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TIFFANY & CO - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[August 27, 2014]

TIFFANY & CO - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations


(Edgar Glimpses Via Acquire Media NewsEdge) OVERVIEW Tiffany & Co. is a holding company that operates through its subsidiary companies (the "Company"). The Company's principal subsidiary, Tiffany and Company ("Tiffany"), is a jeweler and specialty retailer whose principal merchandise offering is jewelry. The Company also sells timepieces, leather goods, sterling silverware, china, crystal, stationery, fragrances and accessories. Through Tiffany and other subsidiaries, the Company is engaged in product design, manufacturing and retailing activities.



The Company's reportable segments are as follows: • Americas includes sales in 122 Company-operated TIFFANY & CO. stores in the United States, Canada and Latin 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 72 Company-operated TIFFANY & CO. stores, as well as sales of TIFFANY & CO. products in certain markets through Internet and wholesale operations; • Japan includes sales in 55 Company-operated TIFFANY & CO. stores, as well as sales of TIFFANY & CO. products through business-to-business, Internet and wholesale operations; • Europe includes sales in 38 Company-operated 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, including (i) retail sales in 6 Company-operated TIFFANY & CO. stores and wholesale distribution in the Emerging Markets region; (ii) wholesale sales of diamonds; and (iii) licensing agreements.


HIGHLIGHTS • Worldwide net sales increased 7% to $992,930,000 in the three months ("second quarter") ended July 31, 2014 due to growth across all jewelry categories and solid growth in the Americas and Asia-Pacific regions, while net sales in Japan declined (see "Net Sales" below). Worldwide net sales increased 10% in the six months ("first half") ended July 31, 2014 to $2,005,062,000 due to growth across all jewelry categories and in all regions.

• On a constant-exchange-rate basis (see "Non-GAAP Measures" below), worldwide net sales increased 7% in the second quarter and 11% in the first half and comparable store sales increased 3% in the second quarter and 7% in the first half.

• The Company opened five TIFFANY & CO. stores in the first half (opening two in the Americas and one each in Japan, Europe and the Emerging Markets region) while closing one in the Americas.

• Earnings from operations as a percentage of net sales ("operating margin") improved 1.9 percentage points in the second quarter due to an increase in gross margin. Operating margin improved 3.4 percentage points in the first half; however, excluding certain expenses recorded in the first half of 2013 (see "Non-GAAP Measures" below), operating margin improved 2.9 percentage points due to an increase in gross margin and sales leverage on operating expenses.

• Net earnings increased 16% to $124,120,000, or $0.96 per diluted share in the second quarter. Net earnings increased 31% to $249,729,000, or $1.92 per diluted share in the first half. Excluding certain expenses recorded in the first quarter of 2013 (see "Non-GAAP Measures" below), net earnings increased 27% in the first half of 2014.

• In May 2014, the Board of Directors approved a 12% increase in the quarterly dividend rate to $0.38 per share of the Company's Common Stock, or an annual dividend rate of $1.52 per share.

22-------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS Non-GAAP Measures The Company reports information in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"). The Company's management does not, nor does it suggest that investors should, consider 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.

Net Sales. The Company's reported net sales reflect either a translation-related benefit from strengthening foreign currencies or a detriment from a strengthening U.S. dollar. Internally, management monitors and measures its sales performance on a non-GAAP basis that eliminates the positive or negative effects that result from translating sales made outside the U.S. 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 following table reconciles the sales percentage increases (decreases) from the GAAP to the non-GAAP basis versus the previous year: Second Quarter 2014 vs. 2013 First Half 2014 vs. 2013 GAAP Constant-Exchange- GAAP Constant-Exchange- Reported Translation Effect Rate Basis Reported Translation Effect Rate Basis Net Sales: Worldwide 7 % - % 7 % 10 % (1 )% 11 % Americas 9 % (1 )% 10 % 8 % (1 )% 9 % Asia-Pacific 14 % 1 % 13 % 15 % (1 )% 16 % Japan (13 )% (3 )% (10 )% 4 % (6 )% 10 % Europe 8 % 7 % 1 % 8 % 6 % 2 % Other 28 % - % 28 % 34 % - % 34 % Comparable Store Sales: Worldwide 3 % - % 3 % 6 % (1 )% 7 % Americas 8 % - % 8 % 7 % (1 )% 8 % Asia-Pacific 7 % - % 7 % 8 % (1 )% 9 % Japan (15 )% (2 )% (13 )% 3 % (6 )% 9 % Europe (2 )% 6 % (8 )% 1 % 6 % (5 )% Other 2 % - % 2 % 10 % - % 10 % 23-------------------------------------------------------------------------------- Table of Contents Statement of Earnings. Internally, management monitors and measures its earnings performance excluding certain items listed below. Management believes excluding such items presents the Company's results on a more comparable basis to the corresponding period in the prior year, thereby providing investors with an additional perspective to analyze the results of operations of the Company. The following table reconciles certain GAAP amounts to non-GAAP amounts: Specific cost-reduction GAAP initiatives a (in thousands) Reported (decrease)/increase Non-GAAP Six months ended July 31, 2013 Selling, general and administrative expenses $ 717,309 $ (9,379 ) $ 707,930 Earnings from operations 318,044 9,379 327,423 Earnings from operations as a % of net sales 17.5 % 18.0 % Net earnings 190,358 5,785 196,143 a Expenses associated with specific cost-reduction initiatives which included severance related to staffing reductions and subleasing of certain office space for which only a portion of the Company's future rent obligations will be recovered.

There were no such adjustments in the first half of 2014.

Comparable Store Sales Comparable store sales include only sales transacted in Company-operated stores 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 are not included if the store 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.

Net Sales Net sales by segment were as follows: Second Quarter First Half (in thousands) 2014 2013 Increase/(Decrease) 2014 2013 Increase Americas $ 483,595 $ 443,856 9 % $ 922,283 $ 851,553 8 % Asia-Pacific 236,805 208,325 14 497,749 431,752 15 Japan 119,085 136,395 (13 ) 292,979 280,922 4 Europe 120,033 111,247 8 221,318 204,233 8 Other 33,412 26,061 28 70,733 52,908 34 $ 992,930 $ 925,884 7 % $ 2,005,062 $ 1,821,368 10 % Americas. Total sales in the Americas increased $39,739,000, or 9%, in the second quarter due to an increase in the average price per jewelry unit sold. In addition, a modest decline in jewelry units was entirely due to fashion jewelry, primarily in silver jewelry at price points below $500, while all other jewelry categories increased. Comparable store sales increased $29,522,000, or 8%, due to geographically broad-based growth across most of the region. Non-comparable store sales grew $9,006,000. On a constant-exchange-rate basis, sales in the Americas increased 10% and comparable store sales increased 8%.

Total sales in the Americas increased $70,730,000, or 8%, in the first half due to an increase in the average price per jewelry unit sold. In addition, a modest decline in jewelry units was entirely due to fashion jewelry, primarily in silver jewelry at price points below $500, while all other jewelry categories increased. Comparable store sales 24-------------------------------------------------------------------------------- Table of Contents increased $53,289,000, or 7%, due to geographically broad-based growth across most of the region. Non-comparable store sales grew $16,561,000. On a constant-exchange-rate basis, sales in the Americas increased 9% and comparable store sales increased 8%.

Asia-Pacific. Total sales in Asia-Pacific increased $28,480,000, or 14%, in the second quarter primarily due to increases in the average price per jewelry unit sold and in the number of jewelry units sold. Comparable store sales increased $14,037,000, or 7% and non-comparable store sales grew $9,889,000. On a constant-exchange-rate basis, Asia-Pacific sales increased 13% and comparable store sales increased 7% primarily due to strong growth in Greater China and Australia.

Total sales in Asia-Pacific increased $65,997,000, or 15%, in the first half primarily due to increases in the number of jewelry units sold and in the average price per jewelry unit sold. Comparable store sales increased $31,315,000, or 8% and non-comparable store sales grew $24,372,000. On a constant-exchange-rate basis, Asia-Pacific sales increased 16% and comparable store sales increased 9% primarily due to strong growth in Greater China and Australia.

Japan. Total sales in Japan decreased $17,310,000, or 13%, in the second quarter and comparable store sales decreased $19,010,000, or 15%, primarily due to a decrease in the number of jewelry units sold in all categories. The decline reflected a softening of customer demand throughout the second quarter, after exceptionally strong 20% total sales growth in the first quarter, or 29% on a constant-exchange-rate basis, when customers had accelerated their purchases in anticipation of an increase in Japan's consumption tax on April 1, 2014. On a constant-exchange-rate basis, Japan sales decreased 10% and comparable store sales decreased 13%.

Total sales in Japan increased $12,057,000, or 4%, in the first half and comparable store sales increased $8,817,000, or 3%, due to an increase in the average price per jewelry unit sold. On a constant-exchange-rate basis, Japan sales increased 10% and comparable store sales increased 9%.

Europe. Total sales in Europe increased $8,786,000, or 8%, in the second quarter primarily due to the effect of currency translation and an increase in the number of jewelry units sold. Comparable store sales decreased $1,906,000, or 2%, and non-comparable store sales increased $8,716,000. On a constant-exchange-rate basis, sales in Europe increased 1% while comparable store sales decreased 8% due to declines in the United Kingdom ("U.K.") and in most of continental Europe.

Total sales in Europe increased $17,085,000, or 8%, in the first half due to the effect of currency translation and an increase in the number of jewelry units sold. Comparable store sales increased $1,046,000, or 1%, and non-comparable store sales increased $12,589,000. On a constant-exchange-rate basis, sales in Europe increased 2% while comparable store sales decreased 5% due to declines in the U.K. and in most of continental Europe.

Other. Other sales increased $7,351,000, or 28%, in the second quarter and $17,825,000, or 34%, in the first half primarily due to retail sales growth in the Emerging Markets region of $3,738,000 and $9,686,000, respectively, primarily reflecting the opening of the first Company-operated TIFFANY & CO.

store in Russia. The remainder of the sales growth in both periods is primarily due to wholesale sales of diamonds.

Product Category Information. In the second quarter, worldwide net sales increased $67,046,000, or 7%, primarily driven by increases of $25,698,000, or 7%, in the fashion jewelry category (primarily due to sales growth in gold jewelry), $20,260,000, or 10%, in the statement, fine & solitaire jewelry category (reflecting growth throughout the category); and $15,587,000, or 6%, in the engagement jewelry & wedding bands category (reflecting growth in solitaire diamond rings).

In the first half, worldwide net sales increased $183,694,000, or 10%, primarily driven by increases of $62,410,000, or 11%, in the engagement jewelry & wedding bands category (reflecting growth in solitaire diamond rings and wedding bands); $62,041,000, or 9%, in the fashion jewelry category (reflecting growth throughout the category); and $52,189,000, or 13%, in the statement, fine & solitaire jewelry category (reflecting growth throughout the category).

25-------------------------------------------------------------------------------- Table of Contents Store Data. Management expects to add 10 Company-operated stores and close three existing stores during 2014: opening four in the Americas, two in Asia-Pacific, two in Japan and one each in Europe and Russia, while closing one each in the Americas, Asia-Pacific and the U.A.E. The following table shows locations which have already been opened or closed, or where plans have been finalized: Actual Openings (Closings) Expected Openings Location Year-to-Date 2014 2014 Americas: Cancun, Mexico First Quarter East Hampton, New York (First Quarter) Aventura, Florida Second Quarter Newbury Street - Boston, Massachusetts Third Quarter Design District - Miami, Florida Fourth Quarter Asia-Pacific: Adelaide, Australia Third Quarter Japan: Kobe, Sogo department store First Quarter Shinjuku - Tokyo Third Quarter Europe: Champs Elysees - Paris, France First Quarter Emerging Markets: Moscow, Russia First Quarter Gross Margin Second Quarter First Half 2014 2013 2014 2013Gross profit as a percentage of net sales 59.9% 57.5% 59.1% 56.8% Gross margin (gross profit as a percentage of net sales) increased by 2.4 percentage points in the second quarter and 2.3 percentage points in the first half largely benefiting from favorable product costs and price increases, as well as, to a lesser extent, from sales leverage on fixed costs resulting from the increase in worldwide net sales.

Management periodically reviews and adjusts its retail prices when appropriate to address product cost increases, specific market conditions and changes in foreign currencies/U.S. dollar relationships. Its long-term strategy is to continue that approach. Among the market conditions that management considers are consumer demand for the product category involved, which may be influenced by consumer confidence, and competitive pricing conditions. Management uses derivative instruments to mitigate certain foreign exchange and precious metal price exposures (see "Item 1. Notes to Condensed Consolidated Financial Statements - Note 7. Hedging Instruments"). Management increased retail prices in the first half of both 2014 and 2013 across all geographic regions and product categories.

Selling, General and Administrative ("SG&A") Expenses Second Quarter First Half 2014 2013 2014 2013 SG&A expenses as a percentage of net sales 38.9% 38.4% 38.2% 39.4% SG&A expenses increased $31,399,000, or 9%, in the second quarter primarily due to increased labor costs of $12,080,000 (primarily increased store-related labor costs), increased store occupancy and depreciation expenses of $5,692,000 (related to new and existing stores) and increased marketing expenses of $3,771,000. SG&A expenses as a percentage of net sales increased 0.5 percentage point.

26-------------------------------------------------------------------------------- Table of Contents SG&A expenses increased $49,066,000, or 7%, in the first half. Excluding the expense noted in "Non-GAAP Measures" in the first quarter of 2013, SG&A expenses increased $58,445,000, or 8%, largely reflecting increased labor costs of $18,050,000 (primarily increased store-related labor costs), increased store occupancy and depreciation expenses of $17,922,000 (related to new and existing stores). SG&A expenses as a percentage of net sales decreased 1.2 percentage points and would have decreased 0.7 percentage point, when excluding the item noted in "Non-GAAP Measures", due to the leveraging effect of fixed costs.

Earnings from Operations Earnings from operations increased 18% in the second quarter. Earnings from operations as a percentage of net sales ("operating margin") improved 1.9 percentage points due to an increase in gross margin. Results by segment are as follows: Second Quarter % of Net Second Quarter % of Net (in thousands) 2014 Sales 2013 Sales Earnings (losses) from operations*: Americas $ 109,805 22.7 % $ 87,731 19.8 % Asia-Pacific 65,492 27.7 % 49,882 23.9 % Japan 39,173 32.9 % 48,235 35.4 % Europe 25,114 20.9 % 22,338 20.1 % Other 2,399 7.2 % (1,188 ) (4.6 )% 241,983 206,998Unallocated corporate expenses (33,462 ) (3.4 )% (30,112 ) (3.3 )% Earnings from operations $ 208,521 21.0 % $ 176,886 19.1 % * Percentages represent earnings (losses) from operations as a percentage of each segment's net sales.

On a segment basis, the ratio of earnings (losses) from operations to each segment's net sales in the second quarter of 2014 compared with 2013 was as follows: • Americas - the ratio increased 2.9 percentage points due to an improvement in gross margin and sales leverage of operating expenses, which partly benefited from a shift in marketing spending to later in the year; • Asia-Pacific - the ratio increased 3.8 percentage points due to an improvement in gross margin partly offset by increased store-related operating expenses and marketing spending; • Japan - the ratio decreased 2.5 percentage points due to decreased sales partly offset by an improvement in gross margin (which includes a benefit from the Company's ongoing program to utilize forward contracts for a portion of forecasted merchandise purchases); • Europe - the ratio increased 0.8 percentage point due to an improvement in gross margin largely offset by increased store-related operating expenses and marketing spending; and • Other - the ratio increased 11.8 percentage points due to an improvement in gross margin from sales generated by retail operations in the Emerging Markets region and lower charges associated with the write-down of wholesale diamond inventory deemed not suitable for the Company's needs which were partly offset by increased store-related expenses.

27-------------------------------------------------------------------------------- Table of Contents Earnings from operations increased 32% in the first half. Operating margin improved 3.4 percentage points in the first half; however, excluding certain expenses recorded in the first half of 2013 (see "Non-GAAP Measures"), operating margin improved 2.9 percentage points due to an increase in gross margin and sales leverage on operating expenses. Results by segment are as follows: First Half % of Net First Half % of Net (in thousands) 2014 Sales 2013 Sales Earnings (losses) from operations*: Americas $ 191,289 20.7 % $ 146,693 17.2 % Asia-Pacific 137,333 27.6 % 105,341 24.4 % Japan 110,669 37.8 % 101,654 36.2 % Europe 42,086 19.0 % 36,616 17.9 % Other 4,663 6.6 % (344 ) (0.7 )% 486,040 389,960Unallocated corporate expenses (67,726 ) (3.4 )% (62,537 ) (3.4 )% Other operating expense - (9,379 ) Earnings from operations $ 418,314 20.9 % $ 318,044 17.5 % On a segment basis, the ratio of earnings (losses) from operations to each segment's net sales in the first half of 2014 compared with 2013 was as follows: • Americas - the ratio increased 3.5 percentage points due to an improvement in gross margin and sales leverage of operating expenses, which partly benefited from a shift in timing of marketing spending to later in the year; • Asia-Pacific - the ratio increased 3.2 percentage points due to an improvement in gross margin; • Japan - the ratio increased 1.6 percentage points due to an improvement in gross margin (which includes a benefit from the Company's ongoing program to utilize forward contracts for a portion of forecasted merchandise purchases) as well as sales leveraging of operating expenses; • Europe - the ratio increased 1.1 percentage points due to an improvement in gross margin largely offset by increased store-related operating expenses and marketing spending, including the opening of a significant store on the Champs Elysees in Paris; and • Other - the ratio increased 7.3 percentage points due to an improvement in gross margin from sales generated by retail operations in the Emerging Markets region and lower charges associated with the write-down of wholesale diamond inventory deemed not suitable for the Company's needs which were partly offset by increased store-related expenses, including the opening of a new store in Russia.

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 centralized information technology, finance, legal and human resources departments. In the second quarter, unallocated corporate expenses increased versus the comparable period in the prior year and increased modestly as a percentage of net sales. In the first half, unallocated corporate expenses increased versus the comparable period in the prior year but remained constant as a percentage of net sales.

Other operating expense in the first half of 2013 was related to specific cost-reduction initiatives. These cost-reduction initiatives included severance related to staffing reductions and subleasing of certain office space for which only a portion of the Company's future rent obligations will be recovered.

Interest and Other Expenses, net Interest and other expenses, net increased $1,457,000, or 10%, in the second quarter of 2014 and $5,021,000, or 18%, in the first half of 2014 primarily due to increased interest expense and financing costs.

28-------------------------------------------------------------------------------- Table of Contents Provision for Income Taxes The effective income tax rate for the second quarter of 2014 was 35.5% versus 34.2% in the prior year. The effective income tax rate for the second quarter of 2014 includes an increase of 0.6 percentage point due to the one-time impact of a change in state tax legislation. The effective income tax rate for the first half of 2014 was 35.3% versus 34.5% in the prior year. The effective income tax rate for the first half of 2014 includes an increase of 1.3 percentage points due to the one-time impact of changes in state tax legislation offset by the favorable impact of a valuation allowance release of 0.6 percentage point.

New Accounting Standards See "Item 1. Notes to Condensed Consolidated Financial Statements - Note 2. New Accounting Standards." LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity needs have been, and are expected to remain, primarily a function of its ongoing, seasonal and expansion-related working capital requirements and capital expenditure needs. Over the long term, the Company manages its cash and capital structure to maintain a strong financial position that provides flexibility to pursue strategic initiatives. Management regularly assesses its working capital needs, capital expenditure requirements, debt service, dividend payouts, share repurchases and future investments. Management believes that cash on hand, internally-generated cash flows, the funds available under its revolving credit facilities and the ability to access the debt and capital markets are sufficient to support the Company's liquidity and capital requirements for the foreseeable future.

The following table summarizes cash flows from operating, investing and financing activities: First Half (in thousands) 2014 2013 Net cash provided by (used in): Operating activities $ 152,796 $ 120,080 Investing activities (62,818 ) (89,868 ) Financing activities (38,380 ) (39,978 ) Effect of exchange rates on cash and cash equivalents 866 (5,408 ) Net increase/(decrease) in cash and cash equivalents $ 52,464 $ (15,174 ) Operating Activities The Company had a net cash inflow from operating activities of $152,796,000 in the first half of 2014 compared with a net cash inflow of $120,080,000 in the same period in 2013. The variance is primarily due to increases in net earnings and in deferred income taxes offset by inventory growth. Additionally, the first half of 2013 includes the Company's contribution of $30,000,000 to its pension plan, which is reflected in Other, net on the Condensed Consolidated Statements of Cash Flows.

Working Capital. Working capital (current assets less current liabilities) and the corresponding current ratio (current assets divided by current liabilities) were $2,780,877,000 and 5.1 at July 31, 2014, compared with $2,531,648,000 and 4.6 at January 31, 2014 and $2,651,043,000 and 5.5 at July 31, 2013.

Accounts receivable, less allowances at July 31, 2014 were 1% higher than January 31, 2014 and 18% higher than July 31, 2013 largely due to sales growth.

Inventories, net at July 31, 2014 were 9% higher than both January 31, 2014 and July 31, 2013. Finished goods inventories rose 9% from January 31, 2014 and 6% from July 31, 2013 and combined raw material and work-in-process inventories increased 9% and 13% from January 31, 2014 and July 31, 2013 in support of new product introductions and anticipated sales growth.

29-------------------------------------------------------------------------------- Table of Contents Prepaid expenses and other current assets at July 31, 2014 were 8% lower than January 31, 2014 and 24% higher than July 31, 2013. The increase from July 31, 2013 is largely due to income tax receivables which were recorded in the fourth quarter of 2013 resulting from the impact of the Arbitration Award. See "Part II - Item 1. Legal Proceedings" for additional information regarding the Arbitration Award.

Investing Activities The Company had a net cash outflow from investing activities of $62,818,000 in the first half of 2014 compared with an outflow of $89,868,000 in 2013. The decreased outflow in the current year is primarily due to net proceeds received upon the maturity of short-term investments which were reinvested in cash equivalents of $21,729,000. Additionally, in the first half of 2014, the Company received repayments of $7,277,000 associated with loans extended to diamond mining and exploration companies whereas, in the first half of 2013, the Company loaned $3,050,000 to such companies and received repayments of $484,000 associated with loans extended.

Financing Activities The Company had a net cash outflow from financing activities of $38,380,000 in the first quarter of 2014 compared with an outflow of $39,978,000 in 2013.

Year-over-year changes in cash flows from financing activities are largely driven by an increase in net proceeds from total borrowings as well as proceeds from the exercise of stock options partly offset by share repurchases.

Additionally, there was an increase in cash dividends paid on Common Stock with $0.72 paid per share of Common Stock in the first half of 2014 compared with $0.66 in the first half of 2013.

Recent Borrowings. The Company had net proceeds from short-term borrowings as follows: First Half (in thousands) 2014 2013Short-term borrowings: Proceeds from credit facility borrowings, net $ 13,966 $ 3,244 Other proceeds from credit facility borrowings 12,067 82,643 Other repayments of credit facility borrowings (964 ) (68,100 ) Net proceeds from total borrowings $ 25,069 $ 17,787 Under all of the Company's revolving credit facilities, there were $275,433,000 of borrowings outstanding, $3,905,000 letters of credit issued but not outstanding and $542,352,000 available for borrowing at July 31, 2014. The weighted-average interest rate for the amount outstanding at July 31, 2014 was 3.50%.

The ratio of total debt (short-term borrowings and long-term debt) to stockholders' equity was 35% at July 31, 2014, 37% at January 31, 2014 and 35% at July 31, 2013.

At July 31, 2014, the Company was in compliance with all debt covenants.

Share Repurchases. In March 2014, the Company's Board of Directors approved a share repurchase program which authorizes the Company to repurchase up to $300,000,000 of its Common Stock through open market transactions. Purchases are discretionary and will be made from time to time based on market conditions and the Company's liquidity needs. The program will expire on March 31, 2017.

30-------------------------------------------------------------------------------- Table of Contents The Company's share repurchase activity was as follows: Second Quarter First Half (in thousands, except per share amounts) 2014 2014 Cost of repurchases $ 9,256 $ 16,402 Shares repurchased and retired 102 184 Average cost per share $ 90.98 $ 89.18 At July 31, 2014, approximately $283,598,000 remained available for share repurchases under this authorization.

Contractual Obligations At July 31, 2014, the Company's gross uncertain tax position decreased by $20,231,000 from January 31, 2014 primarily as a result of the settlement of an audit being conducted by the Internal Revenue Service. As of July 31, 2014, unrecognized tax benefits are not expected to change materially in the next 12 months. Future developments may result in a change in this assessment.

The Company's contractual cash obligations and commercial commitments at July 31, 2014 and the effects such obligations and commitments are expected to have on the Company's liquidity and cash flows in future periods have not changed significantly since January 31, 2014.

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

2014 Outlook For the fiscal year ended January 31, 2015, management is now forecasting net earnings to be in a range of $4.20-$4.30 per diluted share, compared with its most recently published forecast of $4.15-$4.25 per diluted share. This full year forecast is based on the following assumptions, which are approximate and may or may not prove valid, and which should be read in conjunction with risk factors disclosed in Part I, Item 1A in the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 2014: • Worldwide net sales increasing by a high-single-digit percentage.

• Opening 10 Company-operated stores and closing three existing stores: opening four in the Americas, two in Asia-Pacific, two in Japan and one each in Europe and Russia, while closing one each in the Americas, Asia-Pacific and the U.A.E.

• Operating margin increasing due to a higher gross margin and SG&A expense growth less than sales growth.

• Interest and other expenses, net of $65,000,000 with the increase over 2013 reflecting the interest cost on higher average levels of net-debt.

• An effective income tax rate of 35%.

• A 6% increase in net inventories.

• Capital expenditures of $270,000,000, versus $221,000,000 last year, with the increase largely reflecting incremental investments in certain information technology systems.

• Free cash flow (cash flow from operating activities less capital expenditures) of at least $400,000,000.

31-------------------------------------------------------------------------------- Table of Contents Forward-Looking Statements This quarterly report on Form 10-Q 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 Company's goals, plans and projections with respect to store openings and closings, product introductions, sales, retail prices, gross margin, expenses, operating margin, effective income 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 plans and involve inherent risks, uncertainties and assumptions that could cause actual outcomes to differ materially from current goals, plans and projections. The Company has included important factors in the cautionary statements included in its 2013 Annual Report on Form 10-K and in this quarterly report, particularly under "Item 1A. Risk Factors," that the Company believes could cause actual results to differ materially from any forward-looking statement.

Although the Company believes it has been prudent in developing its plans and the underlying 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 quarterly report was first filed with the Securities and Exchange Commission. The Company 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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