

On September 1, 2010, the Company, in a private transaction, issued, at par, ¥10,000,000,000 (approximately $115,000,000) of 1.72% Senior Notes due September 2016. The proceeds will be used to repay a portion of certain debt coming due in the next 12 months. The agreement requires lump sum repayments upon maturity and includes specific financial covenants and ratios and limits certain payments, investments and indebtedness, in addition to other requirements customary to such borrowings.


 
18

 

PART I.
Financial Information
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

Tiffany & Co. (the “Company”) is a holding company that operates through its subsidiary companies. The Company’s principal subsidiary, Tiffany and Company (“Tiffany”), is a jeweler and specialty retailer whose principal merchandise offering is fine jewelry. The Company also sells timepieces, sterling silverware, china, crystal, stationery, fragrances and accessories. Through Tiffany and Company and other subsidiaries, the Company is engaged in product design, manufacturing and retailing activities.

Effective with the first quarter of 2010, management has changed the Company’s segment reporting in order to align with a change in its organizational and management reporting structure. Specifically, the Company is now reporting results in Japan separately from the rest of the Asia-Pacific region, and results for certain “emerging market” countries that were previously included in the Europe and Asia-Pacific segments are now included in the “Other” non-reportable segment. Prior year results have been revised to reflect this change. The Company’s reportable segments are as follows:

 
Americas includes sales in TIFFANY & CO. stores in the United States, Canada and Latin/South America, as well as sales of TIFFANY & CO. products in certain markets through business-to-business, Internet, catalog and wholesale operations;

 
Asia-Pacific includes sales in TIFFANY & CO. stores in Asia-Pacific markets (excluding Japan), as well as sales of TIFFANY & CO. products in certain markets through Internet and wholesale operations;

 
Japan includes sales in TIFFANY & CO. stores, as well as sales of TIFFANY & CO. products through business-to-business, Internet and wholesale operations;

 
Europe includes sales in TIFFANY & CO. stores, as well as sales of TIFFANY & CO. products in certain markets through Internet and wholesale operations; and

 
Other consists of all non-reportable segments. Other consists primarily of wholesale sales of TIFFANY & CO. merchandise to independent distributors for resale in certain emerging markets (such as the Middle East and Russia) and wholesale sales of diamonds obtained through bulk purchases that were subsequently deemed not suitable for the Company’s needs. In addition, Other includes earnings received from a third-party licensing agreement.

The results of IRIDESSE, a business that was closed in 2009, are presented as a discontinued operation in the condensed consolidated financial statements for all periods presented. Prior to the reclassification, IRIDESSE results had been included within the Other non-reportable segment. Refer to “Item 1. Notes to Condensed Consolidated Financial Statements – Note 2. Discontinued Operations.”

All references to years relate to fiscal years ended or ending on January 31 of the following calendar year.

HIGHLIGHTS

 
Worldwide net sales increased 9% in the three months (“second quarter”) and increased 15% in the six months (“first half”) ended July 31, 2010. Sales in all reportable segments increased in the second quarter and first half.

 
On a constant-exchange-rate basis (see “Non-GAAP Measures” below), worldwide net sales increased 8% in the second quarter and increased 13% in the first half. Comparable store sales increased 5% in the second quarter and increased 7% in the first half.

 
The Company opened three stores, two in China and one in Singapore, in the first half of 2010. Management’s current worldwide objective is to open 14 stores in 2010.


 
19

 

 
The Company launched e-commerce sites in Austria, Belgium, France, Germany, Ireland, Italy, the Netherlands and Spain in the second quarter of 2010.

 
Operating margin increased 2.4 percentage points in the second quarter due to a higher gross margin and increased 3.6 percentage points in the first half due to a higher gross margin and the leveraging of operating expenses.

 
Net earnings from continuing operations increased 19% to $67,675,000 in the second quarter and increased 57% to $132,100,000 in the first half of 2010.

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 basis provides a more representative assessment of 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:

   
Second Quarter 2010 vs. 2009
   
First Half 2010 vs. 2009
 
   
GAAP
Reported
   
Translation
Effect
   
Constant-
Exchange-
Rate Basis
   
GAAP
Reported
   
Translation
Effect
   
Constant-
Exchange-
Rate Basis
 
Net Sales:
                                   
Worldwide
    9 %     1 %     8 %     15 %     2 %     13 %
Americas
    8 %     1 %     7 %     14 %     1 %     13 %
Asia-Pacific
    21 %     4 %     17 %     35 %     8 %     27 %
Japan
    4 %     6 %     (2 )%     1 %     6 %     (5 )%
Europe
    14 %     (11 )%     25 %     19 %     (3 )%     22 %
Comparable Store Sales:
                                               
Worldwide
    6 %     1 %     5 %     10 %     3 %     7 %
Americas
    6 %     1 %     5 %     11 %     1 %     10 %
Asia-Pacific
    10 %     3 %     7 %     21 %     7 %     14 %
Japan
    (1 )%     6 %     (7 )%     (3 )%     5 %     (8 )%
Europe
    11 %     (10 )%     21 %     15 %     (3 )%     18 %


 
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RESULTS OF OPERATIONS

Net Sales
Net sales by segment were as follows:

         
Second Quarter
       
(in thousands)
 
2010
   
2009
   
Increase (Decrease)
 
Americas
  $ 350,433     $ 324,862       8 %
Asia-Pacific
    111,490       91,920       21 %
Japan
    118,031       113,738       4 %
Europe
    76,893       67,301       14 %
Other
    11,913       14,672       (19 )%
    $ 668,760     $ 612,493       9 %

         
First Half
       
(in thousands)
 
2010
   
2009
   
            Increase
 
Americas
  $ 665,691     $ 583,856       14 %
Asia-Pacific
    233,826       173,616       35 %
Japan
    233,080       230,767       1 %
Europe
    145,521       122,257       19 %
Other
    24,228       19,612       24 %
    $ 1,302,346     $ 1,130,108       15 %

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, 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 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. Total sales in the Americas increased $25,571,000, or 8%, in the second quarter primarily due to an increase in the average price per unit sold. Comparable store sales increased $16,450,000, or 6%, in the second quarter, consisting of increases in both comparable branch store sales of 5% and New York Flagship store sales of 8%. Non-comparable store sales grew $5,414,000 in the second quarter. On a constant-exchange-rate basis, Americas sales increased 7%, and comparable store sales increased 5% in the second quarter. Combined Internet and catalog sales in the Americas decreased $619,000, or 2%, in the second quarter.

Total sales in the Americas increased $81,835,000, or 14%, in the first half of 2010 largely due to an increase in the number of units sold, as well as an increase in the average price per unit sold. Comparable store sales increased $53,301,000, or 11%, in the first half, consisting of increases in both comparable branch store sales of 10% and New York Flagship store sales of 16%. Non-comparable store sales grew $15,030,000 in the first half. On a constant-exchange-rate basis, Americas sales increased 13%, and comparable store sales increased 10% in the first half. Combined Internet and catalog sales in the Americas increased $5,902,000, or 9%, in the first half due to increases in both the average price per order and the number of orders.

Asia-Pacific. Total sales in Asia-Pacific increased $19,570,000, or 21%, in the second quarter primarily due to an increase in the average price per unit sold. Comparable store sales increased $8,771,000, or 10%, and non-comparable store sales grew $10,284,000. On a constant-exchange-rate basis, Asia-Pacific sales increased 17% and comparable store sales increased 7% in the second quarter due to growth in most markets.

Total sales in Asia-Pacific increased $60,210,000, or 35%, in the first half of 2010 equally due to increases in the average price per unit sold and the number of units sold. Comparable store sales increased $33,164,000, or 21%, and


 
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non-comparable store sales grew $24,775,000. On a constant-exchange-rate basis, Asia-Pacific sales increased 27% and comparable store sales increased 14% in the first half due to growth in most markets.

Japan. Total sales in Japan increased $4,293,000, or 4%, in the second quarter due to an increase in the average price per unit sold (primarily reflecting the translation of yen-denominated sales into U.S. dollars), which was partly offset by a decline in the number of units sold. Comparable store sales declined $1,130,000, or 1%, in the second quarter. On a constant-exchange-rate basis, Japan sales decreased 2% and comparable store sales decreased 7% in the second quarter.

Total sales in Japan increased $2,313,000, or 1%, in the first half of 2010 due to an increase in the average price per unit sold (reflecting the translation of yen-denominated sales into U.S. dollars), which was almost entirely offset by a decline in the number of units sold. Comparable store sales declined $6,235,000, or 3%, in the first half. On a constant-exchange-rate basis, Japan sales decreased 5% and comparable store sales decreased 8% in the first half.

Europe. Total sales in Europe increased $9,592,000, or 14%, in the second quarter primarily due to increases in the number of units sold. This included increased comparable store sales of $6,304,000, or 11%, and non-comparable store sales growth of $4,630,000. On a constant-exchange-rate basis, sales increased 25% and comparable store sales increased 21% in the second quarter, reflecting broad-based geographical growth.

Total sales in Europe increased $23,264,000, or 19%, in the first half of 2010 primarily due to increases in the number of units sold. This included increased comparable store sales of $16,058,000, or 15%, and non-comparable store sales growth of $8,917,000. On a constant-exchange-rate basis, sales increased 22% and comparable store sales increased 18% in the first half, reflecting broad-based geographical growth.

Other. Other sales decreased $2,759,000, or 19%, in the second quarter primarily due to lower wholesale sales of diamonds that were deemed not suitable for the Company’s needs. Other sales increased $4,616,000, or 24% in the first half of 2010 primarily due to higher wholesale sales of diamonds and increased wholesale sales of TIFFANY & CO. merchandise to independent distributors.

Store Data. Management currently expects to open 14 Company-operated TIFFANY & CO. stores and boutiques in 2010, increasing the store base by approximately 6%, which includes the following locations which have already been opened and/or where plans have been finalized:

Location
Openings as of
July 31, 2010
Remaining Openings
2010
Americas:
   
Baltimore, Maryland
 
Third Quarter
Santa Monica, California
 
Third Quarter
Jacksonville, Florida
 
Fourth Quarter
Houston – Woodlands, Texas
 
Fourth Quarter
Los Angeles – Beverly Center, California
 
Fourth Quarter
Asia-Pacific:
   
Shanghai – Hong Kong Plaza, China
First Quarter
 
Shanghai – IFC Mall, China
Second Quarter
 
Marina Bay, Singapore
Second Quarter
 
Beijing – China World III, China
 
Third Quarter
Taipei – Bellavita, Taiwan
 
Third Quarter
Seoul – Hyundai Shinchon, Korea
 
Fourth Quarter
Europe:
   
London – Canary Wharf, England
 
Third Quarter
Barcelona, Spain
 
Fourth Quarter

Gross Margin

     
                     Second Quarter
     
                  First Half
 
     
2010
   
2009
     
2010
   
2009
 
Gross profit as a percentage of net sales
    57.8 %   55.1 %     57.8 %   55.5 %


 
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Gross margin (gross profit as a percentage of net sales) increased in the second quarter and first half by 2.7 and 2.3 percentage points, which was driven primarily by the recapture of higher product costs through retail price increases, as well as manufacturing efficiencies. In addition, gross margin in the second quarter of 2010 benefited from a decline in wholesale sales of rough diamonds.

Management periodically reviews and may adjust its retail prices, as it did in the first quarter of 2010, 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, which may be influenced by consumer confidence and competitive pricing conditions. The Company uses derivative instruments to mitigate foreign exchange and precious metal price exposures (see “Item 1. Notes to Condensed Consolidated Financial Statements – Note 6. Hedging Instruments”).

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

   
                          Second Quarter
   
                   First Half
 
   
2010
   
2009
   
2010
   
2009
 
SG&A expenses as a percentage of net sales
    40.8 %     40.5 %     41.0 %     42.3 %

SG&A expenses increased $25,248,000, or 10%, in the second quarter of 2010, primarily due to increased depreciation and store occupancy expenses of $8,797,000 related to new and existing stores as well as costs associated with Tiffany’s plan to consolidate its New York headquarters staff within one location (see “Item 1. Notes to Condensed Consolidated Financial Statements – Note 8. Commitments and Contingencies”), increased labor and benefit costs of $6,507,000 and increased marketing expenses of $6,204,000. In the first half of 2010, SG&A expenses increased $56,104,000 or 12%, primarily due to increased depreciation and store occupancy expenses of $16,551,000 due to new and existing stores as well as costs associated with Tiffany’s New York headquarters discussed above, increased labor and benefit costs of $15,804,000 and increased marketing expenses of $10,889,000. In addition, SG&A expenses were lower in the second quarter and first half of 2009 due to $4,442,000 of income received in connection with a note that had been previously impaired. SG&A expenses as a percentage of net sales increased by 0.3 percentage point in the second quarter due to the lower SG&A expenses in 2009 as discussed in the previous sentence and decreased by 1.3 percentage points in the first half due to sales leverage on fixed costs. Changes in foreign currency exchange rates had an insignificant translation effect on overall SG&A expenses in the second quarter and first half.

Earnings from Continuing Operations

(in thousands)
 
Second Quarter
2010
   
% of Net
Sales*
   
Second Quarter
2009
   
% of Net
Sales*
 
Earnings (losses) from continuing operations:
                   
Americas
  $ 68,970       19.7 %   $ 55,738       17.2 %
Asia-Pacific
    24,366       21.9 %     19,433       21.1 %
Japan
    31,228       26.5 %     29,321       25.8 %
Europe
    16,841       21.9 %     11,402       16.9 %
Other
    862       7.2 %     (3,176 )     (21.6 )%
      142,267               112,718          
Unallocated corporate expenses
    (24,716 )     3.7 %     (27,606 )     4.5 %
Other (expense) income
    (3,945 )             4,442          
Earnings from continuing operations
  $ 113,606       17.0 %   $ 89,554       14.6 %
*
Percentages represent earnings (losses) from continuing operations as a percentage of each segment’s net sales.

Earnings from continuing operations increased 27% in the second quarter. On a segment basis, the ratio of earnings (losses) from continuing operations (before the effect of unallocated corporate expenses and other (expense) income) to each segment’s net sales in the second quarter of 2010 and 2009 was as follows:

 
Americas – the ratio increased 2.5 percentage points primarily resulting from an increase in gross margin, as well as the effect of sales growth leveraging on operating expenses;

 
Asia-Pacific – the ratio increased 0.8 percentage point primarily due to an increase in gross margin, which was partly offset by increased operating expenses associated with new and existing locations;


 
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Japan – the ratio increased 0.7 percentage point primarily due to an increase in gross margin, which was partly offset by increased marketing expenses;

 
Europe – the ratio increased 5.0 percentage points primarily due to the leveraging of operating expenses, as well as an increase in gross margin; and

 
Other – the ratio increased 28.8 percentage points. The prior period operating loss included a valuation adjustment related to the write-down of wholesale diamond inventory deemed not suitable for the Company’s needs.

(in thousands)
 
First Half
2010
   
% of Net
Sales*
   
First Half
2009
   
% of Net
Sales*
 
Earnings (losses) from continuing operations:
                   
Americas
  $ 123,892       18.6 %   $ 85,207       14.6 %
Asia-Pacific
    56,540       24.2 %     36,695       21.1 %
Japan
    62,224       26.7 %     60,285       26.1 %
Europe
    31,469       21.6 %     18,932       15.5 %
Other
    1,110       4.6 %     (4,400 )     (22.4 )%
      275,235               196,719          
Unallocated corporate expenses
    (51,407 )     3.9 %     (52,093 )     4.6 %
Other (expense) income
    (4,805 )             4,442          
Earnings from continuing operations
  $ 219,023       16.8 %   $ 149,068       13.2