Company Quick10K Filing
Quick10K
Tiffany & Co.
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$107.23 121 $13,020
10-K 2019-01-31 Annual: 2019-01-31
10-Q 2018-10-31 Quarter: 2018-10-31
10-Q 2018-07-31 Quarter: 2018-07-31
10-Q 2018-04-30 Quarter: 2018-04-30
10-K 2018-01-31 Annual: 2018-01-31
10-Q 2017-10-31 Quarter: 2017-10-31
10-Q 2017-07-31 Quarter: 2017-07-31
10-Q 2017-04-30 Quarter: 2017-04-30
10-K 2017-01-31 Annual: 2017-01-31
10-Q 2016-10-31 Quarter: 2016-10-31
10-Q 2016-07-31 Quarter: 2016-07-31
10-Q 2016-04-30 Quarter: 2016-04-30
10-K 2016-01-31 Annual: 2016-01-31
10-Q 2015-10-31 Quarter: 2015-10-31
10-Q 2015-07-31 Quarter: 2015-07-31
10-Q 2015-04-30 Quarter: 2015-04-30
10-K 2015-01-31 Annual: 2015-01-31
10-Q 2014-10-31 Quarter: 2014-10-31
10-Q 2014-07-31 Quarter: 2014-07-31
10-Q 2014-04-30 Quarter: 2014-04-30
10-K 2014-01-31 Annual: 2014-01-31
8-K 2019-03-22 Exhibits
8-K 2019-01-24 Other Events
8-K 2019-01-24 Other Events
8-K 2019-01-18 Regulation FD, Exhibits
8-K 2018-12-06
8-K 2018-11-28 Exhibits
8-K 2018-10-31 Enter Agreement, Off-BS Arrangement
8-K 2018-09-26 Officers, Other Events
8-K 2018-08-28 Earnings, Exhibits
8-K 2018-08-14 Other Events, Exhibits
8-K 2018-05-31 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-05-24 Shareholder Vote, Other Events
8-K 2018-02-05 Other Events
8-K 2018-01-19 Amend Bylaw, Other Events
8-K 2018-01-17 Regulation FD, Exhibits
8-K 2018-01-09 Officers
LNG Cheniere Energy 16,900
HSIC Henry Schein 9,170
WETF Wisdomtree Investments 1,220
RMAX RE/MAX 720
MDGS Medigus 11
TBTC Table Trac 0
EDR Education Realty Trust 0
AIGT Amerinst Insurance Group 0
MB Mindbody 0
AEI25 AEI Income & Growth Fund 25 0
TIF 2019-01-31
Part I
Item 1. Business.
Item 1A. Risk Factors.
Item 1B. Unresolved Staff Comments.
Item 2. Properties.
Item 3. Legal Proceedings.
Item 4. Mine Safety Disclosures.
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Item 6. Selected Financial Data.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8. Financial Statements and Supplementary Data.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Item 9B. Other Information.
Part III
Item 10. Directors, Executive Officers and Corporate Governance.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Item 14. Principal Accounting Fees and Services.
Part IV
Item 15. Exhibits, Financial Statement Schedules.
Item 16. Form 10-K Summary.
EX-21.1 a10korgchart2019.htm
EX-23.1 tif-exhibit231x1312019.htm
EX-31.1 tif-exhibit311x1312019.htm
EX-31.2 tif-exhibit312x1312019.htm
EX-32.1 tif-exhibit321x1312019.htm
EX-32.2 tif-exhibit322x1312019.htm

Tiffany & Co. Earnings 2019-01-31

TIF 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 tif-2019131x10k.htm 10-K Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
For the fiscal year ended January 31, 2019
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
image0a20.jpg
(Exact name of registrant as specified in its charter)
Delaware
 
13-3228013
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
727 Fifth Avenue, New York, NY
 
10022
(Address of principal executive offices)
 
(Zip Code)
Registrant's telephone number, including area code: (212) 755-8000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $.01 par value per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  x    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x 
As of July 31, 2018, the aggregate market value of the registrant's voting and non-voting stock held by non-affiliates of the registrant was approximately $16,707,436,188 using the closing sales price on July 31, 2018 of $137.56.
As of March 18, 2019, the registrant had outstanding 121,454,192 shares of its common stock, $.01 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE.
The following documents are incorporated by reference into this Annual Report on Form 10-K: Registrant's Proxy Statement Dated April 17, 2019 (Part III).

TIFFANY & CO.
K-1


Tiffany & Co.
Table of Contents
Form 10-K for the fiscal year ended January 31, 2019
 
 
Page
 
 
Item 1.
K-4
Item 1A.
K-12
Item 1B.
K-19
Item 2.
K-19
Item 3.
K-20
Item 4.
K-22
 
 
 
 
 
Item 5.
K-23
Item 6.
K-25
Item 7.
K-27
Item 7A.
K-49
Item 8.
K-50
Item 9.
K-98
Item 9A.
K-98
Item 9B.
K-99
 
 
 
 
 
Item 10.
K-100
Item 11.
K-100
Item 12.
K-100
Item 13.
K-100
Item 14.
K-100
 
 
 
 
 
Item 15.
K-101
Item 16.
K-101





SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The historical trends and results reported in this annual report on Form 10-K should not be considered an indication of future performance. Further, statements contained in this annual report on Form 10-K that are not statements of historical fact, including those that refer to plans, assumptions and expectations for future periods, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, the statements under "2019 Outlook" as well as statements that can be identified by the use of words such as 'expects,' 'projects,' 'anticipates,' 'assumes,' 'forecasts,' 'plans,' 'believes,' 'intends,' 'estimates,' 'pursues,' 'scheduled,' 'continues,' 'outlook,' 'may,' 'will,' 'can,' 'should' and variations of such words and similar expressions. Examples of forward-looking statements include, but are not limited to, statements we make regarding the Company's plans, assumptions, expectations, beliefs and objectives with respect to store openings and closings; store productivity; the renovation of the Company's New York Flagship store, including the timing and cost thereof, and the temporary expansion of its retail operations to 6 East 57th Street; product introductions; sales; sales growth; sales trends; store traffic; the Company's strategy and initiatives and the pace of execution thereon; the amount and timing of investment spending; the Company's objectives to compete in the global luxury market and to improve financial performance; retail prices; gross margin; operating margin; expenses; interest expense and financing costs; effective income tax rate; the nature, amount or scope of charges resulting from recent revisions to the U.S. tax code; net earnings and net earnings per share; share count; inventories; capital expenditures; cash flow; liquidity; currency translation; macroeconomic and geopolitical conditions; growth opportunities; litigation outcomes and recovery related thereto; amounts recovered under Company insurance policies; contributions to Company pension plans; and certain ongoing or planned real estate, product, marketing, retail, customer experience, manufacturing, supply chain, information systems development, upgrades and replacement, and other operational initiatives and strategic priorities.

These forward-looking statements are based upon the current views and plans of management, speak only as of the date on which they are made and are subject to a number of risks and uncertainties, many of which are outside of our control. Actual results could therefore differ materially from the planned, assumed or expected results expressed in, or implied by, these forward-looking statements. While we cannot predict all of the factors that could form the basis of such differences, key factors include, but are not limited to: global macroeconomic and geopolitical developments; changes in interest and foreign currency rates; changes in taxation policies and regulations (including changes effected by the recent revisions to the U.S. tax code) or changes in the guidance related to, or interpretation of, such policies and regulations; shifting tourism trends; regional instability; violence (including terrorist activities); political activities or events (including the potential for rapid and unexpected changes in government, economic and political policies, the imposition of additional duties, tariffs, taxes and other charges or other barriers to trade, including as a result of changes in diplomatic and trade relations or agreements with other countries); weather conditions that may affect local and tourist consumer spending; changes in consumer confidence, preferences and shopping patterns, as well as our ability to accurately predict and timely respond to such changes; shifts in the Company's product and geographic sales mix; variations in the cost and availability of diamonds, gemstones and precious metals; adverse publicity regarding the Company and its products, the Company's third-party vendors or the diamond or jewelry industry more generally; any non-compliance by third-party vendors and suppliers with the Company's sourcing and quality standards, codes of conduct, or contractual requirements as well as applicable laws and regulations; changes in our competitive landscape; disruptions impacting the Company's business and operations; failure to successfully implement or make changes to the Company's information systems; gains or losses in the trading value of the Company's stock, which may impact the amount of stock repurchased through open market transactions, including through Rule 10b5-1 plans and accelerated share repurchase or other structured repurchase transactions, and/or privately negotiated transactions; the Company's receipt of any required approvals to the aforementioned renovation of its New York Flagship store and expansion of its retail operations to 6 East 57th Street, as well as the timing of such approvals; changes in the cost and timing estimates associated with the aforementioned renovation and expansion; delays caused by third parties involved in the aforementioned renovation and expansion; any casualty, damage or destruction to the Company's New York Flagship store or 6 East 57th Street; and the Company's ability to successfully control costs and execute on, and achieve the expected benefits from, the operational initiatives and strategic priorities referenced above. Developments relating to these and other factors may also warrant changes to the Company's operating and strategic plans, including with respect to store openings, closings and renovations, capital expenditures, information systems development, inventory management, and continuing execution on, or timing of, the aforementioned initiatives and priorities. Such changes could also cause actual results to differ materially from the expected results expressed in, or implied by, the forward-looking statements.


TIFFANY & CO.
K-2


Additional information about potential risks and uncertainties that could affect the Company's business and financial results is included under "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Annual Report on Form 10-K for the fiscal year ended January 31, 2019. Readers of this Annual Report on Form 10-K should consider the risks, uncertainties and factors outlined above and in this Form 10-K in evaluating, and are cautioned not to place undue reliance on, the forward-looking statements contained herein. 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.


TIFFANY & CO.
K-3


PART I

Item 1. Business.

GENERAL HISTORY AND NARRATIVE DESCRIPTION OF BUSINESS

Tiffany & Co. (the "Registrant") is a holding company that operates through Tiffany and Company ("Tiffany") and the Registrant's other subsidiary companies (collectively, the "Company"). Charles Lewis Tiffany founded Tiffany's business in 1837. He incorporated Tiffany in New York in 1868. The Registrant acquired Tiffany in 1984 and completed the initial public offering of the Registrant's Common Stock in 1987. The Registrant, through its subsidiaries, sells jewelry and other items that it manufactures or has made by others to its specifications.

All references to years relate to fiscal years that end on January 31 of the following calendar year.

MAINTENANCE OF THE TIFFANY & CO. BRAND

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

Management believes that consumers associate the Brand with high-quality gemstone jewelry, particularly diamond jewelry; sophisticated style and romance; excellent customer service; an elegant store and online environment; upscale store locations; "classic" product positioning; and distinctive and high-quality packaging materials (most significantly, the TIFFANY & CO. blue box). Tiffany's business plan includes expenses to maintain the strength of the Brand, such as the following:
Maintaining its position within the high-end of the jewelry market requires Tiffany to invest significantly in diamond and gemstone inventory, which carries a lower overall gross margin; it also causes some consumers to view Tiffany as beyond their price range;
To provide excellent service, stores must be well staffed with knowledgeable professionals;
Elegant stores in the best "high street" and luxury mall locations are more expensive and difficult to secure and maintain, but reinforce the Brand's luxury connotations through association with other luxury brands;
While the "classic" positioning of much of Tiffany's product line supports the Brand and requires sufficient display space in its stores, management's strategic priorities also include the accelerated introduction of new design collections primarily in jewelry, but also in non-jewelry products, which could result in a necessary reallocation of product display space;
Tiffany's packaging supports consumer expectations with respect to the Brand but is expensive; and
A significant amount of marketing across print, digital and social media, as well as public relations events are required to both reinforce the Brand's association with luxury, sophistication, style and romance, as well as to market specific products.

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

REPORTABLE SEGMENTS

The Company has four reportable segments: (i) Americas, (ii) Asia-Pacific, (iii) Japan and (iv) Europe. All non-reportable segments are included within Other. The Company transacts business within certain of its segments through the following channels: (i) retail, (ii) Internet, (iii) catalog, (iv) business-to-business (products drawn from

TIFFANY & CO.
K-4


the retail product line and items specially developed for the business market) and (v) wholesale distribution (merchandise sold to independent distributors for resale). The Company's segment information for the fiscal years ended January 31, 2019, 2018 and 2017 is reported in "Item 8. Financial Statements and Supplementary Data - Note O. Segment Information."

Americas

Sales in the Americas represented 44% of worldwide net sales in 2018, while sales in the United States ("U.S.") represented more than 90% of net sales in the Americas. Sales are transacted through the following channels: retail (in the U.S., Canada and Latin America), Internet and catalog (in the U.S. and Canada), business-to-business (in the U.S.) and wholesale distribution (in Latin America and the Caribbean).

Retail sales in the Americas are transacted in 124 Company-operated TIFFANY & CO. stores in (number of stores at January 31, 2019 included in parentheses): the U.S. (93), Canada (13), Mexico (11), Brazil (6) and Chile (1). Included within these totals are 12 Company-operated stores located within various department stores in Canada and Mexico. Included in the U.S. retail stores is the New York Flagship store, which represented less than 10% of worldwide net sales in 2018.

Asia-Pacific

Sales in Asia-Pacific represented 28% of worldwide net sales in 2018, while sales in Greater China represented approximately 60% of net sales in Asia-Pacific. Sales are transacted through the following channels: retail, Internet (in Australia) and wholesale distribution.

Retail sales in Asia-Pacific are transacted in 90 Company-operated TIFFANY & CO. stores in (number of stores at January 31, 2019 included in parentheses): China (33), Korea (15), Australia (11), Hong Kong (10), Taiwan (7), Singapore (5), Macau (4), Malaysia (2), New Zealand (1) and Thailand (2). Included within these totals are 35 Company-operated stores located within various department stores.

Japan

Sales in Japan represented 15% of worldwide net sales in 2018. Sales are transacted through the following channels: retail, Internet, business-to-business and wholesale distribution.

Retail sales in Japan are transacted in 55 Company-operated TIFFANY & CO. stores. Included within this total are 52 stores located within department stores, generating approximately 75% of net sales in Japan. There are four large department store groups in Japan. The Company operates TIFFANY & CO. stores in locations controlled by these groups as follows (number of locations at January 31, 2019 included in parentheses): Isetan Mitsukoshi Ltd. (16), J. Front Retailing Co., Ltd. (Daimaru and Matsuzakaya department stores) (8), Takashimaya Co., Ltd. (8) and Seven & i Holding Co., Ltd. (Sogo and Seibu department stores) (5). The Company also operates 15 stores in other department stores.

Europe

Sales in Europe represented 11% of worldwide net sales in 2018, while sales in the United Kingdom ("U.K.") represented approximately 40% of net sales in Europe. Sales are transacted through the following channels: retail, Internet and wholesale distribution.

Retail sales in Europe are transacted in 47 Company-operated TIFFANY & CO. stores in (number of stores at January 31, 2019 included in parentheses): the U.K. (11), Italy (9), Germany (7), France (5), Spain (3), Switzerland (3), the Netherlands (2), Russia (2), Austria (1), Belgium (1), the Czech Republic (1), Denmark (1) and Ireland (1). Included within these totals are 11 Company-operated stores located within various department stores. The Company currently operates e-commerce enabled websites within the following countries: U.K., Austria, Belgium, France, Germany, Ireland, Italy, the Netherlands and Spain.


TIFFANY & CO.
K-5


Other

Other consists of all non-reportable segments, including: (i) retail sales transacted in five Company-operated TIFFANY & CO. stores in the United Arab Emirates ("U.A.E.") and wholesale distribution in the Emerging Markets region; (ii) wholesale sales of diamonds (see "PRODUCT SUPPLY CHAIN – Supply of Diamonds" below); and (iii) licensing agreements.

Licensing Agreements. The Company receives earnings from a licensing agreement with Luxottica Group S.p.A., for the development, production and distribution of TIFFANY & CO. brand eyewear, and from a licensing agreement with Coty Inc., for the development, production and distribution of TIFFANY & CO. brand fragrance products. The earnings received from these licensing agreements represented less than 1% of worldwide net sales in 2018.

Retail Distribution Base

Management regularly evaluates opportunities to optimize its retail store base. This includes evaluating potential markets for new TIFFANY & CO. stores, as well as the renovation, relocation, or closure of existing stores. Considerations include the characteristics of the markets to be served, consumer demand and the proximity of other luxury brands and existing TIFFANY & CO. locations. Management recognizes that over-saturation of any market could diminish the distinctive appeal of the Brand, but believes that there are a number of opportunities remaining in new and existing markets that will meet the requirements for a TIFFANY & CO. location in the future.

The following chart details the number of TIFFANY & CO. retail locations operated by the Company since 2014:
 
Americas
 
 
 
 
 
Year:
U.S.

Canada &
Latin America

Asia-Pacific

Japan

Europe

Emerging Markets

Total

2014
95

27

73

56

39

5

295

2015
95

29

81

56

41

5

307

2016
95

30

85

55

43

5

313

2017
94

30

87

54

46

4

315

2018
93

31

90

55

47

5

321


As part of the Company's long-term objectives, management plans to increase gross retail square footage by a low-single-digit percentage, net through the addition of new stores, relocations, renovations and closings.

E-Commerce, Catalog and Phone Orders

The Company currently operates e-commerce enabled websites in 13 countries, as well as informational websites in several additional countries. To a lesser extent, sales are also generated through catalogs that the Company distributes in certain countries as well as orders placed via telephone in certain markets. Sales transacted on those websites, through catalogs or via telephone accounted for 7% of worldwide net sales in 2018, 2017 and 2016. The Company invests in ongoing website enhancements and is evaluating opportunities to expand its e-commerce sites to additional countries. For example, the Company expects to launch an e-commerce enabled website in China in 2019. Management believes that its websites serve an important marketing role in building brand awareness and attracting customers to the Company's stores. In addition, the Company offers a select assortment of its products through third party websites.

Products

The Company's principal product category is jewelry, which represented 92%, 91% and 92% of worldwide net sales in 2018, 2017 and 2016. The Company offers an extensive selection of TIFFANY & CO. brand jewelry at a wide range of prices. Designs are developed by employees, suppliers, independent designers and independent "named" designers (see "MATERIAL DESIGNER LICENSE" below).

The Company also sells watches, home and accessories products and fragrances, which represented, in total, 7% of worldwide net sales in 2018, 2017 and 2016. The remainder of worldwide net sales was attributable to wholesale sales of diamonds and earnings from third-party licensing agreements.

TIFFANY & CO.
K-6


Sales by Reportable Segment of TIFFANY & CO. Jewelry by Category
2018
% of total
Americas
 Sales

% of total
Asia-Pacific
Sales

% of total
Japan
Sales

% of total
Europe
Sales

% of total
Reportable
Segment Sales

Jewelry collections a 
53
%
61
%
37
%
60
%
54
%
Engagement jewelry b 
21
%
31
%
37
%
23
%
26
%
Designer jewelry c
14
%
7
%
18
%
12
%
12
%
2017
 
 
 
 
 
Jewelry collections a
53
%
59
%
30
%
60
%
52
%
Engagement jewelry b 
22
%
31
%
39
%
25
%
27
%
Designer jewelry c
14
%
8
%
22
%
12
%
13
%
2016
 
 
 
 
 
Jewelry collections a 
52
%
54
%
30
%
59
%
50
%
Engagement jewelry b 
24
%
37
%
40
%
26
%
30
%
Designer jewelry c
14
%
7
%
23
%
11
%
13
%
a) This category includes jewelry in a wide range of prices within the Company's high jewelry and named jewelry collections such as Tiffany Paper Flowers®, Tiffany Victoria®, Tiffany Soleste®, Tiffany Keys, Tiffany T, Tiffany HardWear and Return to Tiffany®, among others. Jewelry in this category is primarily crafted using precious metals (platinum, gold or sterling silver) and may contain diamonds and/or other gemstones.
b) This category includes engagement rings and wedding bands. Most jewelry in this category contains diamonds and is constructed of platinum and/or gold.
c)
This category includes only jewelry that is attributed to one of the Company's "named" designers: Elsa Peretti (see "MATERIAL DESIGNER LICENSE" below), Paloma Picasso and Jean Schlumberger. Jewelry in this category is primarily crafted using precious metals (platinum, gold or sterling silver) and may contain diamonds and/or other gemstones.

ADVERTISING, MARKETING, PUBLIC AND MEDIA RELATIONS

The Company's strategy is to invest in marketing and public relations programs designed to build awareness of the Brand, its heritage and its products, as well as to enhance the Brand’s relevance and association among consumers with quality and luxury. The Company regularly advertises in newspapers and magazines, as well as through digital and social media. Public and media relations activities are also significant to the Company's business. The Company engages in a program of media activities and marketing events to maintain consumer awareness of the Brand and TIFFANY & CO. products. It also publishes its well-known Blue Book to showcase its high-end jewelry. In 2018, 2017 and 2016, the Company spent $394.1 million, $314.9 million and $299.0 million, representing 8.9%, 7.6% and 7.5% of worldwide net sales in those respective years, on advertising, marketing and public and media relations, which include costs for media, production, catalogs, Internet, visual merchandising (in-store and window displays), marketing events and other related items.

In addition, management believes that the Brand is enhanced by a program of charitable sponsorships, grants and merchandise donations. The Company also periodically makes donations to The Tiffany & Co. Foundation, a private foundation organized to support 501(c)(3) charitable organizations. The efforts of this Foundation are primarily focused on environmental conservation.






TIFFANY & CO.
K-7


TRADEMARKS

The designations TIFFANY ® and TIFFANY & CO.® are the principal trademarks of Tiffany, and also serve as tradenames. Tiffany has obtained and is the proprietor of trademark registrations for TIFFANY and TIFFANY & CO., as well as the TIFFANY BLUE BOX ®, the TIFFANY BLUE BOX design, TIFFANY BLUE ® and the color Tiffany Blue for a variety of product categories and services in the U.S. and in other countries.

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

Tiffany has been generally successful in such actions and management considers that the Company's worldwide rights in its principal trademarks, TIFFANY and TIFFANY & CO., are strong. However, use of the designation TIFFANY by third parties on related or unrelated goods or services, frequently transient in nature, may not come to the attention of Tiffany or may not rise to a level of concern warranting legal action.

Tiffany actively pursues those who produce or sell counterfeit TIFFANY & CO. goods through civil action and cooperation with criminal law enforcement agencies. However, counterfeit TIFFANY & CO. goods remain available in many markets because it is not possible or cost-effective to eradicate the problem. The cost of enforcement is expected to continue to rise. In recent years, there has been an increase in the availability of counterfeit goods, predominantly silver jewelry, on the Internet and in various markets by street vendors and small retailers. Tiffany pursues infringers through leads generated internally and through a network of investigators, legal counsel, law enforcement and customs authorities worldwide. The Company responds to such infringing activity by taking various actions, including sending cease and desist letters, cooperating with law enforcement in criminal prosecutions, initiating civil proceedings and participating in joint actions and anti-counterfeiting programs with other like-minded third party rights holders.

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

MATERIAL DESIGNER LICENSE

Since 1974, Tiffany has been the sole licensee for the intellectual property rights necessary to make and sell jewelry and other products designed by Elsa Peretti and bearing her trademarks. The designs of Ms. Peretti accounted for 8%, 9% and 9% of the Company's worldwide net sales in 2018, 2017 and 2016.

Tiffany is party to an Amended and Restated Agreement (the "Peretti Agreement") with Ms. Peretti, which largely reflects the long-standing rights and marketing and royalty obligations of the parties. Pursuant to the Peretti Agreement, Ms. Peretti grants Tiffany an exclusive license, in all of the countries in which Peretti-designed jewelry and products are currently sold, to make, have made, advertise and sell these items. Ms. Peretti continues to retain ownership of the copyrights for her designs and her trademarks and remains entitled to exercise approval and consultation rights with respect to important aspects of the promotion, display, manufacture and merchandising of the products made in accordance with her designs. Under and in accordance with the terms set forth in the Peretti Agreement, Tiffany is required to display the licensed products in stores, to devote a portion of its advertising budget to the promotion of the licensed products, to pay royalties to Ms. Peretti for the licensed products sold, to maintain total on-hand and on-order inventory of non-jewelry licensed products (such as tabletop products) at approximately $8.0 million and to take certain actions to protect Ms. Peretti's intellectual property, including to maintain trademark registrations reasonably necessary to sell the licensed products in the markets in which the licensed products are sold by Tiffany.

The Peretti Agreement has a term that expires in 2032 and is binding upon Ms. Peretti, her heirs, estate, trustees and permitted assignees. During the term of the Peretti Agreement, Ms. Peretti may not sell, lease or otherwise dispose of her copyrights and trademarks unless the acquiring party expressly agrees with Tiffany to be bound by the

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provisions of the Peretti Agreement. The Peretti Agreement is terminable by Ms. Peretti only in the event of a material breach by Tiffany (subject to a cure period) or upon a change of control of Tiffany or the Company. It is terminable by Tiffany only in the event of a material breach by Ms. Peretti or following an attempt by Ms. Peretti to revoke the exclusive license (subject, in each case, to a cure period).

PRODUCT SUPPLY CHAIN

The Company's strategic priorities include maintaining substantial control over its product supply chain through internal jewelry manufacturing and direct diamond sourcing. The Company manufactures jewelry in New York, Rhode Island and Kentucky, polishes and performs certain assembly work on jewelry in the Dominican Republic and crafts silver hollowware in Rhode Island. In total, these internal manufacturing facilities produce approximately 60% of the jewelry sold by the Company. The balance, and almost all non-jewelry items, is purchased from third parties. The Company may increase the percentage of internally-manufactured jewelry in the future, but management does not expect that the Company will ever manufacture all of its needs. Factors considered by management in its decision to use third-party manufacturers include access to or mastery of various product-making skills and technology, support for alternative capacity, product cost and the cost of capital investments. To supply its internal manufacturing facilities, the Company processes, cuts and polishes rough diamonds at its facilities outside the U.S. and sources precious metals, rough diamonds, polished diamonds and other gemstones, as well as certain fabricated components, from third parties.

Supply of Diamonds. The Company regularly purchases parcels of rough diamonds for polishing and further processing. The vast majority of diamonds acquired by the Company originate from Botswana, Canada, Namibia, Russia and South Africa. The Company has diamond processing operations in Belgium, Botswana, Cambodia, Mauritius and Vietnam that prepare and/or cut and polish rough diamonds for its use. The Company conducts operations in Botswana through a subsidiary in which local third parties own minority, non-controlling interests, allowing the Company to access rough diamond allocations reserved for local manufacturers. The Company maintains a relationship and has an arrangement with these local third parties; however, if circumstances warrant, the Company could seek to replace its existing local partners or operate without local partners.

The Company secures supplies of rough diamonds primarily through arrangements with diamond producers and, to a lesser extent, on the secondary market. Most of this supply comes from arrangements in which the Company accesses rough diamonds that are offered for sale (including as a sightholder), although with no contractual purchase obligation for such rough diamonds. A smaller portion of rough diamond purchases is made through agreements in which the Company is required to purchase a minimum volume of rough diamonds (anticipated to be approximately $60.0 million in 2019). All such supply arrangements are generally at the market price prevailing at the time of purchase.

As a result of the manner in which rough diamonds are typically assorted for sale, it is occasionally necessary for the Company to knowingly purchase, as part of a larger assortment, rough diamonds that do not meet the Company's quality standards or assortment needs. The Company seeks to recover its costs related to these diamonds by selling such diamonds to third parties (generally other diamond polishers), which has the effect of modestly reducing the Company's overall gross margins. Any such sales are included in the Other non-reportable segment.

In recent years, an average of approximately 80% (by volume) of the polished diamonds used in the Company's jewelry that are 0.18 carats and larger and individually registered ("individually registered diamonds") has been produced from rough diamonds that the Company has purchased. The balance of the Company's needs for individually registered diamonds is purchased from polishers or polished-diamond dealers generally through purchase orders for fixed quantities. The Company's relationships with polishers and polished-diamond dealers may be terminated at any time by either party, but such a termination would not discharge either party's obligations under unfulfilled purchase orders accepted prior to the termination. It is the Company's intention to continue to supply the substantial majority of its needs for individually registered diamonds, as well as a majority of its needs for melee diamonds of less than 0.18 carats used in the Company's jewelry, by purchasing rough diamonds.

Conflict Diamonds. Media attention has been drawn to the issue of "conflict" diamonds. This term is used to refer to diamonds extracted from war-torn geographic regions and sold by rebel forces to fund insurrection. Allegations have also been made that trading in such diamonds supports terrorist activities. Management believes that it is not possible in most purchasing scenarios to distinguish diamonds produced in conflict regions from diamonds produced in other regions once they have been polished. Therefore, concerned participants in the diamond trade, including the

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Company and nongovernment organizations, seek to exclude "conflict" diamonds, which represent a small fraction of the world's supply, from legitimate trade through an international system of certification and legislation known as the Kimberley Process Certification Scheme. All rough diamonds the Company buys, crossing an international border, must be accompanied by a Kimberley Process certificate and all trades of rough and polished diamonds must conform to a system of warranties that references the aforesaid scheme. It is not expected that such efforts will substantially affect the supply of diamonds. In addition, concerns over human rights abuses in Zimbabwe, Angola and the Democratic Republic of the Congo underscore that the aforementioned system has not deterred the production of diamonds in state-sanctioned mines under poor working conditions. The Company has informed its vendors that it does not intend to purchase Zimbabwean, Angolan or Congolese-produced diamonds. Accordingly, the Company has implemented the Diamond Source Warranty Protocol, which requires vendors to provide a warranty, and a qualified independent audit certificate, that loose polished diamonds were not obtained from Zimbabwean, Angolan or Congolese mines.

Beginning in 2019, as part of its diamond source initiative, the Company will also require its vendors to affirmatively state the region or country of origin of any polished diamonds sold to the Company that are 0.18 carats and larger and individually registered.

Worldwide Availability and Price of Diamonds. The availability and price of diamonds are dependent on a number of factors, including global consumer demand, the political situation in diamond-producing countries, the opening of new mines, the continuance of the prevailing supply and marketing arrangements for rough diamonds and levels of industry liquidity. In recent years, there has been substantial volatility in the prices of both rough and polished diamonds. Prices for rough diamonds do not necessarily reflect current demand for polished diamonds.

In addition, the supply and prices of rough and polished diamonds in the principal world markets have been and continue to be influenced by the Diamond Trading Company ("DTC"), an affiliate of the De Beers Group. Although the DTC's historical ability to control worldwide production has diminished due to its lower share of worldwide production and changing policies in diamond-producing countries, the DTC continues to supply a meaningful portion of the world market for rough, gem-quality diamonds and continues to impact diamond supply through its marketing and advertising initiatives. A significant portion of the diamonds that the Company purchased in 2018 had their source with the DTC.

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

The Company purchases conflict-free rough and polished diamonds, in highly graded color and clarity ranges. Management does not foresee a shortage of diamonds in these quality ranges in the short term but believes that, unless new mines are developed, rising demand will eventually create such a shortage and lead to higher prices.

Synthetic and Treated Diamonds. Synthetic diamonds (diamonds manufactured but not naturally occurring) and treated diamonds (naturally occurring diamonds subject to treatment processes, such as irradiation) are produced in growing quantities. Although significant questions remain as to the ability of producers to generate synthetic and/or treated diamonds economically within a full range of sizes and natural diamond colors, and as to consumer acceptance of these diamonds, such diamonds are becoming a larger factor in the market. Should synthetic and/or treated diamonds be offered in significant quantities, the supply of and prices for natural diamonds may be affected. The Company does not produce and does not intend to purchase or sell such diamonds.

Purchases of Precious Metals and Other Polished Gemstones. Precious metals and other polished gemstones used in making jewelry are purchased from a variety of sources for use in the Company's internal manufacturing operations and/or for use by third-party manufacturers contracted to supply Tiffany merchandise. The silver, gold and platinum sourced directly by the Company principally come from two sources: (i) in-ground, large-scale deposits of metals, primarily in the U.S., that meet the Company's standards for responsible mining and (ii) metals from recycled sources. While the Company may supply precious metals to a manufacturer, it cannot determine, in all circumstances, whether the finished goods provided by such manufacturer were actually produced with Company-supplied precious metals.


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The Company generally enters into purchase orders for fixed quantities with precious metals and other polished gemstone vendors. Purchases are generally made at prevailing market prices, which have, with respect to precious metals, experienced substantial volatility in recent years. These relationships may be terminated at any time by either party; such termination would not discharge either party's obligations under unfulfilled purchase orders accepted prior to the termination. The Company believes that there are numerous alternative sources for other polished gemstones and precious metals and that the loss of any single supplier would not have a material adverse effect on its operations.

Finished Jewelry. Finished jewelry is purchased from approximately 40 manufacturers. However, the Company does not enter into long-term supply arrangements with its finished goods vendors. The Company does enter into merchandise vendor agreements with nearly all of its finished goods vendors. The merchandise vendor agreements establish non-price terms by which the Company may purchase and by which vendors may sell finished goods to the Company. These terms include payment terms, shipping procedures, product quality requirements, merchandise specifications and vendor social responsibility requirements. The Company generally enters into purchase orders for fixed quantities of merchandise with its vendors. These relationships may be terminated at any time by either party; such termination would not discharge either party's obligations under unfulfilled purchase orders accepted prior to termination. The Company actively seeks alternative sources for its best-selling jewelry items to mitigate any potential disruptions in supply. However, due to the craftsmanship involved in a small number of designs, the Company may have difficulty finding readily available alternative suppliers for those jewelry designs in the short term.

Watches. The Company sells TIFFANY & CO. brand watches, which are designed, produced, marketed and distributed through certain of the Company's subsidiaries. The Company has relationships with approximately 30 component and subassembly vendors to manufacture watches. The terms of the Company's contractual relationships with these vendors are substantially similar to those described under "Finished Jewelry" above. Sales of these TIFFANY & CO. brand watches represented approximately 1% of worldwide net sales in 2018, 2017 and 2016.

COMPETITION

The global jewelry industry is competitively fragmented. The Company encounters significant competition in all product categories. Some competitors specialize in just one area in which the Company is active. Many competitors have established worldwide, national or local reputations for style, quality, expertise and customer service similar to the Company and compete on the basis of that reputation. Certain other jewelers and retailers compete primarily through advertised price promotion. The Company competes on the basis of the Brand's reputation for high-quality products, customer service and distinctive merchandise and does not engage in price promotional advertising.

Competition for engagement jewelry sales is particularly and increasingly intense. The Company's retail prices for diamond jewelry reflect the rarity of the stones it offers and the rigid parameters it exercises with respect to the cut, clarity and other diamond quality factors which increase the beauty of the diamonds, but which also increase the Company's cost. The Company competes in this market by emphasizing quality.

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.

EMPLOYEES

As of January 31, 2019, the Company employed an aggregate of approximately 14,200 full-time and part-time persons. Of those employees, approximately 5,900 are employed in the United States.

AVAILABLE INFORMATION

The Company files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information statements and amendments to reports filed or furnished pursuant to Sections 13(a), 14 and 15(d) of the Securities Exchange Act of 1934, as amended. Copies of these reports and statements may be obtained, free of charge, on the Company's website at https://investor.tiffany.com/financial-information.

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Item 1A. Risk Factors.

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

(i) Challenging global economic conditions and related low levels of consumer confidence over a prolonged period of time could adversely affect the Company's sales and earnings.

As a retailer of goods which are discretionary purchases, the Company's sales results are particularly sensitive to changes in economic conditions and consumer confidence. Consumer confidence is affected by general business conditions; domestic and international political uncertainties and/or developments; changes in the market value of equity securities and real estate; inflation; interest rates and the availability of consumer credit; tax rates; and expectations of future economic conditions and employment prospects.

Consumer spending for discretionary goods generally declines during times of falling consumer confidence, which negatively affects the Company's sales and earnings.

Certain competitors may react to such conditions by reducing retail prices and promoting such reductions; such reductions and/or inventory liquidations can have a short-term adverse effect on the Company's sales, especially given the Company's policy of not engaging in price promotional activity.

The Company has invested in and operates a significant number of stores in Greater China and anticipates continuing to do so. Any slowdown in the Chinese economy could have a negative impact on the sales and profitability of stores in Greater China as well as stores in other markets that serve Chinese tourists.

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

(ii) Sales may decline or remain flat in the Company's fourth fiscal quarter, which includes the Holiday selling season.

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. Poor sales results during the fourth quarter would have an adverse effect on annual earnings and inventories in the short term.

(iii) The Company conducts operations globally, the risks of which could increase its costs, reduce its profits or disrupt its business.

The Company operates globally and generates a majority of its worldwide net sales outside the United States. It also has both U.S. and foreign manufacturing operations, and relies on certain U.S. and foreign third-party vendors and suppliers. As a result, the Company is subject to the risks of doing business globally, including:
the laws, regulations and policies of governments relating to investments, loans and operations, the costs or desirability of complying with local practices and customs and the impact of various anti-corruption and other laws affecting the activities of U.S. companies abroad;
uncertainties from changes in U.S. or foreign taxation policies, including, for example, as a result of recent revisions to the U.S. tax code;
compliance by third party vendors and suppliers with the Company's sourcing and quality standards, codes of conduct, or contractual requirements as well as applicable laws and regulations;
import and export licensing requirements and regulations, as well as unforeseen changes in regulatory requirements;

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political or economic instability in foreign countries, including the potential for rapid and unexpected changes in government, economic and political policies, such as the United Kingdom's ("U.K.") referendum vote to exit the European Union ("E.U."), as discussed below;
political or civil unrest, acts of terrorism or the threat of international boycotts or U.S. anti-boycott legislation as a result of, for example, changes in government policies of foreign countries in response to actions taken by the U.S. government;
the imposition of additional duties, tariffs, taxes and other charges or other barriers to trade, including as a result of changes in diplomatic and trade relations or agreements with other countries;
challenges inherent in oversight of foreign operations, systems and controls;
potential negative consequences from foreign governments' currency management practices;
uncertainties as to enforcement of certain contract and other rights; and
inventory risk exposures.

Changes in these regulatory, political, economic, or monetary policies and other factors could require the Company to significantly modify its current business practices and may adversely affect its future financial results. For example, the Company could be adversely impacted by U.S. trade policies, legislation, treaties and tariffs, including trade policies and tariffs affecting China, the E.U., Canada and Mexico, as well as retaliatory tariffs by such countries. Such tariffs and, if enacted, any further legislation or actions taken by the U.S. government that restrict trade, such as additional tariffs or trade barriers, and other protectionist or retaliatory measures taken by governments in Europe, Asia and elsewhere, could have a negative effect on the Company's ability to sell products in those markets.

Additionally, in June 2016, voters in the U.K. approved an advisory referendum to withdraw from the E.U., commonly referred to as "Brexit." In March 2017, the U.K. government initiated the exit process under Article 50 of the Treaty of the European Union, commencing a two year period for the U.K. and the other E.U. member states to negotiate the terms of the U.K.'s withdrawal, with such period scheduled to expire on March 29, 2019, unless extended. In November 2018, the U.K. and E.U. agreed upon a draft Withdrawal Agreement that sets out the terms of the U.K.'s withdrawal which, among other terms, includes a transition period from March 29, 2019 through December 31, 2020 to allow time for a future trade deal to be agreed upon. On January 15, 2019, the draft Withdrawal Agreement was rejected by the U.K. Parliament, creating significant uncertainty about the terms (and timing) under which the U.K. will exit the E.U. If the U.K. leaves the E.U. with no agreement, it will likely have an adverse impact on labor and trade, in addition to creating further short-term uncertainty and currency volatility. Brexit could also lead to legal uncertainty and potentially divergent national laws and regulations in the U.K. and E.U. The Company may incur additional costs and expenses as it adapts to these potentially divergent regulatory frameworks, and may face additional complexity with regard to immigration and travel rights for its employees located in the U.K. and the E.U. There may also be similar referendums or votes in other European countries in which the Company does business. The uncertainty surrounding the terms of the U.K.'s withdrawal and its consequences, as well as the impact of any similar circumstances that may arise elsewhere in Europe, could increase the Company's costs and adversely impact consumer and investor confidence.

While these factors, and the effect thereof, are difficult to predict, any one or more of them could lower the Company's revenues, increase its costs, reduce its earnings or disrupt its business.

(iv) Recent revisions to the U.S. tax code, including changes in the guidance related to, or interpretation and application of, such revisions could materially affect the Company's tax obligations, provision for income taxes and effective tax rate. 

On December 22, 2017, the U.S. enacted comprehensive tax legislation, commonly referred to as the 2017 U.S. Tax Cuts and Jobs Act (the "2017 Tax Act"), which significantly affected U.S. tax law by changing how the U.S. imposes income tax on U.S. taxpayers. In particular, these changes impact the U.S. taxation of earnings in the jurisdictions in which the Company operates, the measurement of its deferred tax assets and liabilities and the tax impact in the event the Company were to repatriate the earnings of its non-U.S. subsidiaries to the U.S. The provisions of the 2017 Tax Act may be subject to further interpretation by the Internal Revenue Service, which has broad authority to issue regulations and interpretative guidance that may significantly impact how the Company will apply such provisions.


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Changes in tax law are accounted for in the period of enactment. As a result, the Company's 2017 consolidated financial statements reflected provisional estimates of the immediate tax effect of the 2017 Tax Act. During 2018, as permitted by the Securities and Exchange Commission's Staff Accounting Bulletin No. 118 ("SAB 118"), the Company (i) recorded tax benefits totaling $12.6 million to adjust the provisional estimate recorded in 2017 to remeasure the Company’s deferred tax assets and liabilities; (ii) recorded tax benefits totaling $3.3 million to adjust the provisional estimate recorded in 2017 for the Transition Tax; and (iii) determined to maintain its assertion to indefinitely reinvest undistributed foreign earnings and profits. Further regulatory or accounting guidance regarding the 2017 Tax Act could materially affect the Company's future financial results.

(v) A strengthening of the U.S. dollar against foreign currencies would negatively affect the Company's sales and profitability.

The Company operates retail stores in more than 20 countries outside of the U.S. and, as a result, is exposed to market risk from fluctuations in foreign currency exchange rates, including, among others, the Japanese Yen, Euro, British Pound and Chinese Yuan. In 2018, sales in countries outside of the U.S. in aggregate represented a substantial portion of the Company's net sales and earnings from operations. A strengthening of the U.S. dollar against foreign currencies would require the Company to raise its retail prices in various locations outside of the U.S. in order to maintain its worldwide relative pricing structure, or reduce its profit margins. Consumers in those markets may not accept significant price increases on the Company's goods; thus, there is a risk that a strengthening of the U.S. dollar would result in reduced sales and profitability. In addition, a weakening of any foreign currency relative to other currencies may negatively affect spending by foreign tourists in the various regions where the Company operates retail stores which would adversely affect its net sales and profitability.

The reported results of operations of the Company's international subsidiaries are exposed to foreign exchange rate fluctuations as the financial results of the applicable subsidiaries are translated from the local currency into U.S. dollars during the process of financial statement consolidation. If the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency-denominated transactions would decrease consolidated net sales and profitability. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of such impacts.

(vi) Political activities, regional instability and/or conflict or similar events could disrupt tourist travel and local consumer spending.

Regional and global conflicts or crises, such as military actions, terrorist activities and natural disasters, geopolitical or regulatory developments (and any related protests) and other similar events and conditions in the various regions and cities where the Company operates retail stores may negatively affect spending by both foreign tourists and local consumers. The Company's retail stores, many of which are located in major metropolitan areas globally, may in fact have close proximity to the locations of such events – for example, the Company's New York Flagship store is located adjacent to a private residence of the U.S. President which has, at times, impacted consumer access as a result of security measures. The occurrence of the types of events or conditions described above, or the related effect of security measures implemented to address the possibility of such occurrences, could affect consumer traffic and/or spending in one or more of the Company's locations, which could adversely affect the Company's sales and earnings. While sales in the Company's largest store (the New York Flagship) represent less than 10% of worldwide net sales, the impact of significant sales declines in any one store could still be meaningful to consolidated results.

(vii) Changes in the Company's product or geographic sales mix could affect the Company's profitability.

The Company sells an extensive selection of jewelry and other merchandise at a wide range of retail price points that yield different gross profit margins. Additionally, the Company's geographic regions achieve different operating profit margins due to a variety of factors including product mix, store size and occupancy costs, labor costs, retail pricing and fixed versus variable expenses. The increasing availability of, and ease of access to, retail price information across markets, primarily through the Internet, may affect consumers' decisions regarding in which geographies to shop. If the Company's sales mix were to shift toward products or geographic regions that are significantly different than the Company's plans, it could have an effect, either positively or negatively, on its expected profitability.


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(viii) Increases in costs of diamonds, other gemstones and precious metals or reduced supply availability may adversely affect the Company's ability to produce and sell products at desired profit margins.

Most of the Company's jewelry offerings are made with diamonds, other gemstones and/or precious metals. A significant increase in the costs or change in the supply of these commodities could adversely affect the Company's business, which is vulnerable to the risks inherent in the trade for such commodities. A substantial increase or decrease in the cost or supply of precious metals, high-quality rough and polished diamonds (within the quality grades, colors and sizes that customers demand) and/or other gemstones could affect, negatively or positively, customer demand, sales and gross profit margins. Additionally, should synthetic diamonds (diamonds manufactured but not naturally occurring) and/or treated diamonds (naturally occurring diamonds subject to treatment processes, such as irradiation) be offered in significant quantities and gain consumer acceptance, the supply of, demand for and prices for natural diamonds may be affected.

(ix) The Company may be unable to secure and retain sufficient space for its retail stores in prime locations, and maintaining the Company's brand image and desirability to consumers requires significant investment in store construction, maintenance and periodic renovation.

The Company, positioned as a luxury goods retailer, has established its retail presence in choice store locations. Management regularly evaluates opportunities to optimize its retail store base, including potential markets for new TIFFANY & CO. stores, as well as the renovation and relocation of its existing stores. Maintaining the Company's brand image and desirability to consumers requires that stores be constructed and maintained in a manner consistent with that brand image. This requires significant capital investment, including for periodic renovations of existing stores. Renovations of existing stores may also result in temporary disruptions to an individual store's business. If the Company cannot secure and retain store locations on suitable terms in prime and desired luxury shopping locations, or if its investments to construct and/or renovate existing stores do not generate sufficient incremental sales and/or profitability or significantly disrupt sales and/or profitability during renovations, the Company's sales and/or earnings performance could be jeopardized.

For example, in 2018 the Company announced its plans to undertake a complete renovation of its New York Flagship store, beginning in the spring of 2019 and with an anticipated completion date in the fourth quarter of 2021. This renovation project will require significant capital investment, and while the Company has secured an adjacent temporary retail location, it may result in business and/or consumer traffic disruptions to that location. Significant delays or cost overruns are also possible during the three year construction period, which could significantly increase the cost of this renovation project and adversely impact the Company's future financial results. There can be no assurance that the results of this renovation project will appeal to the Company's customers or will increase the Company's sales or profitability.

(x) The value of the TIFFANY & CO. and TIFFANY trademarks could decline due to third-party use and infringement.

The TIFFANY & CO. and TIFFANY trademarks are assets that are essential to the competitiveness and success of the Company's business, and the Company takes appropriate action to protect them. The Company actively pursues those who produce or sell counterfeit TIFFANY & CO. goods through civil action and cooperation with criminal law enforcement agencies. However, use of the designation TIFFANY by third parties on related goods or services and the Company's failure or inability to protect against such use could adversely affect and dilute the value of the
TIFFANY & CO. brand.

Notwithstanding the general success of the Company's enforcement actions, such actions have not stopped the imitation and counterfeiting of the Company's merchandise or the infringement of the trademark, and counterfeit TIFFANY & CO. goods remain available in most markets. In recent years, there has been an increase in the availability of counterfeit goods, predominantly silver jewelry, on the Internet and in various markets by street vendors and small retailers. The continued sale of counterfeit merchandise or merchandise that infringes the Company's trademarks could have an adverse effect on the TIFFANY & CO. brand by undermining the Company's reputation for quality goods and making such goods appear less desirable to consumers of luxury goods. Damage to the TIFFANY & CO. brand could result in lost sales and earnings.


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(xi) The Company's business is dependent upon the distinctive appeal of the TIFFANY & CO. brand.

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

In addition, adverse publicity regarding TIFFANY & CO. and its products, as well as adverse publicity in respect of, or resulting from, the Company's third-party vendors or the diamond or jewelry industries more generally, could adversely affect the Company's business. For example, the Company sources from third-party vendors certain products that, from time to time, may not, or may contain raw materials that do not, meet the Company's sourcing and quality standards as well as applicable requirements and regulations. In such instances, although the Company may have recourse against such third-party vendors, the Company may self-report to the relevant regulatory agencies, recall affected products and/or pay potential fines.

Any of the above could harm the TIFFANY & CO. brand and reputation, cause a loss of consumer confidence in the TIFFANY & CO. brand, its products and the industry, and/or negatively affect the Company's results of operations.

The considerable expansion in the use of social media in recent years has compounded the potential scope of any negative publicity.

(xii) Any material disruption of, or a failure to successfully implement or make changes to, information systems could negatively impact the Company's business.

The Company is increasingly dependent on its information systems to operate its business, including in designing, manufacturing, marketing and distributing its products, as well as processing transactions, managing inventory and accounting for and reporting its results. Given the complexity of the Company's global business, it is critical that the Company maintain the uninterrupted operation of its information systems. Despite the Company's preventative efforts, its information systems may be vulnerable to damage, disruption or shutdown due to power outages, computer and telecommunications failures, computer viruses, systems failures, security breaches or natural disasters. Damage, disruption or shutdown of the Company's information systems may require a significant investment to repair or replace them, and the Company could suffer interruptions in its operations in the interim.

In addition, in the ordinary course of business, the Company regularly evaluates and makes changes and upgrades to its information systems. The Company is in the process of executing its multi-year effort to evaluate and, where appropriate, to upgrade and/or replace certain of its information systems, including systems for global customer relationship management, order management and inventory management. These system changes and upgrades can require significant capital investments and dedication of resources. While the Company follows a disciplined methodology when evaluating and making such changes, there can be no assurances that the Company will successfully implement such changes, that such changes will be implemented without delays, that such changes will occur without disruptions to its operations or that the new or upgraded systems will achieve the desired business objectives.

Any damage, disruption or shutdown of the Company's information systems, or the failure to successfully implement new or upgraded systems, such as those referenced above, could have a direct material adverse effect on the Company's results of operations, could undermine the Company's ability to execute on its strategic and operational initiatives, and could also affect the Company's reputation, its ability to compete effectively, its relationship with customers and the TIFFANY & CO. brand, which could result in reduced sales and profitability.

(xiii) New and existing data privacy laws and/or a significant data security breach of the Company's information systems could increase the Company's operational costs, subject the Company to claims and otherwise adversely affect its business.

The protection of customer, employee and Company information is important to the Company, and its customers and employees expect that their personal data will be adequately protected. In addition, the regulatory environment surrounding information security and data privacy is becoming increasingly demanding, with evolving requirements

TIFFANY & CO.
K-16


in respect of personal data use and processing, including significant penalties for non-compliance, in the various jurisdictions in which the Company does business. For example, the General Data Protection Regulation that came into force in the E.U. in May 2018 has caused, and will continue to cause, the Company to incur additional compliance costs related thereto. Although the Company has developed and implemented systems, policies, procedures and internal controls that are designed to protect personal data and Company information, prevent data loss and other security breaches, and otherwise identify, assess and analyze cybersecurity risks, such measures cannot provide absolute security. For example, the Company faces a complex and evolving threat landscape in which cybercriminals, nation-states and "hacktivists" employ a complex array of techniques designed to access personal data and other information, including the use of stolen access credentials, malware, ransomware, phishing, structured query language ("SQL") injection attacks and distributed denial-of-service attacks, which may penetrate the Company's systems despite its extensive and evolving protective information security measures. Further, the Company relies on its software and hardware providers to issue timely patches for known vulnerabilities; however, the failure of software and hardware companies to release or to timely release effective patching and the Company's reliance on patches or inability to patch software and hardware vulnerabilities, could expose it to increased risk of attack, data loss and data breach. The Company has experienced, and expects to continue to experience, attempts from cybercriminals and other third parties to gain unauthorized access to its information technology and other information systems. Although these attempts have not had a material impact on the Company to date, in the future the Company could experience attacks that could have a material adverse effect on its business, financial condition or results of operations.

Additionally, the Company's implementation of new information technology or information systems and/or increased use and reliance on web-based hosted (i.e., cloud computing) applications and systems for the storage, processing and transmission of information, including customer and employee personal data, could expose the Company, its employees and its customers to a risk of loss or misuse of such information. The Company's efforts to protect personal data and Company information may also be adversely impacted by data security or privacy breaches that occur at its third-party vendors. While the Company's contractual arrangements with such third-party vendors provide for the protection of personal data and Company information, the Company cannot control these vendors or their systems and cannot guarantee that a data security or privacy breach of their systems will not occur in the future.

A significant violation of applicable privacy laws or the occurrence of a cybersecurity incident resulting in breach of personal data or Company information could result in the temporary suspension of some or all of the Company's operating and/or information systems, damage the Company's reputation, its relationships with customers, vendors and service providers and the TIFFANY & CO. brand and could result in lost data, lost sales, sizable fines, increased insurance premiums, substantial breach-notification and other remediation costs and lawsuits as well as adversely affect results of operations. The Company may also incur additional costs in the future related to the implementation of additional security measures to protect against new or enhanced data security and privacy threats, to comply with state, federal and international laws that may be enacted to address personal data processing risks and data security threats or to investigate or address potential or actual data security or privacy breaches.

(xiv) The loss or a prolonged disruption in the operation of the Company's centralized distribution centers could adversely affect its business and operations.

The Company maintains two separate distribution centers in close proximity to one another in New Jersey. Both are dedicated to warehousing merchandise; one handles worldwide store replenishment and the other processes direct-to-customer orders. Although the Company believes that it has appropriate contingency plans, unforeseen disruptions impacting one or both locations for a prolonged period of time may result in delays in the delivery of merchandise to stores or in fulfilling customer orders.

(xv) The loss or a prolonged disruption in the operation of the Company's internal manufacturing facilities could adversely affect its business and operations.

The Company's internal manufacturing facilities produce approximately 60% of the jewelry sold by the Company. Any prolonged disruption to their operations would require the Company to seek alternate sources of production and could have a negative effect on inventory availability and sales until such sources are established.


TIFFANY & CO.
K-17


(xvi) There is no assurance that the Company will be able to successfully grow its watch business.

The Company sells TIFFANY & CO. brand watches, which are designed, produced, marketed and distributed through certain of the Company's subsidiaries. Sales of these TIFFANY & CO. brand watches represented approximately 1% of worldwide net sales in 2018, 2017 and 2016. The development of this watch business has required and will continue to require additional resources and involves risks and uncertainties, including: (i) significant ongoing expenditures; (ii) the need to employ highly specialized and experienced personnel; (iii) dependence on relatively small supply partners; and (iv) production and distribution inefficiencies. In addition, the Company is competing with businesses with stronger market positions and has invested and will continue to invest in marketing to build customer awareness and to establish product differentiation. There is, however, no assurance that the Company will be able to effectively grow its watch business or that such business will be successful in growing the Company's revenues or enhancing its profitability.

(xvii) If the Company is unable to effectively anticipate and respond to changes in consumer preferences and shopping patterns, or introduce new products or programs that appeal to new or existing customers, the Company's sales and profitability could be adversely affected.

The Company's continued success depends on its ability to anticipate and respond in a timely and cost-effective manner to changes in consumer preferences for jewelry and other luxury goods, attitudes towards the global jewelry industry as a whole, as well as the manner and locations in which consumers purchase such goods. The Company recognizes that consumer tastes cannot be predicted with certainty and are subject to change, which is compounded by the expanding use of digital and social media by consumers and the speed by which information and opinions are shared. The Company's product development strategy is to introduce new design collections, primarily jewelry, and/or expand certain existing collections annually. If the Company is unable to anticipate and respond in a timely and cost-effective manner to changes in consumer preferences and shopping patterns, including the development of an engaging omnichannel experience for its customers, the Company's sales and profitability could be adversely affected.

In addition, beginning in the second quarter of 2018 management increased its spending in a number of areas, including technology, marketing communications, visual merchandising, digital, and store presentations, which it believes are necessary to achieve its longer term sales, margin and earnings growth objectives. Such investment is also intended to build awareness of the Brand, its heritage and its products, as well as to enhance the Brand's association among consumers with quality and luxury. Management intends to maintain comparable levels of spending in these areas in 2019. However, there can be no assurance these strategies will appeal to new or existing customers or that these expenditures will result in increased sales or profitability.

Lastly, approximately 75% of the Company's stores are located within luxury department stores and shopping malls and benefit from the ability of those locations to generate consumer traffic. A substantial decline in department store and/or mall traffic may negatively impact the Company's ability to maintain or increase its sales in existing stores, as well as its ability to open new stores.

(xviii) The price of the Company's common stock may periodically rise or fall based on the Company's achievement of earnings forecasts and investors' expectations.

The Company's strategic planning process is designed to maximize its long-term strength, growth, and profitability. Management believes that this longer-term focus is in the best interests of the Company and its stockholders. At the same time, however, the Company recognizes that, from time to time, it may be helpful to provide investors with guidance as to management's annual earnings forecast. If, or when, the Company announces actual results that differ from those that have been forecast by management or others, the market price of the Company's common stock could be adversely affected.

The Company returns value to its stockholders through common stock share repurchases and payment of quarterly cash dividends. The market price of the Company's common stock could be adversely affected if the Company's share repurchase activity and/or cash dividend rate differs from investors' expectations.


TIFFANY & CO.
K-18


(xix) Environmental and climate changes could affect the Company's business.

The Company operates retail stores in more than 20 countries and has both domestic and foreign manufacturing operations that are susceptible to the risks associated with climate change. Such risks include those related to the physical impacts of climate change, such as more frequent and severe weather events and/or long term shifts in climate patterns, and risks related to the transition to a lower-carbon economy, such as reputational, market and/or regulatory risks. Climate change and climate events could result in social, cultural and economic disruptions in these areas, including supply chain disruptions, the disruption of local infrastructure and transportation systems that could limit the ability of the Company's employees and/or its customers to access the Company's stores or manufacturing locations, damage to such stores or locations or reductions in material availability and quality. These events could also compound adverse economic conditions and impact consumer confidence and discretionary spending. Despite the fact that the Company is pursuing numerous initiatives to reduce its environmental footprint, including efforts related to energy efficiency, renewable energy use and carbon offsets, there remains the risk that insufficient global cooperation could lead to increased negative impacts from climate change. While the Company has an ongoing program for reviewing its vulnerability to the impacts of severe weather events and other risks associated with climate change, these events could nonetheless negatively affect the Company's business and operations.


Item 1B. Unresolved Staff Comments.

None


Item 2. Properties.

The Company leases its various store premises (other than the New York Flagship store, which is owned by the Company) under arrangements that generally range from 3 to 10 years. The following table provides information on the number of locations and square footage of Company-operated TIFFANY & CO. stores as of January 31, 2019:
 
Total Stores

Total Gross Retail Square Footage

Gross Retail Square Footage Range

Average Gross Retail Square Footage

Americas:
 
 
 
 
New York Flagship
1

45,500

45,500

45,500

Other stores
123

681,200

1,000 - 17,600

5,500

Asia-Pacific
90

257,400

400 - 12,800

2,900

Japan:
 
 
 
 
Tokyo Ginza
1

13,300

13,300

13,300

Other stores
54

144,000

1,500 - 7,500

2,700

Europe:
 
 
 
 
London Old Bond Street
1

22,400

22,400

22,400

Other stores
46

163,200

400 - 18,200

3,500

Emerging Markets
5

9,200

400 - 3,600

1,800

Total
321

1,336,200

400 - 45,500

4,200


Excluded from the store count and square footage amounts above are pop-up stores (stores with lease terms of 24 months or less).


TIFFANY & CO.
K-19


NEW YORK FLAGSHIP STORE

The Company owns the building, but not the air rights above the building, housing its New York Flagship store at 727 Fifth Avenue, which was designed to be a retail store for Tiffany and is well located for this function. Approximately 45,500 gross square feet of this 124,000 square foot building are devoted to retail sales and The Blue Box Cafe, which opened in 2017. The balance is devoted to administrative offices, certain product services, jewelry manufacturing and storage. The New York Flagship store is also the focal point for marketing and public relations efforts. Sales in this store represent less than 10% of worldwide net sales.

In 2018, the Company announced its plans to undertake a complete renovation of the New York Flagship store, beginning in the spring of 2019 and with an anticipated completion date in the fourth quarter of 2021. In order to minimize any disruptions during this renovation, the Company has secured an adjacent temporary retail location.

RETAIL SERVICE CENTER

The Company's Retail Service Center ("RSC"), located in Parsippany, New Jersey, comprises approximately 370,000 square feet. Approximately half of the building is devoted to office and information technology operations and half to warehousing, shipping, receiving, merchandise processing and other distribution functions. The RSC receives merchandise and replenishes retail stores. The Company has a 20-year lease for this facility, which expires in 2025, and has two 10-year renewal options.

CUSTOMER FULFILLMENT CENTER

The Company owns the Customer Fulfillment Center ("CFC") in Whippany, New Jersey and leases the land on which the facility resides. The CFC is approximately 266,000 square feet and is primarily used for warehousing merchandise and processing direct-to-customer orders. The land lease expires in 2032 and the Company has the right to renew the lease for an additional 20-year term.

MANUFACTURING AND DESIGN FACILITIES

The Company owns and operates jewelry manufacturing facilities in Cumberland, Rhode Island and Lexington, Kentucky, leases a jewelry manufacturing facility in Pelham, New York, leases a facility in the Dominican Republic which performs certain functions such as jewelry polishing and assembly and leases a facility containing its Jewelry Design and Innovation Workshop in New York, New York. Lease expiration dates range from 2019 to 2029. The owned and leased facilities total approximately 244,000 square feet.

The Company leases a facility in Belgium and owns facilities in Botswana, Cambodia, Mauritius and Vietnam (although the land in Botswana, Cambodia and Vietnam is leased) that prepare, cut and/or polish rough diamonds for use by Tiffany. These facilities total approximately 280,000 square feet and the lease expiration dates range from 2019 to 2062.


Item 3. Legal Proceedings.

Arbitration Award. As the Registrant has previously disclosed, the Registrant and its wholly owned subsidiaries, Tiffany and Company and Tiffany (NJ) Inc. (the Registrant and such subsidiaries, together, the "Tiffany Parties") took action in the courts of the Netherlands to annul the arbitration award issued on December 21, 2013 (the “Arbitration Award”) in favor of the Swatch Group Ltd. (“Swatch”) and its wholly owned subsidiary Tiffany Watch Co. (together with Swatch, the “Swatch Parties”). The Arbitration Award was issued by a three-member arbitral panel convened in the Netherlands pursuant to the Arbitration Rules of the Netherlands Arbitration Institute, and reflected the panel’s ruling with respect to certain claims and counterclaims among the Swatch Parties and the Tiffany Parties under the agreements entered into by and among the Swatch Parties and the Tiffany Parties in December 2007 (the “Agreements”). Pursuant to the Arbitration Award, the Tiffany Parties paid the Swatch Parties damages of CHF 402.7 million (the "Arbitration Damages"), as well as interest from June 30, 2012 to the date of payment, two-thirds of the cost of the Arbitration and two-thirds of the Swatch Parties' legal fees, expenses and costs. These amounts were paid in full in January 2014, and, in the fourth quarter of 2013, the Company recorded a charge of $480.2 million, which included the damages, interest, and other costs associated with the ruling and which was classified as Arbitration award expense in the consolidated statement of earnings.

TIFFANY & CO.
K-20



On March 4, 2015, the District Court of Amsterdam issued a decision in respect of the Tiffany Parties’ petition to annul the Arbitration Award. Under the District Court’s decision, which was in favor of the Tiffany Parties, the Arbitration Award was set aside. However, the Swatch Parties took action in the Dutch courts to appeal the District Court's decision, and a three-judge panel of the Appellate Court of Amsterdam issued its decision on April 25, 2017, finding in favor of the Swatch Parties and ordering the Tiffany Parties to reimburse the Swatch Parties a de-minimis amount for their legal costs. The Tiffany Parties subsequently took action to appeal the decision of the Appellate Court to the Supreme Court of the Netherlands, and the Supreme Court issued its decision on November 23, 2018, dismissing the appeal and ordering the Tiffany Parties to reimburse the Swatch Parties a de-minimis amount for their legal costs. As the Supreme Court is the highest court of appeal in the Netherlands, the Tiffany Parties have exhausted all rights of appeal with respect to the Appellate Court's decision and, as a consequence, the Tiffany Parties' annulment action, and their related claim for the return of the Arbitration Damages and related costs, have been ultimately resolved and the Arbitration Award has been rendered final.

Management had not established any accrual in the Company's consolidated financial statements related to the annulment process or any potential subsequent litigation because it did not believe that the final annulment of the Arbitration Award and a subsequent award of damages exceeding the Arbitration Damages was probable. Therefore, the Supreme Court's decision has no impact on the Company's financial position, results of operations, or cash flows, other than with respect to the de-minimis reimbursement noted above.

Other Litigation Matters. The Company is from time to time involved in routine litigation incidental to the conduct of its business, including proceedings to protect its trademark rights, litigation with parties claiming infringement of patents and other intellectual property rights by the Company, litigation instituted by persons alleged to have been injured upon premises under the Company's control and litigation with present and former employees and customers. Although litigation with present and former employees is routine and incidental to the conduct of the Company's business, as well as for any business employing significant numbers of employees, such litigation can result in large monetary awards when a civil jury is allowed to determine compensatory and/or punitive damages for actions such as those claiming discrimination on the basis of age, gender, race, religion, disability or other legally-protected characteristic or for termination of employment that is wrongful or in violation of implied contracts. However, the Company believes that all such litigation currently pending to which it is a party or to which its properties are subject will be resolved without any material adverse effect on the Company's financial position, earnings or cash flows.

Gain Contingency. On February 14, 2013, Tiffany and Company and Tiffany (NJ) LLC (collectively, the "Tiffany plaintiffs") initiated a lawsuit against Costco Wholesale Corp. ("Costco") for trademark infringement, false designation of origin and unfair competition, trademark dilution and trademark counterfeiting (the "Costco Litigation"). The Tiffany plaintiffs sought injunctive relief, monetary recovery and statutory damages on account of Costco's use of "Tiffany" on signs in the jewelry cases at Costco stores used to describe certain diamond engagement rings that were not manufactured by Tiffany. Costco filed a counterclaim arguing that the TIFFANY trademark was a generic term for multi-pronged ring settings and seeking to have the trademark invalidated, modified or partially canceled in that respect. On September 8, 2015, the U.S. District Court for the Southern District of New York (the "Court") granted the Tiffany plaintiffs' motion for summary judgment of liability in its entirety, dismissing Costco's genericism counterclaim and finding that Costco was liable for trademark infringement, trademark counterfeiting and unfair competition under New York law in its use of "Tiffany" on the above-referenced signs. On September 29, 2016, a civil jury rendered its verdict, finding that Costco's profits on the sale of the infringing rings should be awarded at $5.5 million, and further finding that an award of punitive damages was warranted. On October 5, 2016, the jury awarded $8.25 million in punitive damages. The aggregate award of $13.75 million was not final, as it was subject to post-verdict motion practice and ultimately to adjustment by the Court. On August 14, 2017, the Court issued its ruling, finding that the Tiffany plaintiffs are entitled to recover (i) $11.1 million in respect of Costco's profits on the sale of the infringing rings (which amount is three times the amount of such profits, as determined by the Court), (ii) prejudgment interest on such amount (calculated at the applicable statutory rate) from February 15, 2013 through August 14, 2017, (iii) an additional $8.25 million in punitive damages, and (iv) Tiffany's reasonable attorneys' fees, and, on August 24, 2017, the Court entered judgment in the amount of $21.0 million in favor of the Tiffany plaintiffs (reflecting items (i) through (iii) above). On February 7, 2019, the Court awarded the Tiffany plaintiffs $5.9 million in respect of the aforementioned attorneys' fees and costs, bringing the total judgment to $26.9 million. The Court has denied a motion made by Costco for a new trial; however, Costco has also filed an appeal from the judgment, which is pending before the Second Circuit Court of Appeals. As the Tiffany plaintiffs may not enforce the Court's judgment during the appeals process, the Company has not recorded any amount in its consolidated financial

TIFFANY & CO.
K-21


statements related to this gain contingency as of January 31, 2019. The Company expects that this matter will not ultimately be resolved until, at the earliest, a future date during the Company's fiscal year ending January 31, 2020.


Item 4. Mine Safety Disclosures.

Not Applicable.

TIFFANY & CO.
K-22


PART II

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

In calculating the aggregate market value of the voting stock held by non-affiliates of the Company shown on the cover page of this Annual Report on Form 10-K, 955,407 shares of Common Stock beneficially owned by the executive officers and directors of the Company (exclusive of shares which may be acquired on exercise of stock options) were excluded, on the assumption that certain of those persons could be considered "affiliates" under the provisions of Rule 405 promulgated under the Securities Act of 1933, as amended.

The Company's Common Stock is traded on the New York Stock Exchange under the symbol "TIF". On March 18, 2019, the high and low selling prices quoted on such exchange were $97.46 and $96.30. On March 18, 2019, there were 13,442 holders of record of the Company's Common Stock.

The following graph compares changes in the cumulative total shareholder return on the Company's Common Stock for the previous five fiscal years to returns for the same five-year period on (i) the Standard & Poor's 500 Stock Index and (ii) the Standard & Poor's 500 Consumer Discretionary Index. Cumulative shareholder return is defined as changes in the closing price of the stock and such indices, plus the reinvestment of any dividends paid. The graph assumes an investment of $100 on January 31, 2014 in the Company's Common Stock and in each of the two indices, as well as the reinvestment of any subsequent dividends.

Total returns are based on market capitalization; indices are weighted at the beginning of each period for which a return is indicated. The stock performance shown in the graph is not intended to forecast or to be indicative of future performance.

chart-a5e8155c36f95222a7fa01.jpg

TIFFANY & CO.
K-23


 
1/31/14

1/31/15

1/31/16

1/31/17

1/31/18

1/31/19

Tiffany & Co.
$ 100.00

$ 105.72

$ 79.39

$ 100.36

$ 138.86

$ 117.92

S&P 500 Stock Index
100.00

114.22

113.46

136.20

172.17

168.19

S&P 500 Consumer Discretionary Index
100.00

113.01

121.80

141.86

183.00

186.14


Dividends

It is the Company's policy to pay a quarterly dividend on its Common Stock, subject to declaration by its Board of Directors. In 2017, a dividend of $0.45 per share of Common Stock was paid on April 10, 2017. On May 25, 2017, the Company announced an 11% increase in its regular quarterly dividend rate to a new rate of $0.50 per share of Common Stock, which was paid on July 10, 2017, October 10, 2017 and January 10, 2018.

A dividend of $0.50 per share of Common Stock was paid on April 10, 2018. On May 24, 2018, the Company announced a 10% increase in its regular quarterly dividend rate to a new rate of $0.55 per share of Common Stock, which was paid on July 10, 2018, October 10, 2018 and January 10, 2019.

Issuer Purchases of Equity Securities

In May 2018, the Registrant's Board of Directors approved a new share repurchase program (the "2018 Program"). The 2018 Program, which became effective June 1, 2018 and expires on January 31, 2022, authorizes the Company to repurchase up to $1.0 billion of its Common Stock through open market transactions, including through Rule 10b5-1 plans and one or more accelerated share repurchase ("ASR") or other structured repurchase transactions, and/or privately negotiated transactions. Purchases under this program are discretionary and will be made from time to time based on market conditions and the Company's liquidity needs. The Company may fund repurchases under the 2018 Program from existing cash at such time or from proceeds of any existing borrowing facilities at such time and/or the issuance of new debt. The 2018 Program replaced the Company's previous share repurchase program approved in January 2016 (the "2016 Program"), under which the Company was authorized to repurchase up to $500.0 million of its Common Stock. At the time of termination, $154.9 million remained available for repurchase under the 2016 Program.

The following table contains the Company's purchases of equity securities in the fourth quarter of 2018:
Period
(a) Total Number of Shares (or Units) Purchased

(b) Average Price Paid per Share (or Unit)

(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs

(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
(in millions)

November 1, 2018 to November 30, 2018
262,014

$ 110.96

262,014

$ 650.0

December 1, 2018 to December 31, 2018

$ —


$ 650.0

January 1, 2019 to January 31, 2019
169,239

$ 88.63

169,239

$ 635.0

TOTAL
431,253

$ 102.20

431,253

$ 635.0





TIFFANY & CO.
K-24


Item 6. Selected Financial Data.

The following table sets forth selected financial data, certain of which have been derived from the Company's consolidated financial statements for fiscal years 2014-2018, which ended on January 31 of the following calendar year:
(in millions, except per share amounts, percentages, ratios, stores and employees)
2018 b

2017 c

2016 d

2015 e

2014 f

EARNINGS DATA
 
 
 
 
 
Net sales
$
4,442.1

$
4,169.8

$
4,001.8

$
4,104.9

$
4,249.9

Gross profit a
2,811.0

2,610.7

2,499.0

2,505.2

2,544.3

Selling, general & administrative expenses a
2,020.7

1,801.3

1,752.6

1,706.1

1,632.8

Earnings from operations a
790.3

809.4

746.4

799.1

911.5

Net earnings
586.4

370.1

446.1

463.9

484.2

Net earnings per diluted share
4.75

2.96

3.55

3.59

3.73

Weighted-average number of diluted common shares
123.5

125.1

125.5

129.1

129.9

BALANCE SHEET AND CASH FLOW DATA
 
 
 
 
 
Total assets
$
5,333.0

$
5,468.1

$
5,097.6

$
5,121.6

$
5,171.8

Cash and cash equivalents
792.6

970.7

928.0

843.6

730.0

Inventories, net
2,428.0

2,253.5

2,157.6

2,225.0

2,362.1

Short-term borrowings and long-term debt (including current portion)
996.8

1,003.5

1,107.1

1,095.8

1,107.8

Stockholders' equity
3,130.9

3,248.2

3,028.4

2,929.5

2,850.7

Working capital
3,041.4

3,258.5

2,940.8

2,778.5

2,850.8

Cash flows from operating activities
531.8

932.2

705.7

817.4

633.5

Capital expenditures
282.1

239.3

222.8

252.7

247.4

Stockholders' equity per share
25.77

26.10

24.33

23.10

22.04

Cash dividends paid per share
2.15

1.95

1.75

1.58

1.48

RATIO ANALYSIS AND OTHER DATA
 
 
 
 
 
As a percentage of net sales:
 
 
 
 
 
Gross profit
63.3
%
62.6
%
62.4
%
61.0
%
59.9
%
Selling, general & administrative expenses
45.5
%
43.2
%
43.8
%
41.6
%
38.4
%
Earnings from operations
17.8
%
19.4
%
18.7
%
19.5
%
21.4
%
Net earnings
13.2
%
8.9
%
11.1
%
11.3
%
11.4
%
Capital expenditures
6.4
%
5.7
%
5.6
%
6.2
%
5.8
%
Return on average assets
10.9
%
7.0
%
8.7
%
9.0
%
9.8
%
Return on average stockholders' equity
18.4
%
11.8
%
15.0
%
16.1
%
17.3
%
Total debt-to-equity ratio
31.8
%
30.9
%
36.6
%
37.4
%
38.9
%
Dividends as a percentage of net earnings
45.0
%
65.5
%
49.0
%
43.8
%
39.5
%
Company-operated TIFFANY & CO. stores
321

315

313

307

295

Number of employees
14,200

13,100

11,900

12,200

12,000




TIFFANY & CO.
K-25


NOTES TO SELECTED FINANCIAL DATA

a.
In connection with the implementation of ASU 2017-07 - Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, effective February 1, 2018 (see "Item 8. Financial Statements and Supplementary Data - Note B. Summary of Significant Accounting Policies"), the non-service cost components of net periodic benefit cost have been reclassified on the consolidated statements of earnings from Cost of sales and from Selling, general and administrative expenses to Other expense, net for fiscal years 2014 through 2017. Those reclassifications had no impact on Net earnings, but increased Earnings from operations by: (i) $14.9 million (with $6.0 million reclassified from Cost of sales and $8.9 million reclassified from SG&A expenses) for 2017; (ii) $25.2 million (with $8.7 million reclassified from Cost of sales and $16.5 million reclassified from SG&A expenses) for 2016; (iii) $39.0 million (with $13.9 million reclassified from Cost of sales and $25.1 million reclassified from SG&A expenses) for 2015; and (iv) $20.1 million (with $7.1 million reclassified from Cost of sales and $13.0 million reclassified from SG&A expenses) for 2014.
b.
Financial information and ratios for 2018 reflect a lower effective income tax rate, primarily resulting from the 2017 U.S. Tax Cuts and Jobs Act. See "Item 8. Financial Statements and Supplementary Data - Note N. Income Taxes" for additional information.
c.
Financial information and ratios for 2017 include $146.2 million, or $1.17 per diluted share, of net tax expense related to the enactment of the 2017 U.S. Tax Cuts and Jobs Act. See "Item 8. Financial Statements and Supplementary Data - Note N. Income Taxes" for additional information.
d.
Financial information and ratios for 2016 include the following amounts, totaling $38.0 million of pre-tax expense ($24.0 million after tax expense, or $0.19 per diluted share):
$25.4 million of pre-tax expense ($16.0 million after tax expense, or $0.13 per diluted share) associated with an asset impairment charge related to software costs capitalized in connection with the development of a finished goods inventory management and merchandising information system. See "Item 8. Financial Statements and Supplementary Data - Note B. Summary of Significant Accounting Policies" and "Note E. Property, Plant and Equipment" for additional information; and
$12.6 million of pre-tax expense ($8.0 million after tax expense, or $0.06 per diluted share) associated with impairment charges related to financing arrangements with diamond mining and exploration companies. See "Item 8. Financial Statements and Supplementary Data - Note B. Summary of Significant Accounting Policies" for additional information.
e.
Financial information and ratios for 2015 include the following amounts, totaling $46.7 million of pre-tax expense ($29.9 million after tax expense, or $0.24 per diluted share):
$37.9 million of pre-tax expense ($24.3 million after tax expense, or $0.19 per diluted share) associated with impairment charges related to a financing arrangement with Koidu Limited; and
$8.8 million of pre-tax expense ($5.6 million after tax expense, or $0.05 per diluted share) associated with severance related to staffing reductions and subleasing of certain office space for which only a portion of the Company's future rent obligations would be recovered.
f.
Financial information and ratios for 2014 include $93.8 million of net pre-tax expense ($60.9 million net after tax expense, or $0.47 per diluted share) associated with the redemption of $400.0 million in aggregate principal amount of certain senior notes prior to their scheduled maturities.

TIFFANY & CO.
K-26


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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

KEY STRATEGIC PRIORITIES

The Company's key strategic priorities are to:

Amplify an evolved brand message.

The Brand is the single most important asset of Tiffany and, indirectly, of the Company. Management intends to increasingly invest in and evolve marketing and public relations programs through a variety of media designed to build awareness of the Brand, its heritage and its products, as well as to enhance the Brand's association with quality and luxury by consumers.

Renew the Company's product offerings and enhance in-store presentations.

The Company's product development strategy is to accelerate the introduction of new design collections, primarily in jewelry, but also in non-jewelry products, and/or expand certain existing collections annually, all of which are intended to appeal to existing and new customers.

To ensure a superior shopping experience, the Company is focused on enhancing the design of its stores, as well as the creative visual presentation of its merchandise, to provide an engaging luxury experience in both its new and existing stores.

Deliver an exciting omnichannel customer experience.

Management intends to continue to expand and optimize its global store base by evaluating potential markets for new TIFFANY & CO. stores, as well as through the renovation, relocation, or closing of existing stores. Management will also continue to pursue opportunities to grow sales through its e-commerce websites and utilize the websites to drive store traffic. In addition, the Company employs highly qualified sales and customer service professionals and is focused on developing effective omnichannel relationships with its customers.

Strengthen the Company's competitive position and lead in key markets.

The global jewelry industry is competitively fragmented. While the Company enjoys a strong reputation and large customer base, it encounters significant competition in all product categories and geographies. By focusing on enhanced marketing communications, product development and optimization of its store base and digital capabilities, the Company's objective is to be an industry leader in key markets.

Cultivate a more efficient operating model.

The Company is focused on improving its business operations through new systems, more effective processes and cost restraint, to drive margin growth. This includes realizing greater efficiencies in its product supply chain and other operations, and enhancing its global procurement capabilities. The Company has developed a substantial product supply infrastructure for the procurement and processing of diamonds and the manufacturing of jewelry. This infrastructure is intended to ensure adequate product supply and favorable product costs while adhering to the Company's quality and ethical standards.

Inspire an aligned and agile organization to win.

The Company's success depends upon its people and their effective execution of the Company's strategic priorities. The Company's management strives to motivate and develop employees with the core competencies and adaptability needed to achieve its objectives.

TIFFANY & CO.
K-27


By pursuing these key strategic priorities, management is committed to the following long-term financial objectives:

To achieve sustainable sales growth.

Management's objective is to generate mid-single-digit percentage worldwide sales increases, primarily through comparable sales growth, as well as through modest store square footage growth.

To increase retail productivity and profitability.

Management is focused on increasing the frequency of store and website visits and the percentage of store and website visitors who make a purchase, as well as optimal utilization of store square footage, to grow sales and sales per square foot.

To achieve improved operating margins, through both improved gross margins and efficient expense management.

Management's long-term objective is to improve gross margins, including through controlling product input costs, realizing greater efficiencies in its product supply chain and adjusting retail prices when appropriate. Additionally, management is focused on efficient selling, general and administrative expense management, thereby generating sales leverage on fixed costs. These efforts are collectively intended to generate a higher rate of operating earnings growth relative to sales growth, and management targets an improvement in operating margin of 50 basis points per year over the long term.

To improve inventory and other asset productivity and cash flow.

Management's long-term objective is to maintain inventory growth at a rate less than sales growth, with greater focus on efficiencies in product sourcing and manufacturing as well as optimizing store inventory levels, all of which is intended to contribute to improvements in cash flow and return on assets.

To maintain a capital structure that provides financial strength and the ability to invest in strategic initiatives, while also allowing for the return of excess capital to shareholders through dividends and share repurchases.

2018 SUMMARY

Worldwide net sales increased 7% to $4.4 billion, reflecting sales growth in all reportable segments. Comparable sales increased 4% from the prior year. On a constant-exchange-rate basis (see "Non-GAAP Measures" below), worldwide net sales increased 6% and comparable sales increased 4%.

The Company added a net of six TIFFANY & CO. stores (opening four in Asia-Pacific, two in the Americas two in Europe, one in Japan and one in the Emerging Markets, while closing two in the Americas, one in Asia-Pacific and one in Europe) which resulted in a 1% net increase in gross retail square footage. In addition, the Company relocated 10 existing stores.

The Company introduced its Tiffany Paper Flowers® jewelry collection and Tiffany True engagement rings and expanded existing collections.

Earnings from operations decreased $19.1 million, or 2% in 2018 compared to the prior year. Earnings from operations as a percentage of net sales ("operating margin") decreased 160 basis points, due to an increase in gross margin which was more than offset by a higher Selling, general, and administrative expense ratio, which included increased marketing and other strategic investment spending which management believes are necessary to support long-term sales growth.

The Company's effective income tax rate decreased to 21.1% in 2018 from 51.3%, or 32.1% on an adjusted basis in 2017 (see "Non-GAAP Measures").

Net earnings increased to $586.4 million, or $4.75 per diluted share, in 2018 from $370.1 million, or $2.96 per diluted share, in 2017. Net earnings in 2017 included a net charge of $146.2 million, or $1.17

TIFFANY & CO.
K-28


per diluted share, related to the enactment of the 2017 U.S. Tax Cuts and Jobs Act (the "2017 Tax Act"). Excluding that net charge, net earnings were $516.3 million, or $4.13 per diluted share, in 2017 (see "Non-GAAP Measures").

Inventories, net increased 8% to $2.4 billion.

Cash flow from operating activities was $531.8 million in 2018, compared with $932.2 million in 2017. Free cash flow (see "Non-GAAP Measures") was $249.7 million in 2018, compared with $692.9 million in 2017.

The Company returned capital to shareholders by paying regular quarterly dividends (which were increased 10% effective July 2018 to $0.55 per share, or an annualized rate of $2.20 per share) and by repurchasing 3.5 million shares of its Common Stock for $421.4 million.

RESULTS OF OPERATIONS

Non-GAAP Measures

The Company reports information in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"). Internally, management also monitors and measures its performance using certain sales and earnings measures that include or exclude amounts, or are subject to adjustments that have the effect of including or excluding amounts, from the most directly comparable GAAP measure ("non-GAAP financial measures"). The Company presents such non-GAAP financial measures in reporting its financial results to provide investors with useful supplemental information that will allow them to evaluate the Company's operating results using the same measures that management uses to monitor and measure its performance. 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. These non-GAAP financial measures presented here may not be comparable to similarly-titled measures used by other companies.


TIFFANY & CO.
K-29


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"). Sales on a constant-exchange-rate basis are calculated by taking the current year's sales in local currencies and translating them into U.S. dollars using the prior year's foreign currency exchange rates. Management believes this constant-exchange-rate basis provides a useful supplemental basis for the assessment of sales performance and of 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.

 
2018
 
2017
 
GAAP 
Reported

 
Translation
Effect

 
Constant-
Exchange-
Rate Basis

 
GAAP 
Reported

 
Translation
Effect

 
Constant-
Exchange-
Rate Basis

Net Sales:
 
 
 
 
 
 
 
 
 
 
 
Worldwide
7
 %
 
1
%
 
6
 %
 
4
 %
 
 %
 
4
 %
Americas
5

 

 
5

 
2

 
1

 
1

Asia-Pacific
13

 

 
13

 
10

 
2

 
8

Japan
8

 
2

 
6

 
(1
)
 
(2
)
 
1

Europe
3

 
1

 
2

 
6

 
3

 
3

Other
(20
)
 

 
(20
)
 
26

 

 
26

 
 
 
 
 
 
 
 
 
 
 
 
Comparable Sales:
 
 
 
 
 
 
 
 
 
 
 
Worldwide
4
 %
 
%
 
4
 %
 
 %
 
 %
 
 %
Americas
5

 

 
5

 
1

 

 
1

Asia-Pacific
5

 

 
5

 
(1
)
 
1

 
(2
)
Japan
7

 
2

 
5

 
(1
)
 
(3
)
 
2

Europe
(2
)
 
1

 
(3
)
 

 
2

 
(2
)
Other
(15
)
 

 
(15
)
 
2

 

 
2



TIFFANY & CO.
K-30


Beginning in the first quarter of 2018, the Company revised its definition of comparable sales (see "Comparable Sales" below) to include e-commerce and catalog sales, in addition to sales transacted in Company-operated stores open for more than 12 months. For reference purposes, the following table reconciles the comparable sales percentage increases (decreases) from the GAAP to the non-GAAP basis versus the previous year for 2017:
 
2017
As Previously Reported
 
GAAP 
Reported
 
Translation
Effect
 
Constant-
Exchange-
Rate Basis
Comparable Sales:
 
 
 
 
 
Worldwide
 %
 
 %
 
 %
Americas
1

 
1

 

Asia-Pacific
(1
)
 
1

 
(2
)
Japan
(1
)
 
(3
)
 
2

Europe
(2
)
 
2

 
(4
)
Other
2

 

 
2


Statements of Earnings. Internally, management monitors and measures its earnings performance excluding certain items listed below. Management believes excluding such items provides a useful supplemental basis for the assessment of the Company's results relative to the corresponding period in the prior year. The following tables reconcile certain GAAP amounts to non-GAAP amounts:
(in millions, except per share amounts)
GAAP
 
Charges related to the 2017 Tax Act a
 
Non-GAAP
Year Ended January 31, 2018
 
 
 
 
 
Provision for income taxes
$
390.4

 
$
(146.2
)
 
$
244.2

Effective income tax rate
51.3
%
 
(19.2
)%
 
32.1
%
Net earnings
370.1

 
146.2

 
516.3

Diluted earnings per share*
2.96

 
1.17

 
4.13

a 
Net expense recognized in 2017 related to the estimated impact of the 2017 Tax Act. See "Provision for Income Taxes" and "Item 8. Financial Statements and Supplementary Data - Note N. Income Taxes" for additional information.
(in millions, except per share amounts)
GAAP
 
Impairment charges b
 
Non-GAAP
Year Ended January 31, 2017
 
 
 
 
 
SG&A expenses
$
1,752.6

 
$
(38.0
)
 
$
1,714.6

As a % of sales
43.8
%
 
 
 
42.8
%
Earnings from operations
746.4

 
38.0

 
784.4

As a % of sales
18.7
%
 
 
 
19.6
%
Provision for income taxes c
230.5

 
14.0

 
244.5

Net earnings
446.1

 
24.0

 
470.1

Diluted earnings per share*
3.55

 
0.19

 
3.75

b 
Expenses associated with the following:
$25.4 million of pre-tax expense ($16.0 million after-tax expense, or $0.13 per diluted share) associated with an asset impairment charge related to software costs capitalized in connection with the development of

TIFFANY & CO.
K-31


a finished goods inventory management and merchandising information system (see "Information Systems Assessment"); and
$12.6 million of pre-tax expense ($8.0 million after-tax expense, or $0.06 per diluted share) associated with impairment charges related to financing arrangements with diamond mining and exploration companies (see "Financing Arrangements with Diamond Mining and Exploration Companies").
c 
The income tax effect resulting from the adjustments has been calculated as both current and deferred tax benefit (expense), based upon the tax laws and statutory income tax rates applicable in the tax jurisdiction(s) of the underlying adjustment.

*Amounts may not add due to rounding.

Free Cash Flow. Internally, management monitors its cash flow on a non-GAAP basis. Free cash flow is calculated by deducting capital expenditures from net cash provided by operating activities. The ability to generate free cash flow demonstrates how much cash the Company has available for discretionary and non-discretionary purposes after deduction of capital expenditures. The Company's operations require regular capital expenditures for the opening, renovation and expansion of stores and distribution and manufacturing facilities as well as ongoing investments in information technology. Management believes this provides a useful supplemental basis for assessing the Company's operating cash flows. The following table reconciles GAAP net cash provided by operating activities to non-GAAP free cash flow:
(in millions)
2018

2017

2016

Net cash provided by operating activities a
        $
531.8

        $
932.2

        $
705.7

Less: Capital expenditures a
(282.1
)
(239.3
)
(222.8
)
Free cash flow
        $
249.7

        $
692.9

        $
482.9


a 
See "Liquidity and Capital Resources" below for further information on the Company's cash flows.

Comparable Sales

Comparable sales include sales transacted in Company-operated stores open for more than 12 months. Sales from e-commerce sites are included in comparable sales for those sites that have been operating for more than 12 months. Sales for relocated stores are included in comparable sales if the relocation occurs within the same geographical market. In all markets, the results of a store in which the square footage has been expanded or reduced remain in the comparable sales base.

Net Sales

The Company generates sales through its retail, Internet, wholesale, business-to-business and catalog channels (see "Item 1. Business - Reportable Segments").

Net sales by segment were as follows:
(in millions)
 
2018

% of Total Net Sales

 
2017

% of Total Net Sales

 
2016

% of Total Net Sales

 
2018 vs 2017
% Change in Net Sales

 
2017 vs 2016
% Change in Net Sales

Americas
 
$
1,960.3

44
%
 
$
1,870.9

45
%
 
$
1,841.9

46
%
 
5
 %
 
2
 %
Asia-Pacific
 
1,239.0

28

 
1,095.0

26

 
999.1

25

 
13

 
10

Japan
 
643.0

15

 
596.3

14

 
604.4

15

 
8

 
(1
)
Europe
 
504.4

11

 
489.0

12

 
462.5

12

 
3

 
6

Other
 
95.4

2

 
118.6

3

 
93.9

2

 
(20
)
 
26

 
 
$
4,442.1

 
 
$
4,169.8

 
 
$
4,001.8

 
 
7
 %
 
4
 %


TIFFANY & CO.
K-32


Net Sales — 2018 compared with 2017. In 2018, worldwide net sales increased $272.3 million, or 7%, reflecting an increase in net sales in all reportable segments.

In 2018, jewelry sales represented 92% of worldwide net sales. Jewelry sales by product category were as follows:

(in millions)

2018
 
2017
 
$ Change
 
% Change
Jewelry collections
$
2,374.1

 
$
2,146.6

 
$
227.5

 
11
 %
Engagement jewelry
1,157.4

 
1,111.9

 
45.5

 
4

Designer jewelry
544.5

 
551.2

 
(6.7
)
 
(1
)

The increase in net sales of the Jewelry collections category was driven primarily by the Tiffany T collection, and to a lesser extent other collections, while the Engagement jewelry category reflected increases in band rings and diamond rings.

Changes in net sales by reportable segment were as follows:
(in millions)
Comparable Sales

 
Non-comparable Sales

 
Wholesale/
Other

 
Total

Americas
$
87.7

 
$
3.0

 
$
(1.3
)
 
$
89.4

Asia-Pacific
48.2

 
62.2

 
33.6

 
144.0

Japan
37.6

 
1.5

 
7.6

 
46.7

Europe
(10.1
)
 
24.7

 
0.8

 
15.4


In 2018, jewelry sales represented 88%, 98%, 92% and 96% of total net sales in the Americas, Asia-Pacific, Japan and Europe, respectively. Changes in jewelry sales relative to the prior year were as follows:
 
Average Price per Unit Sold
 
 
 
As Reported

 
Impact of Currency Translation

 
Number of
Units Sold

Change in Jewelry Sales
 
 
 
 
 
Americas
(2
)%
 
%
 
6
%
Asia-Pacific
12

 

 

Japan
1

 
1

 
8

Europe
(1
)
 
1

 
3


Americas. In 2018, total net sales increased $89.4 million, or 5%, which included comparable sales increasing $87.7 million, or 5%. Sales increased across most of the region, which management attributed to higher spending by local customers. On a constant-exchange-rate basis, total net sales and comparable sales increased 5%.

The increase in the number of jewelry units sold reflected increases across all product categories. Management attributed the decrease in the average price per jewelry unit sold to a shift in sales mix.

Asia-Pacific. In 2018, total net sales increased $144.0 million, or 13%, which included comparable sales increasing $48.2 million, or 5%. Total sales growth reflected increased retail sales in Greater China and most of the other countries in the region and an increase in wholesale travel retail sales in Korea. Management attributed the growth in the region to increased spending by local customers and foreign tourists. On a constant-exchange-rate basis, total net sales increased 13% and comparable sales increased 5%.


TIFFANY & CO.
K-33


Management attributed the increase in the average price per jewelry unit sold to greater growth in retail sales compared to wholesale sales in 2018 and to a shift in sales mix, which had an unfavorable effect on the number of units sold.

Japan. In 2018, total net sales increased $46.7 million, or 8%, which included comparable sales increasing $37.6 million, or 7%. Management attributed the sales increase in the region to higher spending by local customers and foreign tourists. On a constant-exchange-rate basis, total net sales increased 6% and comparable sales increased 5%.

The increase in the number of jewelry units sold primarily reflected increases in the Jewelry collections and the Engagement jewelry categories, partly offset by a decrease in the Designer jewelry category.

Europe. In 2018, total net sales increased $15.4 million, or 3%, which included comparable sales decreasing $10.1 million, or 2%. Sales results were varied by country, with higher spending attributed to local customers more than offsetting lower spending attributed to foreign tourists. Total net sales growth reflected the effect of new stores, while comparable sales reflected the negative effects from new stores on existing store sales. On a constant-exchange-rate basis, total net sales increased 2% and comparable sales decreased 3%.

The increase in the number of jewelry units sold reflected increases in the Jewelry collections and the Designer jewelry categories, partially offset by a decrease in the Engagement jewelry category.

Other. In 2018, total net sales decreased $23.2 million, or 20%, primarily due to a decrease in wholesale sales of diamonds and lower comparable sales.

Net Sales — 2017 compared with 2016. In 2017, worldwide net sales increased $168.0 million, or 4%, reflecting an increase in net sales in most reportable segments.

In 2017, jewelry sales represented 91% of worldwide net sales. Jewelry sales by product category were as follows:

(in millions)

2017
 
2016
 
$ Change
 
% Change
Jewelry collections
$
2,146.6

 
$
1,991.0

 
$
155.6

 
8
 %
Engagement jewelry
1,111.9

 
1,174.9

 
(63.0
)
 
(5
)
Designer jewelry
551.2

 
529.1

 
22.1

 
4


The increase in net sales of Jewelry collections was driven primarily by the Tiffany HardWear and Tiffany T collections, while the Engagement jewelry category reflected decreases across the category. The Designer jewelry category reflected increases across the category.

Changes in net sales by reportable segment were as follows:
(in millions)
Comparable Sales

 
Non-comparable Sales

 
Wholesale/
Other

 
Total

Americas
$
19.9

 
$
(0.8
)
 
$
9.9

 
$
29.0

Asia-Pacific
(6.2
)
 
38.8

 
63.3

 
95.9

Japan
(3.6
)
 
(2.5
)
 
(2.0
)
 
(8.1
)
Europe
(1.4
)
 
22.1

 
5.8

 
26.5


In 2017, jewelry sales represented 89%, 99%, 91% and 97% of total net sales in the Americas, Asia-Pacific, Japan and Europe, respectively. Changes in jewelry sales relative to the prior year were as follows:

TIFFANY & CO.
K-34


 
Average Price per Unit Sold
 
 
 
As Reported

 
Impact of Currency Translation

 
Number of
Units Sold

Change in Jewelry Sales
 
 
 
 
 
Americas
(4
)%
 
 %
 
5
 %
Asia-Pacific
(11
)
 
1

 
21

Japan

 
(3
)
 
(3
)
Europe
2

 
2

 
4


Americas. In 2017, total net sales increased $29.0 million, or 2%, which included comparable sales increasing $19.9 million, or 1%. Management attributed performance in this region to an increase in spending by local customers. On a constant-exchange-rate basis, total net sales increased 1% and comparable sales increased 1%.

The increase in the number of jewelry units sold reflected increases in the Jewelry collections and Designer jewelry categories. The decrease in average price per jewelry unit sold reflected decreases across all categories.

Asia-Pacific. In 2017, total net sales increased $95.9 million, or 10%, which included comparable sales decreasing $6.2 million, or 1%. Total net sales growth was due to increased wholesale sales, primarily in Korea, and the effect of new stores, while comparable store sales reflected growth in mainland China offset by declines in most other countries. Management attributed the declines in other Asia-Pacific countries partly to lower spending by Chinese tourists. On a constant-exchange-rate basis, total net sales increased 8% and comparable sales decreased 2%.

The increase in the number of jewelry units sold reflected increases in Jewelry collections and the Designer jewelry categories. Management attributed the decrease in the average price per jewelry unit sold to a shift in sales mix to the Jewelry collections and Designer jewelry categories that partly resulted from the increase in wholesale sales noted above.

Japan. In 2017, total net sales decreased $8.1 million, or 1%, which included comparable sales decreasing $3.6 million, or 1%. The sales declines reflected the negative effect of currency translation. On a constant-exchange-rate basis, total net sales increased 1% and comparable sales increased 2%.

The decrease in the number of jewelry units sold primarily reflected decreases in the Jewelry collections and the Designer jewelry categories, partly offset by increases in the Engagement jewelry category.

Europe. In 2017, total net sales increased $26.5 million, or 6%, which included comparable sales decreasing $1.4 million, each benefiting from the positive effect of currency translation. Total net sales growth also reflected the effect of new stores and e-commerce sales growth. Management attributed retail sales growth to higher spending by local customers. On a constant-exchange-rate basis, total net sales increased 3% while comparable sales decreased 2%, due to similar trends noted above.

The increase in the number of jewelry units sold reflected increases across all categories. Management attributed the increase in average price per unit sold to the positive effect of currency translation.

Other. In 2017, total net sales increased $24.7 million, or 26%, primarily due to an increase in wholesale sales of diamonds.

Store Data. In 2018, the Company increased gross retail square footage by 1%, net, through store openings, closings and relocations. The Company opened 10 stores and closed four: opening four in Asia-Pacific (three in China and one in Thailand), two in the Americas (one each in the U.S. and Latin America), two in Europe (one each in Germany and Denmark), one in Japan and one in the Emerging Markets, while closing two stores in the Americas (in the U.S.), one store in Asia-Pacific (in China) and one store in Europe (in Italy). In addition, the Company relocated 10 existing stores.

In 2017, the Company increased gross retail square footage by 3%, net, through store openings, closings and relocations. The Company opened nine stores and closed seven: opening five in Asia-Pacific (two in China, two in

TIFFANY & CO.
K-35


Australia and one in Korea), three in Europe (one each in Italy, Russia and the U.K.) and one in the Americas (in the U.S.) while closing three stores in Asia-Pacific (one each in China, Korea and Taiwan), two stores in the Americas (in the U.S.) and one each in Japan and the Emerging Markets. In addition, the Company relocated seven existing stores.

Sales per gross square foot generated by all company-operated stores were approximately $2,800 in 2018, $2,700 in 2017 and $2,700 in 2016.

Excluded from the store counts and sales per gross square foot amounts above are pop-up stores (stores with lease terms of 24 months or less).

Gross Margin
(in millions)
2018

 
2017

 
2016

Gross profit
$
2,811.0

 
$
2,610.7

 
$
2,499.0

Gross profit as a percentage of net sales
63.3
%
 
62.6
%
 
62.4
%

Gross margin (gross profit as a percentage of net sales) increased 70 basis points in 2018, largely reflecting favorable product input costs, a decrease in wholesale sales of diamonds and sales leverage on fixed costs, partially offset by the impact of an $8.5 million charge recorded in the third quarter of 2018 related to the bankruptcy filing of a metal refiner to which the Company entrusted precious scrap metal.

Gross margin increased 20 basis points in 2017 due to favorable product input costs, partly offset by the dilutive effects from increases in wholesale sales and in wholesale sales of diamonds, as well as increases in certain product-related costs, including inventory reserves and distribution and logistics.

Management periodically reviews and adjusts its retail prices when appropriate to address product input cost increases, specific market conditions and changes in foreign currencies/U.S. dollar relationships. Its long-term strategy is to continue that approach, although significant increases in product input costs or weakening foreign currencies can affect gross margin negatively over the short-term until management makes necessary price adjustments. 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 8. Financial Statements and Supplementary Data – Note H. Hedging Instruments"). Management increased retail prices in both 2018 and 2017 across most geographic regions and product categories, some of which were intended to mitigate the impact of foreign currency fluctuations.

Selling, General and Administrative Expenses
(in millions)
2018

 
2017

 
2016

As reported:
 
 
 
 
 
SG&A expenses
$
2,020.7

 
$
1,801.3

 
$
1,752.6

SG&A expenses as a percentage of net sales ("SG&A expense ratio")
45.5
%
 
43.2
%
 
43.8
%
Excluding other operating expenses*:
 
 
 
 
 
SG&A expenses
 
 
 
 
$
1,714.6

SG&A expense ratio
 
 
 
 
42.8
%
*See "Non-GAAP Measures" above for a description of such excluded operating expenses.
SG&A expenses increased $219.4 million, or 12%, in 2018, largely reflecting marketing and other strategic investment spending (that began in the second quarter of 2018), increased labor and incentive compensation costs and store occupancy and depreciation expenses. There was no significant effect on SG&A expense changes from foreign currency translation. SG&A expenses as a percentage of net sales increased 230 basis points compared to 2017, which included the impact of increased marketing and other strategic investment spending, which

TIFFANY & CO.
K-36


management believes are necessary to support long-term sales growth. Management intends to maintain such spending at these higher levels for the foreseeable future.

SG&A expenses increased $48.7 million, or 3%, in 2017. Excluding the 2016 items noted in "Non-GAAP Measures," SG&A expenses in 2017 increased $86.7 million, or 5% compared to 2016, largely reflecting increased store occupancy and depreciation expenses and labor and incentive compensation costs. There was no significant effect on SG&A expense changes from foreign currency translation.

The Company's SG&A expenses are largely fixed or controllable in nature (including, but not limited to, marketing costs, employees' salaries and benefits, fixed store rent and depreciation expenses), with the total of such costs representing approximately 80 - 85% of total SG&A expenses, and the remainder comprised of variable items (including, but not limited to, variable store rent, sales commissions and fees paid to credit card companies).

Earnings from Operations
(in millions)
2018

 
2017

 
2016

As reported:
 
 
 
 
 
Earnings from operations
$
790.3

 
$
809.4

 
$
746.4

Operating margin
17.8
%
 
19.4
%
 
18.7
%
Excluding other operating expenses*:
 
 
 
 
 
Earnings from operations
 
 
 
 
$
784.4

Operating margin
 
 
 
 
19.6
%
*See "Non-GAAP Measures" above for a description of such excluded operating expenses.
Earnings from operations decreased $19.1 million, or 2% in 2018 and operating margin decreased 160 basis points, reflecting an increase in gross margin, which was more than offset by a higher SG&A expense ratio.

Earnings from operations increased $63.0 million, or 8% in 2017 and operating margin increased 70 basis points, which reflected impairment charges recorded in 2016 (see "Non-GAAP Measures"). When excluding such charges, the decrease in operating margin in 2017 resulted from a higher SG&A expense ratio, partly offset by a higher gross margin.

TIFFANY & CO.
K-37


Results by segment were as follows:
(in millions)
2018

 
% of Net
Sales

 
2017

 
% of Net
Sales

 
2016

 
% of Net
Sales

Earnings from operations*:
 
 
 
 
 
 
 
 
 
 
Americas
$
386.7

 
19.7
 %
 
$
399.0

 
21.3
 %
 
$
387.9

 
21.1
 %
Asia-Pacific
311.5

 
25.1

 
287.7

 
26.3

 
258.4

 
25.9

Japan
237.2

 
36.9

 
209.3

 
35.1

 
208.1

 
34.4

Europe
86.2

 
17.1

 
90.4

 
18.5

 
85.9

 
18.6

Other
(6.4
)
 
(6.7
)
 
3.6

 
3.0

 
4.0

 
4.3

 
1,015.2

 
 
 
990.0

 
 
 
944.3

 
 
Unallocated corporate
expenses
(224.9
)
 
(5.1
)%
 
(180.6
)
 
(4.3
)%
 
(159.9
)
 
(4.0
)%
Earnings from operations before other operating expenses
790.3

 
17.8
 %
 
809.4

 
19.4
 %
 
784.4

 
19.6
 %
Other operating expenses

 
 
 

 
 
 
(38.0
)
 
 
Earnings from operations
$
790.3

 
17.8
 %
 
$
809.4

 
19.4
 %
 
$
746.4

 
18.7
 %
*
Percentages represent earnings from operations as a percentage of each segment's net sales.
On a segment basis, the ratio of earnings from operations to each segment's net sales in 2018 compared with 2017 was as follows:
Americas – the ratio decreased 160 basis points due to an increase in Selling, general and administrative expenses, including increased marketing and other strategic investment spending and sales deleverage on operating expenses;
Asia-Pacific – the ratio decreased 120 basis points due to an increase in Selling, general and administrative expenses, including increased marketing and other strategic investment spending, partly offset by an increase in gross margin;
Japan – the ratio increased 180 basis points due to an increase in gross margin (which included the effect of changes in foreign currency exchange rates on inventory purchases), as well as the impact of sales leverage on operating expenses; and
Europe – the ratio decreased 140 basis points due to an increase in Selling, general and administrative expenses, including increased marketing and other strategic investment spending, partly offset by an increase in gross margin.

On a segment basis, the ratio of earnings from operations to each segment's net sales in 2017 compared with 2016 was as follows:
Americas – the ratio increased 20 basis points due to an improvement in gross margin, partly offset by sales deleverage on operating expenses;
Asia-Pacific – the ratio increased 40 basis points due to sales leverage on operating expenses, partly offset by a decrease in gross margin, both attributable to increased wholesale sales in the region;
Japan – the ratio increased 70 basis points due to an increase in gross margin (which included the effect of changes in foreign currency exchange rates on inventory purchases), partly offset by sales deleverage on operating expenses; and
Europe – the ratio decreased 10 basis points due to sales deleverage on operating expenses, partly offset by an increase in gross margin.


TIFFANY & CO.
K-38


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. Unallocated corporate expenses increased by $44.3 million in 2018 due to (i) increased costs associated with upgrades to the Company's information technology systems, (ii) an $8.5 million charge recorded in the third quarter of 2018 related to the bankruptcy filing of a metals refiner to which the Company entrusted precious scrap metal, and (iii) increased incentive compensation expense. Such expenses increased $20.7 million in 2017, primarily due to an increase in charitable donations to the Tiffany & Co. Foundation, a private foundation organized to support 501(c)(3) charitable organizations, increased costs associated with upgrades to the Company's information technology systems and higher severance costs associated with changes in corporate management.

Interest Expense and Financing Costs

Interest expense and financing costs decreased $2.3 million, or 5%, in 2018 and $4.0 million, or 9%, in 2017.

Other Expense, Net

Other expense, net includes the non-service cost components of net periodic benefit cost, interest income and gains/losses on investment activities and foreign currency transactions. Other expense, net was $7.1 million in 2018, $6.9 million in 2017 and $23.8 million in 2016. The $16.9 million decrease in Other expense, net in 2017 compared to 2016 was primarily due to a decrease in the non-service cost components of net periodic benefit cost and due to increases in gains on sales of marketable securities and interest income.

Provision for Income Taxes

The effective income tax rate was 21.1% in 2018, compared with 51.3% in 2017 and 34.1% in 2016. The effective income tax rate in 2017 reflected the impact of a $146.2 million net charge, or $1.17 per diluted share, related to the enactment of the 2017 Tax Act in December 2017. Excluding this net charge, the effective income tax rate was 32.1% in 2017 (see "Non-GAAP Measures").
The effective income tax rate in 2018 of 21.1% benefited from the favorable impact of the 2017 Tax Act, including the reduction of the U.S. statutory income tax rate to 21% and the introduction of the Foreign Derived Intangible Income deduction. In addition, the effective income tax rate in 2018 was decreased by 210 basis points due to benefits of $15.9 million, or $0.13 per diluted share, recorded in 2018 to adjust charges related to the 2017 Tax Act that were recorded in 2017 and are described below.
The effective income tax rate in 2017 of 51.3% differed from the effective income tax rate in 2016 of 34.1% primarily due to the $146.2 million net charge referenced above. The effective income tax rate in 2017 also differed from 2016 as a result of an increase in the domestic manufacturing deduction, the implementation of ASU 2016-09, which requires excess tax benefits and/or shortfalls related to exercises and vesting of share-based compensation to be recorded in the provision for income taxes rather than in additional paid in capital and lower state taxes, partially offset by the impact of a change in uncertain tax positions primarily attributable to the conclusion of a tax examination during the first quarter of 2016.
On December 22, 2017, the 2017 Tax Act was enacted in the U.S. This enactment resulted in a number of significant changes to U.S. federal income tax law for U.S. taxpayers. On the same date, the SEC issued Staff Accounting Bulletin No. 118 ("SAB 118"), which addressed the application of U.S. GAAP in situations in which a registrant did not have necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. Changes in tax law are accounted for in the period of enactment. As such, the Company's 2017 consolidated financial statements reflected the estimated immediate tax effect of the 2017 Tax Act. See "Item 8. Financial Statements and Supplementary Data - Note N. Income Taxes" for additional information on the provisions and impacts of the 2017 Tax Act and SAB 118.

The net charge of $146.2 million recognized in 2017 related to the enactment of the 2017 Tax Act consisted of:
Estimated tax expense of $94.8 million, or $0.76 per diluted share, for the impact of the reduction in the U.S. statutory income tax rate on the Company’s deferred tax assets and liabilities,


TIFFANY & CO.
K-39


Estimated tax expense of $56.0 million, or $0.45 per diluted share, for the one-time transition tax effected via a mandatory deemed repatriation of post-1986 undistributed foreign earnings and profits ("Transition Tax"), and

A tax benefit of $4.6 million, or $0.04 per diluted share, resulting from the effect of the 21% statutory income tax rate for the month of January 2018 on the Company’s annual statutory income tax rate for the year ended January 31, 2018. Because the Company’s fiscal year ended on January 31, 2018, the Company’s statutory income tax rate for fiscal 2017 was 33.8%, rather than 35.0%.

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 priorities. 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.

At January 31, 2019, the Company's cash and cash equivalents totaled $792.6 million, of which approximately 25% was held in locations outside the U.S. where the Company has determined to maintain its assertion to indefinitely reinvest undistributed earnings to support its continued expansion and investments in such foreign locations. To the extent the Company were to repatriate such funds, it may incur withholding taxes, state income taxes and the tax expense or benefit associated with foreign currency gains or losses. The Company believes it has sufficient sources of cash in the U.S. to fund its U.S. operations without the need to repatriate those funds held outside the U.S. See "Item 8. Financial Statements and Supplementary Data - Note N. Income Taxes" for additional information. In addition, the Company had Short-term investments of $62.7 million at January 31, 2019.

The following table summarizes cash flows from operating, investing and financing activities:
(in millions)
2018

 
2017

 
2016

Net cash provided by (used in):
 
 
 
 
 
Operating activities
$
531.8

 
$
932.2

 
$
705.7

Investing activities
(29.9
)
 
(481.1
)
 
(236.8
)
Financing activities
(674.3
)
 
(421.1
)
 
(386.4
)
Effect of exchange rate changes on cash and cash equivalents
(5.7
)
 
12.7

 
1.9

Net increase in cash and cash equivalents
$
(178.1
)
 
$
42.7

 
$
84.4


Operating Activities

The Company had net cash inflows from operating activities of $531.8 million in 2018, $932.2 million in 2017 and $705.7 million in 2016. The decrease in 2018 compared to 2017 primarily reflected increases in inventory purchases and cash payments for income taxes. The increase in 2017 compared to 2016 reflected more effective management and timing of payables and reduced payments for income taxes, partly offset by increased inventory purchases. Additionally, the Company made a $120.0 million voluntary contribution to its U.S. pension plan in 2016.

Working Capital. Working capital (current assets less current liabilities) decreased to $3.0 billion at January 31, 2019 from $3.3 billion at January 31, 2018.

Accounts receivable, net at January 31, 2019 were 6% higher than at January 31, 2018.

Inventories, net at January 31, 2019 were 8% higher than at January 31, 2018, which primarily reflected an increase in finished goods inventories. Currency translation had the effect of decreasing Inventories, net by 3% from January 31, 2018.

TIFFANY & CO.
K-40



Accounts payable and accrued liabilities at January 31, 2019 were 17% higher than at January 31, 2018, partly reflecting the receipt of an advance payment of $31.1 million during 2018 related to the previous acquisition of the premises containing one of the Company's leased retail stores and an administrative office under compulsory acquisition laws in Australia (see "Item 8. Financial Statements and Supplementary Data – Note J. Commitments and Contingencies" for additional information).

Investing Activities

The Company had net cash outflows from investing activities of $29.9 million in 2018, $481.1 million in 2017 and $236.8 million in 2016. The decrease in net cash outflows in 2018 compared to 2017 was driven by net cash flows resulting from purchases and sales of marketable securities and short-term investments. The increase in net cash outflows in 2017 compared to 2016 was driven by increased net purchases of marketable securities and short-term investments.

Marketable Securities and Short-Term Investments. The Company invests a portion of its cash in marketable securities and short-term investments. The Company had $240.0 million of net sales of marketable securities and short-term investments during 2018, compared with net purchases of marketable securities and short-term investments of $246.6 million in 2017 and $15.7 million in 2016.

Capital Expenditures. Capital expenditures are typically related to the opening, renovation and/or relocation of stores (which represented approximately 60% of capital expenditures in 2018, 2017 and 2016), as well as distribution and manufacturing facilities and ongoing investments in information technology. Capital expenditures were $282.1 million in 2018, $239.3 million in 2017 and $222.8 million in 2016, representing 6% of worldwide net sales in each year.

The Company currently anticipates capital expenditures to be 7 - 9% of worldwide net sales during the fiscal years 2019 through 2021, which includes the expected expenditures for the renovation of its New York Flagship store. Additionally, the renovation of the New York Flagship store is expected to lower diluted earnings per share by approximately $0.10 - $0.15 in fiscal years 2019 through 2021 due to accelerated depreciation charges related to the existing store, preliminary development costs and the incremental costs associated with renting and fitting out the adjacent space that will be utilized to minimize disruptions during the renovation period. Following the completion of this renovation project, the Company currently anticipates capital expenditures returning to historical levels as a percentage of worldwide net sales.

Financing Activities

The Company had net cash outflows from financing activities of $674.3 million in 2018, $421.1 million in 2017 and $386.4 million in 2016.


TIFFANY & CO.
K-41


Borrowings. The Company had net (repayments of) proceeds from short-term and long-term borrowings as follows:
(in millions)
2018

 
2017

 
2016

Short-term borrowings:
 
 
 
 
 
 (Repayments of) proceeds from credit facility borrowings, net
$
(18.4
)
 
$
(67.8
)
 
$
14.2

Proceeds from other credit facility borrowings
49.3

 
39.2

 
76.8

Repayments of other credit facility borrowings
(32.0
)
 
(96.1
)
 
(83.1
)
Net (repayments of) proceeds from short-term borrowings
(1.1
)
 
(124.7
)
 
7.9

Long-term borrowings:
 
 
 
 
 
Proceeds from the issuance of long-term debt

 

 
98.1

Repayment of long-term debt

 

 
(97.1
)
Net proceeds from long-term borrowings

 

 
1.0

Net (repayments of) proceeds from total borrowings
$
(1.1
)
 
$
(124.7
)
 
$
8.9


Credit Facilities. On October 25, 2018, the Registrant, along with certain of its subsidiaries designated as borrowers thereunder, entered into a five-year multi-bank, multi-currency committed unsecured revolving credit facility, including a letter of credit subfacility, consisting of basic commitments in an amount up to $750.0 million (which commitments may be increased, subject to certain conditions and limitations, at the request of the Registrant) (the “Credit Facility”). The Credit Facility replaced the Registrant’s previously existing $375.0 million four-year unsecured revolving credit facility and $375.0 million five-year unsecured revolving credit facility, which were each terminated and repaid in connection with the Registrant’s entry into the Credit Facility.

The Credit Facility matures in 2023, provided that such maturity may be extended for one or two additional one-year periods at any time with the consent of the applicable lenders, as further described in the agreement governing such facility.

Commercial Paper. In August 2017, the Registrant and one of its wholly owned subsidiaries established a commercial paper program (the "Commercial Paper Program") for the issuance of commercial paper in the form of short-term promissory notes in an aggregate principal amount not to exceed $750.0 million. Borrowings under the Commercial Paper Program may be used for general corporate purposes. The aggregate amount of borrowings that the Company is currently authorized to have outstanding under the Commercial Paper Program and the Registrant's Credit Facility is $750.0 million. The Registrant guarantees the obligations of its wholly owned subsidiary under the Commercial Paper Program. Maturities of commercial paper notes may vary, but cannot exceed 397 days from the date of issuance. Notes issued under the Commercial Paper Program rank equally with the Registrant's present and future unsecured and unsubordinated indebtedness.

Other Credit Facilities. In 2016, the Registrant's wholly owned subsidiary, Tiffany & Co. (Shanghai) Commercial Company Limited, entered into a three-year multi-bank revolving credit agreement (the "Tiffany-Shanghai Credit Agreement"). The Tiffany-Shanghai Credit Agreement has an aggregate borrowing limit of RMB 990.0 million ($147.4 million at January 31, 2019) and matures in July 2019.

The weighted-average interest rate for borrowings outstanding under all the Company's credit facilities was 3.69% at January 31, 2019 and 4.35% at January 31, 2018.

Senior Notes. In August 2016, the Registrant issued ¥10.0 billion ($91.8 million at January 31, 2019) of 0.78% Senior Notes due August 2026 (the "Yen Notes") in a private transaction. The Yen Notes bear interest at a rate of 0.78% per annum, payable semi-annually on February 26 and August 26 of each year, commencing February 26, 2017. The proceeds from the issuance of the Yen Notes were used to repay the Registrant's ¥10.0 billion 1.72% Senior Notes due September 2016 upon the maturity thereof.

The ratio of total debt (short-term borrowings and long-term debt) to stockholders' equity was 32% at January 31, 2019 and 31% at January 31, 2018.


TIFFANY & CO.
K-42


At January 31, 2019, the Company was in compliance with all debt covenants.

For additional information regarding all of the Company's credit facilities, senior note issuances and other outstanding indebtedness, see "Item 8. Financial Statements and Supplementary Data - Note G. Debt."

In May 2018, the Registrant's Board of Directors approved a new share repurchase program (the "2018 Program"). The 2018 Program, which became effective June 1, 2018 and expires on January 31, 2022, authorizes the Company to repurchase up to $1.0 billion of its Common Stock through open market transactions, including through Rule 10b5-1 plans and one or more accelerated share repurchase ("ASR") or other structured repurchase transactions, and/or privately negotiated transactions. Purchases under this program are discretionary and will be made from time to time based on market conditions and the Company's liquidity needs. The Company may fund repurchases under the 2018 Program from existing cash at such time or from proceeds of any existing borrowing facilities at such time and/or the issuance of new debt. The 2018 Program replaced the Company's previous share repurchase program approved in January 2016 (the "2016 Program"), under which the Company was authorized to repurchase up to $500.0 million of its Common Stock. At the time of termination, $154.9 million remained available for repurchase under the 2016 Program. As of January 31, 2019, $635.0 million remained available under the 2018 Program.

During the second quarter of 2018, the Company entered into ASR agreements with two third-party financial institutions to repurchase an aggregate of $250.0 million of its Common Stock. The ASR agreements were entered into under the 2018 Program. Pursuant to the ASR agreements, the Company made an aggregate payment of $250.0 million from available cash on hand in exchange for an initial delivery of 1,529,286 shares of its Common Stock. Final settlement of the ASR agreements was completed in July 2018, pursuant to which the Company received an additional 353,112 shares of its Common Stock.  In total, 1,882,398 shares of the Company's Common Stock were repurchased under these ASR agreements at an average cost per share of $132.81 over the term of the agreements.

The Company's share repurchase activity was as follows:
 
(in millions, except per share amounts)
2018

 
2017

 
2016

Cost of repurchases
$
421.4

 
$
99.2

 
$
183.6

Shares repurchased and retired
3.5

 
1.0

 
2.8

Average cost per share
$
121.28

 
$
94.86

 
$
65.24


Proceeds from exercised stock options. The Company's proceeds from exercised stock options were $23.1 million, $54.6 million and $15.3 million in 2018, 2017 and 2016, respectively.

Dividends. The cash dividend on the Company's Common Stock was increased once in each of 2018, 2017 and 2016. The Company's Board of Directors declared quarterly dividends which totaled $2.15, $1.95 and $1.75 per common share in 2018, 2017 and 2016, respectively, with cash dividends paid of $263.8 million, $242.6 million and $218.8 million in those respective years. The dividend payout ratio (dividends as a percentage of net earnings) was 45%, 66% and 49% in 2018, 2017 and 2016, respectively. Dividends as a percentage of adjusted net earnings (see "Non-GAAP Measures") were 47% in 2017 and 2016.

At least annually, the Company's Board of Directors reviews its policies with respect to dividends and share repurchases with a view to actual and projected earnings, cash flows and capital requirements.

Financing Arrangements with Diamond Mining and Exploration Companies

The Company previously provided financing to diamond mining and exploration companies in order to obtain rights to purchase the output from mines owned by these companies. The Company recorded impairment charges totaling $12.6 million during 2016 related to such loans receivable from two diamond mining and exploration companies (see "Item 8. Financial Statements and Supplementary Data - Note B. Summary of Significant Accounting Policies”).


TIFFANY & CO.
K-43


Information Systems Assessment

The Company is engaged in a multi-year program to upgrade and/or replace certain of its information systems. As part of this program, the Company concluded that the development of a previous system originally intended to deliver enhanced finished goods inventory management and merchandising capabilities would instead be delivered through further development of the Company’s Enterprise Resource Planning system and the continued implementation of a new order management system. Accordingly, the Company evaluated the costs capitalized in connection with the development of the previous system for impairment in accordance with its policy on the review of long-lived assets (see "Item 8. Financial Statements and Supplementary Data - Note B. Summary of Significant Accounting Policies” and “Note E. Property, Plant and Equipment") and recorded a related pre-tax impairment charge of $25.4 million within SG&A during 2016. The multi-year program is ongoing and, as previously disclosed, may require significant capital expenditures and dedication of resources in both current and future periods.

Contractual Cash Obligations and Commercial Commitments

The following is a summary of the Company's contractual cash obligations at January 31, 2019:
(in millions)
Total

2019

2020-2021

2022-2023

Thereafter

Unrecorded contractual obligations:
 
 
 
 
Operating leases a
$
1,507.0

$
292.8

$
452.0

$
324.2

$
438.0

Inventory purchase obligations b
283.9

283.9




Interest on debt c
592.8

35.9

71.8

68.6

416.5

Other contractual obligations d
113.8

72.1

21.7

2.7

17.3

Recorded contractual obligations:
 
 
 
 
 
Short-term borrowings
113.4

113.4




Long-term debt e
891.8



50.0

841.8

 
$
3,502.7

$
798.1

$
545.5