By  on September 1, 2006

NEW YORK — Despite strong sales, Tiffany & Co. said Thursday that second-quarter earnings dropped because of a $6.6 million tax benefit in the previous year.

Results also were pulled down by softer sales in Japan as well as higher product costs. But the New York-based purveyor of fine jewelry and other luxury goods vowed that it would deliver a higher growth rate in the long term. Management said on a conference call with analysts that the company is on track to grow total square footage by 7 percent this year.

"Our ongoing plans for store openings and new product introductions sustain our confidence in Tiffany's ability to achieve higher rates of growth over the long term," said Michael J. Kowalski, chairman and chief executive officer.

For the quarter ended July 31, net earnings fell to $41.1 million, or 29 cents a diluted share, from $50.5 million, or 35 cents, in the previous year on sales that climbed 9 percent to $574.9 million from $526.7 million.

"Comparable-store sales in August to date include a return to midsingle-digit growth in the U.S., double-digit growth in many international markets and a high-single-digit decline in Japan," Kowalski said in a statement. "For this [current] third quarter, we are looking for a midsingle-digit increase in earnings before income taxes, and net earnings approximately equal to last year's 16 cents per diluted share, which had benefited from a lower effective tax rate due to favorable reserve adjustments related to the expiration of certain statutory periods."

Kowalski said full-year earnings for the current fiscal year are pegged to show a "low-double-digit increase in earnings before income taxes," with net earnings ranging from $1.77 to $1.82 a share.

James Fernandez, executive vice president and chief financial officer, said on the conference call that the company is optimistic "about Tiffany's prospects for 2006 and beyond. We certainly acknowledge that there are various economic uncertainties and geopolitical anxieties. However, we remain convinced there are increasing numbers of discerning consumers seeking the extraordinary product that we offer."

Citing "the opportunity to expand Tiffany's market penetration by entering many new markets," Fernandez added that, in 2006, "we are increasing Tiffany worldwide square footage by approximately 7 percent, which is slightly above our midsingle-digit growth strategy."Regarding second-quarter results, Fernandez said the gross margin rate dropped to 55.1 percent from 55.5 percent in the previous year as a result of higher product costs. "We've been affected by higher costs for precious metals, but as appropriate are addressing cost pressures through retail price adjustments," he explained. "Higher costs are affecting the entire industry, and, while it is difficult to quantify any customer resistance to higher prices, we believe that Tiffany is maintaining its competitive position and value proposition."

By region and business segment, direct marketing sales clocked an 18 percent gain to $35.7 million. International sales climbed 10 percent to $223.2 million while sales in the U.S. rose 8 percent to $288.6 million, and "other" sales increased 4 percent to $27.4 million.

"Growth was seen across a range of product categories, with diamond jewelry maintaining a prominent role in the growth from high-end diamond jewelry to diamond engagement rings to new diamond and platinum pendants," Mark Aaron, vice president of investor relations, said on the call.

"We're also pleased with continued favorable response to some of Tiffany's other relatively new fine jewelry collections, such as the Swing and Legacy collection," Aaron said. "Our Celebration ring initiative continues to be very successful and has become an important base of our business. There was also growth in silver and gold jewelry highlighted by the popular 1837 and Atlas collection. Sales also rose in the designer jewelry category, including Elsa Peretti and Paloma Picasso."

Regarding the Frank Gehry jewelry designs, Aaron said even though the product was only introduced into "one-third of our stores at the end of the second quarter, it's far exceeding our expectations, and we will complete the store rollout in the third quarter."

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