Q2 2019 Earnings Call
Good day, everyone and welcome to this Tiffany and company second quarter 2019 conference call.
Today's call is being recorded.
Participating on today's call is Jason Wong Treasurer, and VP of Investor Relations Mr., Mark Erceg, Tiffany's Executive Vice President and Chief Financial Officer.
And Mr. Alessandro Bolio, low Tiffany's, Chief Executive Officer, and at this time I'd like to turn the call over to Jason Wong. Please go ahead.
Thanks Amanda.
Welcome and thank you for joining us on today's call Sydney issued its second quarter results earlier today with the news release the following of our report on Form 10-Q .
Following some comments were all found or more we will be pleased to take your questions very few in Asia.
Before continuing please note that statements made on this call that are not historical facts are forward looking statements actual results might differ materially from the plan assumed or expected results expressed in or implied by these forward looking statements.
The company undertakes no obligation to update or revise any forward looking statements to reflect subsequent events or circumstances, except as required by applicable law or regulation.
Additional information concerning factors risks and uncertainties that caused that could cause actual results to differ materially as well as the required reconciliations of the non-GAAP measures referenced in this presentation to their comparable GAAP measures is set forth in Tiffany's Form 10-Q filed earlier today with the Securities and Exchange Commission as well as the news release filed today under cover of form 8-K.
Those filings can be found on Tiffany's investor Web site in the Investor Dot Tiffany dotcom by selecting financials I'll now turn the call over dalessandro.
Thanks, Jason and welcome everyone.
Let me start by saying right the problem that our second quarter results were mixed.
The top line I mean, probably came in a bit light versus what ongoing going humanistic patients, but we are encouraged by the slight over LIBOR, we achieved on the bottom line versus our internal forecast, which mark will elaborate on during his prepared remarks, but first let's spend some time, putting our second quarter sales results and complex global reported sales dropped by 3%.
But these was against the backdrop that included last year's strong 12% increase.
A significant decline in both sales attributed to trainees and all of the purists.
And meaningful business disruption in Hong Kong, let's take a few additional sequans on each of these.
Last year during the second quarter of 2018, we generated significant U.S. and global attention behind the lipstick launch of paper flowers in New York and our believing brings campaign, which we believe drove a meaningful increase in both traffic and sales we expect similar excitement behind our main product activations diesel year, but those will take place during the later stages of the third and the early part of the fourth quarter.
Second quarter sales results were also impacted by a continued sharp decline in sales to both Chinese and all other tourists, which we believe lower our reported sales by a couple percentage points.
And the Hong Kong, where we have 10 stores, which is our fourth biggest market relative to total sales only after the United States and Japan in mainland China as being presented with a unique set of challenges.
Obviously, we hope for a quick can do sort of a solution to the rest being experience there, but in the meantime, we must acknowledge the current situation is taking a toll on our business. In fact, we estimate the during the second quarter, we lost nearly six four selling days due to unplanned store closures.
Despite all of this our internal estimates indicate that during the second quarter. We grew constant currency retail sales to local customers on a global basis by 2%.
Which we believe is that much better indicator of underlying brand strength and our future growth potential.
And within which we once again posted strong double digit growth with local customers in mainland China.
Having provided some short term commentary on the second quarter, let's now people to something much more important our mid and long term efforts to generate sustainable top and bottom line growth rate.
Consistent with our position as global luxury Jordan.
We have now six quarters into the long and the exciting journey, we effectively began at the start of fiscal 2018. When we took the bold decision to meaningfully increase investment spending to support our six key focus areas.
As we stated then and as we continue to believe now those investments have been carefully designed to be self reinforcing and to work in concert with each other over time in order to ultimately allow us to consistently deliver sustainable top line sales growth.
You have also heard about repeatedly space that we do not expect to deliver sustainable topline sales growth until we have been able to introduce a sufficient number of distinctive new product amplify and evolved marketing message with sufficient impact as to attract a significant number of new customers reactivate lapsed ones, while continuing to delight our existing customers.
Upgrade the key aspects of our physical store network, while also adding experiential elements to our in store environment, such as visual merchandising Jordan valley bars, and sector and develop through enabling technologies, a seamless omni channel customer experience.
We are making good progress on all of these fronts. However, as an illustration since we believe there are inherent limits on the maximum amount of product units. We can be properly supported with 360 degree marketing and PR campaigns as well as robust in store execution without becoming confusing or distracting for our customers. We estimate that it may take until fiscal 2021 to properly refresh our product assortment with enough newness to generate balanced and sustainable growth across our entire product portfolio.
We are committed to reinvigorating the business the right way as we aim for industry, leading levels of shareholder value creation.
Which we believe define long term success in the meantime, it maybe admittedly be a bit hard to see how the strategic investment decisions. We have made so far are positively impacting the business given timing shift in new product launches as compared to last year macroeconomic noise from lower tourism spending and the disruption taking place in Hong Kong.
Therefore, we we thought it might be helpful to spend a few minutes talking about how all of the decisions. We have made over the past 18 months are working together in mainland China at key strategic market, which from the beginning of this journey, we have identified to receive a high level of management focus and investment for example, mainland China is where we chose to disproportionately increased marketing spending and media penetration last year. It was also mainland China, where we took the decision to spend up our retail Foundation information technology platform first back in the first quarter of financing.
During the first half of 2019, we increased the hydraulic presence at our Beijing, China was store as well as in a number of additional major stores, such as Shanghai agency and be injunction complaints.
Then during the second quarter of 2019, we sold through limited quantities of specialty from King's Diamonds and them on we chat for 520 or I'd Love you very supported by you out at famous Chinese actor with nearly 50 million Weibo followers, and we made both e-commerce or now what Tiffany Dot cm web site for the first time.
We believe that all of these actions plus improvements in the relevance of our messaging to Chinese consumers and the launch of pay per flowers last fall has enabled us to significantly improve our brand our scores as surveyed by a third party in mainland China across critical consumer segments, such as self purchasing women high spenders and discuss this in turn allows us to improve our overall brand power ranking in China from fourth.
Second place during the past year.
And even more importantly, we believe these actions plus others have allowed us to dramatically improve our business among domestic Chinese consumers for perspective constant currency comparable sales during the first half of 2019 grew four times faster than the first half of 2018.
And second quarter 2019 sales grew more than 25%.
In order to maintain this momentum we have a number of really exciting is strategically important initiatives. Some have already begun and others will take place in the second half of the year across greater China, all of which are designed to continue to broaden our appeal among Chinese consumers such initiatives can be grouped in four key strategies.
First we are strengthening our store network by opening or upgrading our flagship stores in three key metropolitan areas, Beijing, Shanghai and long form in Beijing, the relocation and upgrade of our flagship store in China World took place in Q1 in the next two quarters, we expect to add over two major flagship launches in Hong Kong and Shanghai, respectively. In Hong Kong, We plan to open a three floor threeq facing flagship store at one thinking about the most popular shopping area in Oncomed, among Chinese tourists, which we expect to close the gap with that major luxury brands, which have prominent stores in that area.
In Shanghai, we plan to relocate and that large our store to arguably the most prominent cognizant location in the city at Oncomed Plaza and the area of Shanghai, where other prestigious luxury brands have significance Street frontage presence with our three flagship stores Beijing, Shanghai and Oncomed, we expect customers to be able to more fully experience the refinement Assortments service and ultimately the power of the Tiffany and company Brian .
Second we are in the process of expanding our airport duty free start network in Q3, we plan to open the first Tiffany's store in a duty free zone in mainland China at the beach in adequate with a partner.
Next month, we plan to relocate and upgrade our directly owned store at the Hong Kong Airport currently the smallest in Hawaii Airport network to a full size duty free store with these two stores, we expect to be able to more efficiently target that Chinese traveler retail segment.
Third we are stepping up our digital relevance with the recently commerce enablement of our China Company website.
This is important for us to be able to inform and influence purchasing decisions of customers when they have the sizing, which brand and specific product to buy.
Apart from the additional online sales opportunity, especially interfere Chinese cities, where we don't have a physical presence. We expect these e-commerce efforts to increase traffic and conversion rates in our physical stores and increase the effectiveness of our digital marketing.
We are also increasing our weight in the Chinese digital ecosystem with the additional week Chad Limited edition program, we did for Chinese Valentine's day in numbers and additional ones for the holidays and for Chinese new year.
Fourth we have three new marketing initiatives planned for the second half of 2019 first we plan to open Blue box cafes in both the new Hong Kong location at one picking road as well as the nine Shanghai flagship at on Penn Plaza. This will be the first permanent bluebox cafes in Tiffany stores outside of New York and the Justice in New York, We expect it will generate substantial customer attention and stop traffic.
Secondly, we will be conducting a series of consumer facing nine month of defining events across greater China to educate consumers on our unparalleled cutting and polishing craftsmanship at to reinforce our Diamond authority in this market.
Last and perhaps most importantly on September 23rd in Shanghai, We really non Gregg Tiffany and company vision and deposited the largest private Tiffany brand exhibition.
The brand will celebrate its over 180 year history and heritage M- unique experiential setting.
Instead of being just a retrospective over 350 archival products along with numerous other value Jordi Pcs and the exclusive previous from that 2019 global K. during collection will be displayed in a more experiential thematic environment, which maps the DNA of the Tiffany brand. We expect these initiatives to drastically increase the awareness and the depth of knowledge about what brands among the Chinese including importantly, the millennial segment.
Now that we have provided additional insight on now our efforts are aligning across greater China, let's shift back to the broader company for which we keep progressing on that roadmap that we shared with you.
About 18 months ago.
Many of you have asked us about our excitement from the second half product units, which will be taking place plays all across the world.
Well, we don't want to take the surprise away from our customers. We can mention that we have already pre launched a color full new extension to our iconic Tiffany T collection.
We have also already pre launched in selected stores, bringing decorated men's lineup.
And as we mentioned on last quarter's call. We are moving forward with an additional fragrance offering later this year.
So while we have knowledge that we still have much to do before the full effect of the strategic investments. We have made and continue to make across the business are fully implemented across all product categories and key markets. We are very encouraged by the progress we are making particularly in the areas, where we have dedicated that most time and resources.
Let me now turn the call over to Mark So he can share a few additional thoughts before we open up the call to your questions.
Thanks, Alex.
Since you've likely already reviewed our filings and our prepared remarks are expected to run a bit longer than recent quarters, and we want to make sure we need plenty of time for your questions I'll focus my comments today on just a few salient matters.
First gross margin in the second quarter was 130 basis points below year ago, just like it was during the first quarter. There was a little bit of negative sales leverage on fixed manufacturing and other costs, but our factory load are better balanced as we built inventory to support our second half launches in anticipation of a stronger holiday season.
So the real driver of lower gross margin in the quarter for the mix impact from a meaningful increase in high jewelry sales, which as you know is an area we've been focusing on this past year.
And over the balance of the year since our second half product launches should increase the sales mix for our gold and diamond jewelry collections relative to higher margin silver jewelry, we'd expect some additional pressure on gross margin.
However that being more than offset by volume leverage as we expect to regain sales momentum and the absence of certain costs such as a bankruptcy filing of a metal refiner, we recorded in the third quarter of last year.
Looking even further out we plan to invest even more behind our high jewelry offerings and have plans to continue introducing even more gold with and without diamonds and diamond products as part of our strategic efforts to put more emphasis on increasing our average unit selling price in the years ahead.
Importantly, our multi year product and marketing plans call for moving a larger percentage of our overall sales mix to higher price points gradually by focusing on and growing gold and diamond jewelry collections and high jewelry at a faster pace than engagement in silver jewelry.
That said it is important to note we still have plans for both engagement in silver jewelry to grow going forward just at rates below those expected to be achieved in high jewelry and across our gold and diamond jewelry collections.
It is for this reason that some of you might have noticed we refrain the product imagery on all of our ecommerce sites along with the products featured in our digital and social campaigns recently showcased gold and diamond jewelry collections more prominently.
Second SGN expenses were well contained during the second quarter with total estimated expenses as a percentage of sales dropping from 46.3% last year to 45.2%. This year a reduction of 110 basis points.
Prudent cost management, particularly on the labor line as we seek to create organizational efficiencies and ongoing global procurement efforts, which achieved a notable milestone this past quarter with the implementation of our new source to pay solution in the United States both contributed.
We also took the decision to hold back some advertising dollars in the second quarter. So they can be more effectively deployed against our strong second half product introduction plans.
Finally from a store network perspective, and in addition to the greater China stores, Alex referenced earlier, we just announced the opening of two stores in India. Later this fiscal year and next year, one each in Delhi, and Mumbai to a joint venture with an India based luxury retail leader and we are continuing to make good progress on the New York flagship transformation.
From a guidance standpoint, you may recall at the start of the year and again during our first quarter earnings release, we called for a first soft first half followed by a rebound during the second half.
Which would result in full year reported sales growth of low single digits.
And while our first and second quarter sales results were a couple of points lower than we would have liked the reasons. We have discussed they have been generally speaking consistent with our overall expectations.
As Alex mentioned earlier tourism patterns are volatile and the situation in Hong Kong remains very fluid. In addition, the Japanese government has announced its intention to increase sales consumption tax rate from 8% to 10% in October of this year.
Which is adding even more unpredictability to an already challenging macroeconomic environment.
This is because in the past business has significantly accelerated in Japan prior to consumer sales tax increases of this magnitude and then decelerated in the months thereafter, or whether or not the same phenomenon will occur. This time around is very hard to predict.
Against the backdrop of these uncertainties and after balancing our first half results against our strong second half marketing and product plans, we still expect to grow full year reported sales by low single digits and relative to the bottom line. Our guidance also remains unchanged at low to mid single digit growth in diluted earnings per share.
Now that said if for example, the ongoing unrest in Hong Kong persist much longer at its current rate, we may find ourselves towards the lower end of our full year reported sales and EPS guidance range and if the situation were to deteriorate, even further or if the current level of unrest is maintained for the balance of the fiscal year, we may find ourselves below the bottom end of our ranges.
I'll now turn the call back to Jason and we can take your questions.
Thanks, Alessandro Mark operator, we are ready to take some questions.
Thanks.
If you would like to ask a question. Please press star one on your telephone keypad.
We are using a speakerphone. Please engineering function is turned after like signal to Richard Goodman.
Thank you another star one to ask a question.
And we'll take our first question from Oliver Chen with Cowen and company. Please go ahead.
Regarding your comments on gold and Diamond versus silver silver is a nice margin business and.
It's also also featuring Golden Diamond seems very brand appropriate, but how does that interplay with your thoughts on the evolution of the longer term operating margin and also as you spoke to a lot of your your comments regarding the caution points and things happening geopolitically, what what are your thoughts on.
The guidance level and being more conservative in guidance in light of the softer topline than you would have one thank you.
Okay. Thank you Oliver as four or.
The the gold versus silver evolution.
Silver, although he is the smallest.
Part of our business in terms of mental where the order is the largest portion is platinum the second is by far our gold and silver is the smaller one.
It's an important.
Segment for Us and there is a segment in which we believe we believe this part of our average of our portfolio and we have plans.
To grow it going farther as or any other segments. It's true that in this particular moment, we are experiencing a stronger momentum more in the golder rather than in December . So it's something that is happening in this moment, but we know also that these trends can vary from season to season from time to time and our efforts.
Both on on both sides of the collections.
Yes, and I'll, let us add that you know the jewelry collection gold and gold diamonds.
He has very strong gross margins and it's in its own right. I mean, we're obviously not saying that we don't want to see the concert business over business grow we want to see the gold in the dining business grow at a faster at a faster rate as far as the.
Second portion of your question with respect to how were thinking about the full year.
Honestly at this point is playing out largely as we anticipated. We said we have a softer first half and a stronger second half driven by the product and marketing plans that we have in place we feel good about those programs and we will continue to be very communicative with our with our owners about where we see the business trending but right now we see low single digit reported sales growth in low to mid diluted EPS growth in the current contacts with the caveat that have been provided.
Okay, and just to follow up last year, there was an opportunity to do with the marketing earlier, the customers quite dynamic and behaving behaving earlier in some respects on that and the digital aspect has gotten very competitive online. So how how will you approach that in terms of timing and key catalyst for marketing that's different this year versus last year as you approach the important holiday season. Thank you.
We.
And.
Analyzing very carefully the results of last year and all the good things and those are the things that could that improve the and that we feel very confident about the plans. We have for this year in terms of the campaigns content and tightening.
Okay Best regards thank you.
Thank you.
Operator next question please.
We will take our next question from.
Matthew boss with Jpmorgan.
Great. Thanks, So as we think about your six strategic outline priorities and the 2021 timeline that you cited earlier I guess, maybe since taking the helm Alex what do you see as your biggest wins versus areas. You would say are taking longer than you initially expected.
Float in.
In terms of product I have to say that it was very clear to me that with the 18 months developing time for new products in jewelry and considering that there is only a limited number of new lines that you can maintain newness that you can introduce during the year if the being a multi year process. This is why you will remember that already in the when we announced the first quarter results last year, we were very clear mentioning a long and exciting journey because it was clear to me that to revamp and product assortment from a brain late Tiffany it's multi year particular progress process. So the incentives. This was didn't come as a surprise I am and I think on the marketing we are.
We have been acting very quickly and effectively and though we changed the communication and we keep on tweaking and changing and evolving every every quarter so to be honest.
We view the longest the time needed is.
Of course, inefficiencies and especially in the cultural shift recharge the second to last the priorities that we mentioned in our in our both Matt and on efficiencies. We start seeing are going to be some signs of managing costs more effectively in this quarter, but honestly. It's just the beginning because this is a process that will take current years in order to really show a significant impact on profit and the cultural change is.
It's something that is progressing well, but is obviously the one that takes the most because has to do with the human beings and 14000 people in the company, but I have to say is I mean, there are no depletions were eight field back we had a problem or where do we stop we keep on focusing on the road map, we put together.
Great and then Mark maybe just on the back half of the year embedded within your full year guide how best to think about topline and earnings growth that you're expecting in the third quarter relative to the fourth quarter any guidepost I think would be really helpful.
No I do appreciate that but thats something that.
I think we would be able to get ready to provide we obviously guide on on the full year.
With respect to the quarters.
We don't want to.
The overly prescriptive there.
Okay best of luck.
Thank you.
Thank you.
Our next question will come from.
Bernie Chow with Wells Fargo.
Hey, everyone. Good morning, just two quick ones for me I guess I'm trying to mirror. The first point Army for Alex just trying to marry the the comments about the assortment refresh really not being completed till fiscal 21 kind of combined with the outlook for improving fundamentals on top line to the rest of the year why why would you think that the topline and fundamentals can improve if you're thinking that the product assortment really won't be refreshed until next year and then and then a quick one for Mark we've heard from some companies I know that you guys are not a promotional brand I understand that but in terms of competitively. When you look across the globe are you seeing some of the wholesalers and retailers retailers are being a little bit more competitive on pricing year to date, we've heard we've heard some rumblings about any color would be helpful.
Okay, well as for the product assortment I mean, I don't want to be misunderstood in the sense that.
This is an area on which we are progressing literally every quarter.
And if you look also at the past 12 months, we have added important launches like paper flowers peak through Diamond then that we have.
Return to Tiffany Love Bugs, and we are now talking about the.
A colorful burst turnover fee and sector. So it's a it's a good progress a continuous progress. The point is that what is important is that.
To reach a critical mass of newness in order to really see.
Results.
Being steady growing because it's a it's a process as a path is a German so I'm confident about or the second part of this year, because we will be in a much better position, but we were one year ago, but I expect the one in Italy have to be in a much better position than we will be in the second half. So it's really a path with a study with the study.
Got it the other thing I would offer on that as you think about where we are this year to date reported sales were down 2.7% contained within that about over slightly over two points of FX scrape.
Which we think is going to be based on current spot rates.
Largely it push it might cost us 2030 basis points in the balance of the year, but it's not going to nearly as consequential.
Think about the comps that we're going to be starting to dial up against last year in Q1 in Q2, we both.
For both quarterly posted plus sevens.
That was a plus three and in Q3 and it was flat basically in Q4, new stores is also going to be contributing a lot more in the second half than it did in the first half you heard Alex talked about them very large stores will be coming online, but actually contributor and then of course. The biggest thing is just the product in the marketing of the holiday plans and everything else that we've been doing so.
We feel good about where we sit right now based on the way we've laid out the year as far as the question on price promotional activity you're right. We don't engage in any of those types of activities and frankly, while we continue to do this grapes, we haven't seen anybody out there doing things in our particular space that gives us at this point any cause for concern.
Thank you.
Our next question will come from Lorraine Hutchinson with Bank of America.
Thank you good morning.
It sounds like the newness will ramp up and have a greater impact on sales starting in the fourth quarter.
Do you expect to launch sufficient newness next year that you will be able to continue to grow topline more sustainably from here on.
Absolutely that is exactly the plan and I am glad because thanks to different approaches speeding the company. Thanks also to the.
Julie W workshop that we have set up together for prototyping, the new car, but I have to say that the company has been month as accelerated a lot the base of the product design and development and we are now in a situation, where we have a very clear.
The assortment already.
Prototype for 2020, and we are working now on 2021. So we have really a long term visibility on our assortment that was not the case just one year ago. So yes, I think the teams have been working very well in this and.
We will have a very strong pipeline for next year and the year.
Okay.
Thank you.
Thank you.
Well take our next question from Omar Saad with Evercore ISI.
Good morning, Thanks for taking my question.
Oh, sorry, just wanted to follow up on the newness question, sorry to beat it beat the drum.
You guys made the point in the prepared remarks that there is a certain mix of newness that without overloading. The system are willing the customer.
But without becoming too good strategy could you elaborate on that is are you, saying, there's too much newness now were not enough for the wrong kind of newness or you need more of a different type of newness I'm just trying to understand what the bottleneck is.
Yes.
Thank you Omar.
My assessment is that it's quite clear in the market that in the past few years out.
Number of introductions of distinctive new products was below industry standards. We have decided one enough you have a goal to increase that level between groups. The standard that is roughly speaking that on the 15% of sales coming from Eunice now more than that would be.
Too much because experience affairs, so but also because of that it's only a number of new products that customers can absorb during one year because jewelry is different from pension is not that every season everything just George.
In classics and so that is.
The cadence of seven.
Hello, and this was clear since the beginning.
Part of the rules so over of luxury jewelry and we.
And then on this path so please.
No.
No acceleration we have just following the set the path that we have set.
And then very pleased about that thanks to say.
I understand thank you that makes it a lot clear could you also maybe discuss the as the decline in M&A dollars. In are you guys pulling back on investment or marketing and how much of this is sustainable and should we worry about the need to invest especially with the flagship renovations coming up make sure that that theres dollars in the budget for that thank you.
That's a great question.
I would say.
We did.
That back a little bit of some of the marketing spending in the second quarter in order to put that specifically against the large wave of product and marketing endeavors. We have planned for the second half of the year.
In total for the full year, we have plans to spend in a in a dollarized basis very similar levels of marketing funds in 19th we spent versus 18 and you'll recall that from 2018 medians meaningful step up in marketing dollars that we are investing behind the business.
The second quarter itself the specific concern, while certainly spend a little less in marketing versus year ago in the quarter that in the prior period had the launch of paper floors.
Obviously weather.
Disruption.
I can tell you the amount.
Any derived by the labor.
Items and the benefit items and all the other cost take out items, we affected in the quarter was was much larger than.
Any marketing shift that you might have seen.
Understood. Thanks Mark.
Thank you.
Well take our next question from Janet Kloppenburg with J K research.
Good morning, everyone and I was wondering if you could talk little bit about the tourists last levels in the <unk> and North America did they worsen in Twoq versus Threeq Q and if you could talk about the local North America customer and the performance there and your outlook.
And just lastly, I believe your guidance has included an outlook for.
Tourism, the United States to flatten out by the end of the year and I'm just wondering what's embedded in guidance, if that's changed or not thanks. So much.
Thank you so about.
Well first of all I would like to underline that the domestic favors.
So many things to domestic customers on a global basis went positive once again plus 2%.
Versus the plus 3% the previous one.
For me and for that important point to close is the largest part of our sales at least for the brand.
For our future growth, having said so through that on the tourism. We have been we have been suffering in the second quarter as well I have to say that the decrease in phase two Chinese tourists on a global basis as being.
Similar in the second quarter as well as in the first quarter and the same would apply to non tightening. So curious because also there, especially due to the strong dollar that has been a decrease in sales territories. So its something that was.
Well basically.
In the second quarter.
It refers to you as sort of North America consumers. So we have the.
We have experienced now since a few quarters.
Quite a softer trends these.
This quarter, we the sales to domestic sales in the us was slightly.
Were slightly down but.
I'm very confident that we told the marketing activities and the push we have it in the second part of the year. If things remain the same we will we will have a good performance because we are really focusing on the second half of the year.
And just as a follow up Mark just a clarification on marketing I know that this second half will benefit some contraction in the first half, but overall marketing spend for fiscal 19 will it be relatively flat year over year or what what will that dynamic look like thanks.
Yes, yes for the full year, we expect the marketing dollars spent in 2019 to be very comparable to 2018, which again was a significant step up from 70.
Great. Thanks, so much.
Thank you.
Well take our next question from Irwin Ramberg with HSBC.
Yes, hi, good morning, gentlemen, thank you for taking my question I wanted to come back on the Hong Kong I'm, just wondering if you could.
Tell us would Hong Kong is as a proportion of either sales or profits and.
What you are losing in Hong Kong today, do you think your recouping it partly elsewhere.
Whether its mainland, China, or Japan, or Korea or elsewhere.
And then maybe quite surprising timing for development a flagship.
In Canada and in the airport will that help you mitigate the pain somewhat.
Secondly, I just wanted to.
Furthermore, a kind of a clarification around how the pipeline of products and H. two plays out from a gross margin perspective.
I understand your comment in terms of.
Pressure for the long term.
Linked to the fact that you're doing higher end.
Im not sure I understood, what we need to have in mind for gross margin in h. to get that cannot stabilizer to rebound.
After each one and then thirdly and lastly, if you have any updates on.
How to space.
The temporary space near the flagship in New York plays out into the holiday season.
What sort of will you have the holiday season in New York. Thank you.
I'll try and bindings are knocking down the rapid probably really ask people to it.
Trying to hold themselves to one question, so with respect to Hong Kong.
Our fourth largest market is critically important for us we talked about the fact that we lost six store days during the second quarter, but thats just indicative of what's happening in that market today.
You know obviously right now there's a lot of.
Folks are focused on various matters and shopping may not be their primary concern for us Hong Kong is a country are there is a market that is mid single digits or total sales.
If that was to be down by 20% hypothetically.
That would take one point off the full year sales clock, if it was down by 40% and it was mid single digits. It would take off to four points.
For the year is just to give you some some sense on it as far as the gross margin question is concerned we really talked about happening in the first quarter in the second quarter was very strong high jewelry sales.
Which has a lower gross margin associated with it and we talked about that in the past as we think about the first half second half inflection points on gross margin one of the key things to know is that we believe will restore our volume momentum and will get fixed cost leverage as a result of that going into the second half. We also believe that there are some one time items like the.
Filing of a metal refiner that went into bankruptcy during the third quarter of last year and a few other items.
Some of which are related to obsolescence and a few other things that are coming to pass. We are confident that we can continue to expand our operating margin on a going forward basis. Once we get to a sustainable plot of sales growth.
Because of all the things that that will do to the TNL as well all of our cost takeout initiatives and then as far as the flagship stores concern one I'll, let Alex address your questions about the temp space.
Yeah, well above the flagship store here as you know it's a it's a huge problem just that we are following very closely and we are now in the process of building.
The the temporary store next door and we are evaluating the plans.
For not only for this.
For me is the holiday, but possible for.
Then the ships that we have to go do that moving the physical moving next year. So we are still working in the in the plans in order to maximize the benefit not only from the Buffalo sort of medium term.
So we don't have a clear a decision by the central Bank.
Thank you, but it will that time space be open for the for the current holiday season.
Well the temp space be open for the holiday season. We know this is Walter we are evaluating.
Right, Okay, okay, but just to clarify but the the flagship store will be fully operating during during the holiday.
Yes.
Okay. Thank you.
Thank you.
Our next question comes from Marni Shapiro with retail tracker.
Hey, guys.
I'm excited about all the product launches in the back half of the year. As these are just talk a little bit about you've touched on the marketing effort you've pushed the marketing into the back half of the year. Our these launches global launches and there's the marketing push global sometimes you launch things here in North America, sometimes and roll them out across the country can you talk a little bit more specifically about that and do the lunches hit across multiple categories. So from silver is through gold fashion through the highest end or are they more concentrated into.
The area, where you're you're sort of leaning on any way, which is the more gold in fashion jewelry.
Thank you for your question and that is actually a great point because.
In the past 12 months as we were in the process of accelerating our launches we were forced to have timing of launches around the world. While and this is the reason why we have postponed launches to the second part of the year in order to be able to add but totally global launches. So the answer is yes, they will be global launches.
Worldwide in.
In the second part of the year as for the kind of products. Let me say that everything is a good range of price points main focus is actually on the boulder claim that and with the and with Diamond, but there are also.
Newness in more entry price both in gold as well as silver as well as of course in the fine jewelry.
$20000 up to I will say $80000 that will be really introduced so it's quite a I would say price wise and as a kind of jewellery is quite the widespread fantastic. Thank you guys.
Thank you.
And we will take our next question from Brian Nagel with Oppenheimer.
Hi, good morning.
Thanks for taking my question.
So the question I have we spent we talked a lot about today and in prior calls just about the impact of that.
The headwind of.
Sorry for sales to foreign tourists in key markets.
As you look at it as you look at this this issue is are there levers.
The Tiffany can pool.
Or is the company mortgage at the Mercy of this you know whether it be currencies or other factors I guess the levers is there other marketing levers are there shorter or longer term that to help really offset this.
Yes, the topline headwinds.
Well.
Thank you for the questions actually tourist flows are important for a refund and put all the luxury brands and be something of course that goes beyond our control because has to do with.
Exchange rates up but also simply a rival of a customer's cellphone tourists in different countries and sites and now there are ways of course, we haven't we have put in place in order to try to address this first of all he is a lane that are less there is less suspending abroad to concentrate on the domestic market. So trying to get to the consumers in the local market level. They are in the in these we have a strong position because we have a network is truly global and so we are capable to reach out to customers. If they travel, but also is going to stay at home.
The second kind of activity, we are doing and this was one of the examples I was making about China is a to be present selectively nothing very important adequate locations. Because for example is the reason for having.
A store in that the BG and Porter because of Chinese tourists at that point can purchase at Beijing, why they are flying out regardless of the destination of the flight or the reason for enlarging the Hong Kong Airport. The store is because on calling me is a crucial point whenever.
People not only as a final destination, but forces a connecting flight is a very nice set shopping environment. So this is another activity we.
We can we can do and then the third we are doing and the third one is that of a balancing our inventory. So for example, this is why I mentioned before during the prepared remarks, we have shifted the high jewelry assortment to mainland China, two stores in Shanghai, and Beijing, because as the 10 years that juries tend to spend less but older than that yes, we have more availability of HIV products in the country in the way that we can match ups, partially offset the sales abroad. Now all this is what is in our hands of course, Oh. These can only partially offset the new sales growth because it's normal that somebody wins, a tourist tends to spend more freely more heavily and.
But this is a this is what we can do and we are doing effectively.
Thank you for all the color Alex if I could just slip one more.
Unrelated question, just any update on the on the engagement category.
Particularly following the launch of the new setting a little while ago and just how how how is overall sales track there and any idea on that from a market share perspective. Thanks.
Yes, well about our engagement jewelry in.
Cause some currencies in the second quarter was basically flat pricing was down 1%.
In the previous quarter. It was minus three I think so if.
It has been trading a little bit a little bit better if.
But it has been.
Let me say.
Basically in line with also the other collections. The other collections were a constant currency plus one engagement jewelry was minus one so I would say.
Yes, it's in line with the with the overall trend actually doing a little bit better than global sales.
Thank you very much.
Thank you.
And our next question will come from Rick.
Needham and company.
Thank you good morning.
So guidance assumes a comp improvement in the back half can you provide some color by region in terms of where do you see the most opportunity to drive an inflection and perhaps where you anticipate sales softness will persist.
You talked about are you touched on softness in the UK and Japan potentially continuing his pressure points, but curious how you're thinking about the other regions.
I think what we would say at this point as we look across the geographic landscape, we would expect.
No markets like mainland China to continue to perform well you know Europe , while it has.
Then kind of flattish, we do believe that the product and marketing plans. We have there will allow us to grow comparable store sales in constant currency in those regions. North America is probably the single largest opportunity for US you know last year, we had a relatively soft holiday and with the programs. We have in place. This year. Yeah. We really believe that we should be able to do a better job of connecting with us consumer.
And given its size thats clearly the largest opportunity for us and Japan, we talked about Japan and the consumption tax change. There you know that's a little bit of a wildcard back in 2014, when the consumption tax you know went from 5% to 8% we saw meaningful pull forward of a business in the two month period prior to the implementation of that tax increase and then it kind of fell away. So how that breaks over the third and fourth quarters is a little bit of a wildcard for us, but generally speaking we expect the regions to perform better in the second half than they did in the first for all the reasons we've cited.
And can you also provide some color on the performance of your newly revamped web sites are you getting the responses that you expected from consumers in terms of traffic and conversion and is there anything to call out in terms of regions are categories that may be working particularly well online in light of your marketing pull back in the first half.
Well at this moment is a little bit of a.
Very good momentum for our.
Online sales because as you know we just re platform. The during the end the end of April may our our lifestyle. So basically devry is.
There are many.
Yes no.
[noise] features new imagery new.
No copies that the Abbvie in.
To put in the in the web site, which is totally new so we have on one side. We have a we are constantly learning from this is newness and that we are investing in order to see what is working better work that can be improved though so it's a work in process and especially you know that when new changer completely youre on your platform, especially also in the awarding et cetera, if that has any impact on the.
On the Surcharging engine optimization because of the algorithms of Googles and the other search engines, let's take a few months in order to.
We come back to the normal.
Efficiency. So all these are to say that.
These are three months have been.
Did the disrupted quite this up yet to say with the negative trends that you now what online sales, but we are we were expecting better and we are seeing an improvement in that we this is the reason why we did all this changes during the summer in order to be ready for the second part of the year, we choose when.
The most important season is also for online phase consider also the superintendency, we have opened the China website.
As a as ecommerce site.
Another big Big effort, the start as being as being very positive, but it's just one month, but we are off to a good stuff.
Thanks very much.
Thank you.
Well take our next question from Jay sole with you, but yes.
Great. Thanks, so much Mark I have a question about tariffs did tariffs in China have any impact on gross margin in the quarter and some of the recent news from China about the increase in tariffs on that they're making have any will that have any impact on that business going forward. Thank you.
That's a great question and the the Terror is is an area that we've been spending a lot of time.
It is important to point out is how much movement. There has been if you go back to.
Before July Onest of 2018, and you look at the product types, whether its silver or yellow gold why gold platinum what have you are all in blended weighted average tariff.
It was roughly 28% then in July of 2018 with with the meal.
Tariff cuts that went into effect that dropped down to your high single digit percentage, we dial back around in September mid September of 18. It went up to the mid teens in by June of this year, we were basically back to the mid Twentys.
With the current discussion taking place.
What could be triggered in December would actually take us above where we were when this whole thing started so instead of being at 28, we could be in the low thirtys potentially so it's an area that we're watching very very closely because of the way we shipped product typically from the U.S. There is a bit of a lag effect in when that tends to.
To hit US we don't expect you know a large additional impact if those December tariffs, which take effect. This fiscal year that said we have used.
Some pricing in the past to help mitigate some of these areas, but as the pricing.
Also would go in the opposite direction to follow the tariffs down we've had to be very flexible and responsive in marketplace. The biggest concern that we have frankly on a longer term basis is the the tariff differential between a company such as ourselves to manufacturers most things in the U.S. versus some of the European competitors, and that's where when we first got together last quarter, we talked about the fact that we didn't feel it would be appropriate for this to take pricing actions and maybe do that unilaterally in and get ourselves into an uncompetitive price situation. So we did have to eat that last round of tariffs.
Whether or not we have to do something like that again, what make that determination over the next you know many weeks and months.
But for now for the fiscal I think we're in a in a reasonably good place but longer term. It's an area that we obviously have a lot of concern about and are watching very closely.
Okay got it thank you so much.
Then we will take our last question from Bob Drbul with Guggenheim.
Hey, Mark just a question for you on the systems investments that you're making I just wondered if you could just give us an update on any milestones that you're you're at with the systems piece of it and anything that we should be looking for the next several quarters. Thanks.
Yes, no thats great. Thank you and you Alex alluded to one of the Big system things that we just did recently, which was standing up our E com platform in China.
That took a lot of work by a lot of folks and I think we are going to be very well served by that I'm in the first quarter discussion we talked about the advanced planning system. We just stood up in the merchandising supply chain side of house and we did mention that we just stood up our source to pay system. Our Cooper system in the U.S. This past quarter. So we are making good progress we still have a lot of work to do.
But we have a very strong dedicated team towards making sure that we.
Sandy things up one after the next to last really start running the company with global platforms and global processes and global systems and frankly, that's also one of the things that ultimately will allow us to be more efficient in total.
As we look to find ways to.
Create additional investment dollars that we can put into topline growth.
Okay. Thanks, Bob I think it is now 930 20 inches of everyone's time will now wrap up the hearing aid session. Please note on your calendar that hit me expects the reported third quarter results on Thursday December 5th before the market opens and will host a conference call.
Thanks to all of you for participating on this call into so many of you for your continued interest in Tiffany I look forward to hearing from you with any additional questions or comments as I begin my our role here at Tiffany operator, we can now conclude the call.
Thank you for your participation you may now disconnect.