TIFFANY & CO. MERGER AGREEMENT
OnOctober 28, 2020 ,Tiffany & Co. (the "Registrant") entered into an Amended and Restated Agreement and Plan of Merger (the "Merger Agreement") by and among the Registrant, LVMH Moët Hennessy - Louis Vuitton SE, a societas Europaea (European company) organized under the laws ofFrance ("Parent"),Breakfast Holdings Acquisition Corp. , aDelaware corporation and a wholly owned subsidiary of Parent ("Holding"), andBreakfast Acquisition Corp. , aDelaware corporation and a wholly owned subsidiary of Holding ("Merger Sub"). The Merger Agreement amends and restates the Agreement and Plan of Merger, dated as ofNovember 24, 2019 (the "Original Merger Agreement"), by and among the Registrant, Parent, Holding and Merger Sub, in its entirety, on the terms and subject to the conditions set forth therein. Pursuant to the Merger Agreement, Merger Sub will be merged with and into the Registrant (the "Merger"), with the Registrant continuing as the surviving company in the Merger and a wholly owned indirect subsidiary of Parent. Additional information about to the Merger Agreement is set forth in the Registrant's Preliminary Proxy Statement on Schedule 14A filed with theU.S. Securities and Exchange Commission (the "SEC") onNovember 16, 2020 and "Item 1. Financial Statements - Note 2. Merger Agreement."
NOVEL CORONAVIRUS
An outbreak of a novel strain of the coronavirus, COVID-19, was identified inChina inDecember 2019 and was subsequently recognized as a pandemic by theWorld Health Organization inMarch 2020 . This COVID-19 outbreak has severely restricted the level of economic activity around the world. In addition to travel restrictions put in place in early 2020 in response to COVID-19, governments have closed borders, imposed prolonged quarantines and have continued or reinstated those measures or implemented other restrictions and requirements in light of the continuing or renewed spread of COVID-19 and concern of additional waves of outbreaks and may continue to take these and other actions in the future. As a result of the COVID-19 outbreak, a substantial number of the Company's retail stores was closed for some portion of time in the nine months endedOctober 31, 2020 . Company retail store closures peaked at approximately 75% to 80% of the Company's retail stores worldwide during the month of April. However, the Company gradually reopened many of its stores throughout the three months endedJuly 31, 2020 , in accordance with applicable guidelines established by local governments. As ofJuly 31, 2020 and throughOctober 31, 2020 , substantially all of the Company's retail stores worldwide were fully or partially opened, in accordance with applicable guidelines established by local governments. In response to new restrictions and requirements implemented in lateOctober 2020 andNovember 2020 in certain European countries as a result of increased COVID-19 infection rates, the Company has temporarily closed certain of its retail stores in that region. As ofNovember 20, 2020 , approximately 60% of the Company's retail stores inEurope were temporarily closed in accordance with the applicable guidelines established by local governments. Substantially all of the Company's stores in its other regions remained fully or partially open as of that date. However, a continued increase in the number of COVID-19 cases in other countries in which the Company operates its retail stores could lead to additional store closures during the three months endingJanuary 31, 2021 (the "fourth quarter"), which could have a significant negative impact on the Company's business, sales, cash flows and results of operations in that period. For the three and nine months endedOctober 31, 2020 , the Company's worldwide net sales declined 1% and 25%, respectively, compared to the prior year, with the decrease in the year-to-date due to the negative global impact of COVID-19. Although the Company continues to experience decreased customer traffic and retail sales in many of its retail locations as compared to corresponding periods in the prior year, the Company has continued to benefit from increased sales both in Mainland China and its global e-commerce business during these periods. For example, total sales in Mainland China, the first market impacted by COVID-19, increased approximately 70% and 50% for the three and nine months endedOctober 31, 2020 , as compared to the corresponding periods in the prior year. The Company's worldwide e-commerce sales increased 92% and 81% during the three and nine months endedOctober 31, 2020 , respectively, and represented approximately 12% of its total net sales during the nine months endedOctober 31, 2020 , versus 6% in each of the last three full fiscal years. The Company's current expectations for the fourth quarter now include a modest decline in total net sales and strong growth in operating earnings and diluted earnings per share, relative to the same period in the prior year. The Company's earnings expectations for the fourth quarter exclude certain costs that it will incur upon the closing of theTIFFANY & CO. 36 -------------------------------------------------------------------------------- Table of Contents pending Merger, as the parties to the pending Merger have not yet established a date on which that transaction will be completed. These expenses, which are expected to be significant, primarily include advisor fees and expenses related to the vesting of outstanding stock-based awards. Additional information about these advisor fees, the vesting of outstanding stock-based awards and the Merger Agreement is set forth in the Registrant's Preliminary Proxy Statement on Schedule 14A filed with theU.S. Securities and Exchange Commission (the "SEC") onNovember 16, 2020 and in "Item 1. Financial Statements - Note 2. Merger Agreement." In light of the impact of COVID-19, the Company continues to review and carefully manage its operating expenses and eliminate certain non-essential spending. As part of these efforts, the Company has negotiated, and continues to negotiate, with its landlords for rent concessions principally under leases for retail stores. The Company has also continued to pay its employees, although at a reduced level after a period of time for certain employees in locations impacted by COVID-19who cannot work from home, and has not taken action to reduce its workforce in connection with COVID-19. In response to the COVID-19 outbreak, the Company has also taken steps to further strengthen its financial position and balance sheet, and to maintain flexibility with respect to its liquidity sources and provide additional financial maintenance covenant headroom. See "Liquidity and Capital Resources" below for additional information. The extent to which the COVID-19 outbreak will continue to impact the Company's business operations, financial results, and liquidity will depend on numerous factors that the Company may not be able to accurately predict or assess due to their dynamic and evolving nature (including the duration and scope of the COVID-19 outbreak, including additional waves caused by additional periods of increases or spikes in the number of COVID-19 cases); the possibility of future mutations or outbreaks of related strains of the virus in areas in which the Company operates; whether a vaccine or cure that mitigates the effect of the virus will be synthesized, and, if so, when such vaccine or cure will be ready for public use; the extent of the protective and preventative measures that have been or will be put in place by both governmental entities and other businesses; whether the virus's impact will be seasonal; the negative impact the outbreak has on global and regional economies and economic activity, including the duration and magnitude of its impact on consumer discretionary spending and levels of consumer confidence; and how quickly economies recover after the COVID-19 outbreak subsides. Accordingly, management cannot predict with certainty for how long and to what extent the COVID-19 outbreak will impact its business operations or the global economy as a whole. See "Part II - Other Information. Item1A. Risk Factors" for additional information. The Company will continue to take steps to mitigate the potential risks posed by the spread and related circumstances and impacts of COVID-19. The Company's management also remains focused on addressing the challenges presented by COVID-19 by preserving the Company's liquidity and managing its cash flows with preemptive actions such as those described above. Despite the aforementioned challenges, the Company intends to continue to execute on its strategic plans and operational initiatives during this outbreak. However, the uncertainties associated with the protective and preventative measures put in place or recommended by both governmental entities and other businesses, among other uncertainties, will likely result in delays or modifications to these plans and initiatives.
OVERVIEW
The Registrant is a holding company that operates throughTiffany and Company ("Tiffany") and the Registrant's other subsidiary companies (collectively, the "Company"). The Registrant, through its subsidiaries, designs and manufactures products and operatesTIFFANY & CO. retail stores worldwide, and also sells its products through Internet, catalog, business-to-business and wholesale operations. The Company's principal merchandise offering is jewelry (representing 92% of worldwide net sales in the fiscal year endedJanuary 31, 2020 ); it also sells watches, home and accessories products and fragrances.
The Company's reportable segments are as follows:
•Americas includes sales in 122 Company-operatedTIFFANY & CO. stores inthe United States ("U.S."),Canada andLatin America , as well as sales ofTIFFANY & CO. products in certain markets through Internet, catalog, business-to-business and wholesale operations; •Asia-Pacific includes sales in 87 Company-operatedTIFFANY & CO. stores, as well as sales ofTIFFANY & CO. products in certain markets through Internet, business-to-business and wholesale operations;TIFFANY & CO. 37 -------------------------------------------------------------------------------- Table of Contents •Japan includes sales in 59 Company-operatedTIFFANY & CO. stores, as well as sales ofTIFFANY & CO. products through Internet, business-to-business and wholesale operations;
•Europe includes sales in 47 Company-operated
•Other consists of all non-reportable segments. Other includes the Emerging Markets region, which includes sales in five Company-operatedTIFFANY & CO. stores and wholesale operations in theMiddle East . In addition, Other includes wholesale sales of diamonds as well as earnings received from third-party licensing agreements.
SUMMARY OF THIRD QUARTER AND YEAR-TO-DATE RESULTS
•Worldwide net sales decreased 1% to$1,008.2 million in the three months ("third quarter") and 25% to$2,310.8 million in the nine months ("year-to-date") endedOctober 31, 2020 , which, in the year-to-date, management attributed to the effects of COVID-19 as described above under "Novel Coronavirus"; comparable sales increased 3% in the third quarter and decreased 22% in the year-to-date. On a constant-exchange-rate basis (see "Non-GAAP Measures" below), worldwide net sales decreased 2% in the third quarter and 24% in the year-to-date, while comparable sales increased 1% in the third quarter and decreased 21% in the year-to-date. •Net earnings increased 52% to$119.0 million , or$0.98 per diluted share, in the third quarter from$78.4 million , or$0.65 per diluted share, in the prior year. Net earnings in the third quarter of 2020 also included the impact of costs related to the pending Merger, as described below under "Non-GAAP Measures." Excluding these costs, Net earnings increased 73% to$135.5 million , or$1.11 per diluted share, in the third quarter of 2020 compared to the prior year. •Net earnings decreased 75% to$86.3 million , or$0.71 per share, in the year-to-date compared with$339.9 million , or$2.80 per diluted share, in the prior year. Net earnings in the year-to-date of 2020 also included the impact of costs related to the pending Merger, as well as the compensation received in respect of the previous acquisition of the premises containing one of the Company's leased retail stores and an administrative office inSydney, Australia under compulsory acquisition laws inAustralia , and a charitable contribution to TheTiffany & Co. Foundation, as described below under "Non-GAAP Measures." Excluding these items, Net earnings decreased 68% to$110.1 million , or$0.90 per diluted share, in the year-to-date of 2020 compared to the prior year.
•Inventories, net decreased 4% from
TIFFANY & CO. 38 --------------------------------------------------------------------------------
Table of Contents RESULTS OF OPERATIONS Non-GAAP Measures The Company reports information in accordance withU.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.Net Sales . The Company's reported net sales reflect either a translation-related benefit from strengthening foreign currencies or a detriment from a strengtheningU.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 theU.S. intoU.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 intoU.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 tables reconcile the sales percentage increases (decreases) from the GAAP to the non-GAAP basis versus the previous year: Third Quarter 2020 vs. 2019 Year-to-date 2020 vs. 2019 Constant- Constant- GAAP Translation Exchange- GAAP Translation Exchange- Reported Effect Rate Basis Reported Effect Rate BasisNet Sales : Worldwide (1) % 1 % (2) % (25) % (1) % (24) % Americas (16) (1) (15) (36) (1) (35) Asia-Pacific 30 4 26 (7) (1) (6) Japan (8) 1 (9) (25) 1 (26) Europe (6) 3 (9) (24) - (24) Other (30) - (30) (59) - (59) Comparable Sales: Worldwide 3 % 2 % 1 % (22) % (1) % (21) % Americas (15) (1) (14) (35) (1) (34) Asia-Pacific 40 4 36 3 - 3 Japan (4) 1 (5) (23) 1 (24) Europe (6) 3 (9) (25) - (25) Other (7) - (7) (31) - (31) TIFFANY & CO. 39
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Third Quarter 2020 vs. 2019 Year-to-date 2020 vs. 2019
Constant- Constant-
GAAP Translation Exchange- GAAP Translation Exchange-
Reported Effect Rate Basis Reported Effect Rate Basis
Jewelry sales by product
category:
Jewelry collections 7 % 2 % 5 % (21) % (1) % (20) %
Engagement jewelry (6) 1 (7) (28) - (28)
Designer jewelry (6) 1 (7) (23) 1 (24)
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:
Charges related to
(in millions, except per share amounts) GAAP the pending Merger a Non-GAAP
Three Months Ended October 31, 2020
Gross Profit $ 643.5 $ 0.4 $ 643.9
As a % of sales 63.8 % - % 63.9 %
Selling, general & administrative ("SG&A") 478.5 (18.0) 460.5
expenses
As a % of sales 47.5 % (1.8) % 45.7 %
Earnings from operations 165.0 18.4 183.4
As a % of sales 16.4 % 1.8 % 18.2 %
Provision for income taxes b 29.6 1.9 31.5
Net earnings 119.0 16.5 135.5
Diluted earnings per share 0.98 0.14 1.11
aCosts recorded in the third quarter of 2020 related to the pending Merger. See "Item 1. Financial Statements - Note 2. Merger Agreement" for additional information.
bThe income tax effect resulting from the adjustments has been calculated as
both current and deferred tax expense, based upon the tax laws and statutory
income tax rates applicable in the tax jurisdiction(s) of the underlying
adjustment.
TIFFANY & CO.
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Sydney, Australia
Recovery and
(in millions, except per share Charges related to Charitable
amounts) GAAP the pending Merger c Contribution d Non-GAAP Nine Months Ended October 31, 2020 Gross Profit$ 1,414.1 $ 1.3 $ -$ 1,415.4 As a % of sales 61.2 % 0.1 % - % 61.3 % SG&A expenses 1,294.9 (41.7) (12.0) 1,241.2 As a % of sales 56.0 % (1.8) % (0.5) % 53.7 % Earnings from operations 119.2 43.0 12.0 174.2 As a % of sales 5.2 % 1.9 % 0.5 % 7.5 % Other expense (income), net (20.6) - 31.4 10.8 Provision for income taxes e 21.9 4.3 (4.5) 21.7 Net Earnings 86.3 38.7 (14.9) 110.1 Diluted earnings per share 0.71 0.32 (0.12) 0.90
c Costs recorded in the year-to-date of 2020 related to the pending Merger. See "Item 1. Financial Statements - Note 2. Merger Agreement" for additional information.
d Recognition of (i) a pre-tax gain of$31.4 million related to amounts received as compensation for the previous acquisition of the premises containing one of the Company's leased retail stores and an administrative office inSydney, Australia under compulsory acquisition laws in that country and (ii) a pre-tax expense of$12.0 million for a charitable contribution to TheTiffany & Co. Foundation funded in the first quarter of 2020 in connection with the compensation referenced above. See "Item 1. Financial Statements - Note 12. Commitments and Contingencies" for additional information on the compulsory acquisition matter. e The income tax effect resulting from the adjustments has been calculated as both current and deferred tax expense (benefit), based upon the tax laws and statutory income tax rates applicable in the tax jurisdiction(s) of the underlying adjustment. 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.TIFFANY & CO. 41
-------------------------------------------------------------------------------- Table of ContentsNet Sales
Net sales by segment were as follows:
Third Quarter Year-to-date
(in millions) 2020 2019 Increase/(Decrease) 2020 2019 Increase/(Decrease)
Americas $ 354.4 $ 422.5 (16) % $ 826.2 $ 1,283.6 (36) %
Asia-Pacific 381.7 294.1 30 854.3 915.8 (7)
Japan 155.7 169.3 (8) 353.1 469.3 (25)
Europe 104.2 111.3 (6) 249.3 330.0 (24)
Other 12.2 17.4 (30) 27.9 67.4 (59)
$ 1,008.2 $ 1,014.6 (1) % $ 2,310.8 $ 3,066.1 (25) %
Worldwide net sales decreased $6.4 million , or 1%, in the third quarter of 2020
and decreased $755.3 million , or 25%, in the year-to-date, which, in the
year-to-date, management attributed to the effects of COVID-19 and the resulting
store closures across various markets that began in the first quarter of 2020
and continued into the second quarter. On a constant-exchange-rate basis,
worldwide net sales decreased 2% in the third quarter and 24% in the
year-to-date compared to the prior year.
Jewelry sales by product category were as follows:
Third Quarter
(in millions) 2020 2019 $ Change % Change
Jewelry collections $ 577.4 $ 541.8 $ 35.6 7 %
Engagement jewelry 260.3 276.8 (16.5) (6)
Designer jewelry 105.8 112.0 (6.2) (6)
Year-to-date
(in millions) 2020 2019 $ Change % Change
Jewelry collections $ 1,302.9 $ 1,644.7 $ (341.8) (21) %
Engagement jewelry 603.4 833.6 (230.2) (28)
Designer jewelry 258.5 337.8 (79.3) (23)
In the third quarter, net sales reflected an increase in the Jewelry collections
category attributable to increases in Gold jewelry and Silver jewelry and
decreases across the Engagement jewelry and Designer jewelry categories. In the
year-to-date, net sales reflected decreases across each of the jewelry
categories.
TIFFANY & CO.
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Table of Contents Changes in net sales by reportable segment were as follows: (in millions) Comparable Sales Non-comparable Sales Wholesale/Other Total Third Quarter 2020: Americas $ (60.0) $ (2.0) $ (6.1)$ (68.1) Asia-Pacific 96.6 (4.9) (4.1) 87.6 Japan (5.9) 3.1 (10.8) (13.6) Europe (6.2) (0.3) (0.6) (7.1) Year-to-date 2020: Americas $ (424.8) $ (6.0) $ (26.6)$ (457.4) Asia-Pacific 19.4 (2.7) (78.2) (61.5) Japan (101.5) 6.9 (21.6) (116.2) Europe (79.1) (0.7) (0.9) (80.7) Changes in jewelry sales relative to the prior year by reportable segment were as follows: Average Price per Unit Sold Impact of Currency Number of As Reported Translation Units Sold Third Quarter 2020: Americas (1) % (1) % (14) % Asia-Pacific 23 4 9 Japan 8 1 (14) Europe (7) 3 1 Year-to-date 2020: Americas (7) % (1) % (28) % Asia-Pacific 12 (1) (18) Japan 2 1 (26) Europe (5) - (20)Americas . In the third quarter, total net sales decreased$68.1 million , or 16%, which included comparable sales decreasing$60.0 million , or 15%. Total sales results reflected sales declines across most of the region, which management primarily attributed to a decline in foreign tourism in the region related to the continuing effects of COVID-19. In the year-to-date, total net sales decreased$457.4 million , or 36%, which included comparable sales decreasing$424.8 million , or 35%. Total sales results reflected sales declines across the region, which management attributed to the effects of COVID-19, and the resulting store closures across the region that began inmid-March 2020 and continued into June, with most stores in the region reopened in mid-June. On a constant-exchange-rate basis, total net sales decreased 15% in the third quarter and 35% in the year-to-date, while comparable sales decreased 14% and 34%, respectively, in those periods. The decrease in the number of jewelry units sold in both periods reflected decreases across all jewelry categories, which management attributed to the effects of COVID-19. The decrease in the average price per jewelry unit sold in the year-to-date was primarily due to a change in sales mix, which management attributed to the strong growth in e-commerce sales, as well as a decline in sales of High jewelry within the Jewelry collections category.Asia-Pacific . In the third quarter, total net sales increased$87.6 million , or 30%, which included comparable sales increasing$96.6 million , or 40%. Total sales results reflected strong retail sales growth in Mainland China and TIFFANY & CO. 43 -------------------------------------------------------------------------------- Table of ContentsKorea , partially offset by mixed performance across other markets in the region. In the year-to-date, total net sales decreased$61.5 million , or 7%, which included comparable sales increasing$19.4 million , or 3%, with the decrease in total sales primarily due to a decline in wholesale travel retail sales. Total sales results in the year-to-date also reflected strong e-commerce sales growth, as well as strong retail sales growth in Mainland China andKorea , which was more than offset by softness across other markets in the region, which management attributed to the effects of COVID-19, and the resulting store closures across the region beginning with Mainland China in February and persisting for varying durations through early June. On a constant-exchange-rate basis, total net sales increased 26% in the third quarter and decreased 6% in the year-to-date, while comparable sales increased 36% and 3%, respectively, in those periods. The increase in the number of jewelry units sold in the third quarter reflected increases in all jewelry categories. The decrease in the number of jewelry units sold in the year-to-date reflected decreases in all jewelry categories, which management attributed to the effects of COVID-19, as well as the decline in wholesale travel retail sales. The increase in the average price per jewelry unit sold in both periods was primarily due to a shift in sales mix to gold jewelry within the Jewelry collections category, as well as the decline in wholesale travel retail sales.Japan . In the third quarter, total net sales decreased$13.6 million , or 8%, which included comparable sales decreasing$5.9 million , or 4%. Management attributed the decrease in the third quarter to a decline in foreign tourism in the region, as well as strong growth in the prior year due to high consumer demand prior to the consumption tax increase which occurred onOctober 1, 2019 . In the year-to-date, total net sales decreased$116.2 million , or 25%, which included comparable sales decreasing$101.5 million , or 23%. Management attributed the decrease in the year-to-date to the effects of COVID-19, including the resulting store closures across the region, which primarily began in earlyApril 2020 and continued through early June, and the decline in tourist traffic beginning early in the first quarter of 2020. On a constant-exchange-rate basis, total net sales decreased 9% and 26% in the third quarter and year-to-date, respectively, while comparable sales decreased 5% and 24%, respectively, in those periods.
The decrease in the number of jewelry units sold in both periods reflected decreases in all jewelry categories, which management attributed to the effects of COVID-19. The increase in the average price per jewelry unit sold in the third quarter was primarily due to a shift in sales mix within the Jewelry collections category.
Europe . In the third quarter, total net sales decreased$7.1 million , or 6%, which included comparable sales decreasing$6.2 million , or 6%. In the third quarter, sales decreased across most of the region, which management attributed to a decline in foreign tourism in the region related to the continuing effects of COVID-19. In the year-to-date, total net sales decreased$80.7 million , or 24%, which included comparable sales decreasing$79.1 million , or 25%. In the year-to-date, sales decreased across most of the region, which management also attributed to the effects of COVID-19, and the resulting store closures across the region, which began inmid-March 2020 and continued into June, with the vast majority of the stores in the region reopened by mid-June. As ofJuly 31, 2020 and throughOctober 31, 2020 , substantially all of the Company's retail stores in the region were fully or partially opened, in accordance with applicable guidelines established by local governments. In response to new restrictions and requirements implemented in lateOctober 2020 andNovember 2020 in certain European countries as a result of increased COVID-19 infection rates, the Company has temporarily closed certain of its retail stores in the region. As ofNovember 20, 2020 , approximately 60% of the Company's retail stores inEurope were temporarily closed in accordance with the applicable guidelines established by local governments. On a constant-exchange-rate basis, total net sales decreased 9% and 24% in the third quarter and year-to-date, respectively, while comparable sales decreased 9% and 25%, respectively, in those periods. The decrease in the number of jewelry units sold in the year-to-date reflected decreases across all jewelry categories, which management attributed to the effects of COVID-19. The decrease in the average price per jewelry unit sold in both periods was primarily due to a change in sales mix, which management attributed to the strong growth in e-commerce sales, as well as a decline in sales of High jewelry within the Jewelry collections category. Other. Other sales decreased$5.2 million , or 30%, in the third quarter and$39.5 million , or 59%, in the year-to-date due to decreases in sales within the Emerging Markets region in both periods and a decrease in wholesale sales of diamonds in the year-to-date. Store Data. In the year-to-date of 2020, the Company opened one Company-operated store inAsia Pacific and one inJapan and closed five Company-operated stores inAsia-Pacific , two in theAmericas and one inEurope .TIFFANY & CO. 44 --------------------------------------------------------------------------------
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Gross Margin
Third Quarter Year-to-date
(dollars in millions) 2020 2019 2020 2019
As reported:
Gross profit $ 643.5 $ 625.7 $ 1,414.1 $ 1,902.7
Gross profit as a percentage of net sales 63.8 % 61.7 % 61.2 % 62.1 %
On a Non-GAAP basis*:
Gross profit $ 643.9 $ 1,415.4
Gross profit as a percentage of net sales 63.9 %
61.3 %
* See "Non-GAAP Measures" above for additional information. Gross margin (gross profit as a percentage of net sales) increased 210 basis points and decreased 90 basis points in the third quarter and year-to-date of 2020, respectively. The increase in the third quarter was primarily due to a change in sales mix to higher margin products. The decrease in the year-to-date was primarily due to (i) sales deleverage on fixed costs resulting from the effects of COVID-19 on net sales, (ii) certain overhead costs not capitalized in the period resulting from certain manufacturing locations being closed or operating at reduced capacity due to COVID-19 and (iii) an increase in inventory reserves, partially offset by a change in sales mix to higher margin products. Additionally, the year-to-date of 2020 included the impact of a$12.3 million charge that was recorded in the three months endedApril 30, 2020 to fully reserve the asset related to an expected insurance recovery in respect of the bankruptcy filing of a metal refiner to which the Company entrusted precious scrap metal (see "Item 1. Financial Statements - Note 12. Commitments and Contingencies"). 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 1. Financial Statements - Note 9. Hedging Instruments"). Management adjusted retail prices in the third quarter and year-to-date of 2020 and 2019 across most geographic regions and product categories, some of which were intended to mitigate foreign currency fluctuations.
Selling, General and Administrative ("SG&A") Expenses
Third Quarter Year-to-date
(dollars in millions) 2020 2019 2020 2019
As reported:
SG&A expenses $ 478.5 $ 507.2 $ 1,294.9 $ 1,439.1
SG&A expenses as a percentage of net
sales ("SG&A expense ratio") 47.5 % 50.0 % 56.0 % 46.9 %
On a Non-GAAP basis*:
SG&A expenses $ 460.5 $ 1,241.2
SG&A expense ratio 45.7 % 53.7 %
* See "Non-GAAP Measures" above for additional information.
SG&A expenses decreased$28.7 million , or 6%, in the third quarter of 2020, which included$18.0 million in costs related to the pending Merger (see "Non-GAAP Measures" for further details), and decreased$144.2 million , or 10%, in the year-to-date of 2020, which included$41.7 million in costs related to the pending Merger and a$12.0 million charitable contribution to TheTiffany & Co. Foundation (see "Non-GAAP Measures" for further details). In theTIFFANY & CO. 45 -------------------------------------------------------------------------------- Table of Contents third quarter, the increase in SG&A expenses from costs related to the pending Merger was more than offset by decreased marketing spending and continued prudent management of the Company's operating expenses, which included the reduction or elimination of certain non-essential spending. In the year-to-date, the increase in SG&A expenses from costs related to the pending Merger and charitable contribution to TheTiffany & Co. Foundation was more than offset by decreased marketing spending (although (i) marketing expense as a percentage of net sales in the year-to-date of 2020 was approximately in line with the Company's historical percentage and (ii) the Company plans to increase its marketing spending in the fourth quarter of 2020 as compared to the third quarter of 2020), decreased labor and incentive compensation costs and decreased store occupancy expenses. Excluding the pending Merger-related costs in both periods and the charitable contribution in the year-to-date noted above, SG&A expenses decreased$46.7 million , or 9%, in the third quarter of 2020 and decreased$197.9 million , or 14%, in the year-to-date of 2020 compared to the prior year (see "Non-GAAP Measures"). In the year-to-date, SG&A expenses as a percentage of net sales increased due to sales deleverage on operating expenses resulting from the effects of COVID-19 on net sales. Changes in foreign currency exchange rates did not have a meaningful effect on SG&A expenses in the third quarter and year-to-date as compared with the prior year.
Earnings from Operations
Third Quarter Year-to-date
(in millions) 2020 2019 2020 2019
As reported: Earnings from operations$ 165.0 $ 118.5 $ 119.2 $ 463.6 Operating margin 16.4 % 11.7 % 5.2 % 15.1 % On a Non-GAAP basis*: Earnings from operations$ 183.4 $ 174.2 Operating margin 18.2 % 7.5 %
* See "Non-GAAP Measures" above for additional information.
Earnings from operations of$165.0 million in the third quarter of 2020 compared with$118.5 million in the prior year. Earnings from operations of$119.2 million in the year-to-date of 2020 compared with$463.6 million in the prior year. Excluding the pending Merger-related costs in both periods of 2020 and the charitable contribution in the year-to-date of 2020 described in "Non-GAAP Measures", Earnings from operations was$183.4 million in the third quarter of 2020 and$174.2 million in the year-to-date of 2020.
Results by segment were as follows:
Third Quarter % of Net Third Quarter % of Net
(in millions) 2020 Sales 2019 Sales
Earnings (loss) from operations*:
Americas $ 33.9 9.6 % $ 60.5 14.3 %
Asia-Pacific 124.7 32.7 42.9 14.6
Japan 61.9 39.7 57.4 33.9
Europe 18.1 17.4 12.1 10.9
Other (4.6) (37.4) (3.6) (20.9)
234.0 169.3
Unallocated corporate expenses (50.6) (5.0) (50.8) (5.0)
Other operating expenses (18.4) -
Earnings from operations $ 165.0 16.4 % $ 118.5 11.7 %
* Percentages represent earnings from operations as a percentage of each segment's net sales.
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On a segment basis, the earnings from operations to each segment's net sales in
the third quarter of 2020 compared with 2019 was as follows:
•Americas - The ratio decreased due to sales deleverage on operating expenses
and a decrease in gross margin;
•Asia-Pacific - The ratio increased due to sales leverage on operating expenses
and an increase in gross margin;
•Japan - The ratio increased due to an increase in gross margin and a decrease
in the SG&A expense ratio; and
•Europe - The ratio increased due to a decrease in the SG&A expense ratio and an
increase in gross margin.
% of Net % of Net
(in millions) Year-to-date 2020 Sales Year-to-date 2019 Sales
Earnings (loss) from operations*:
Americas $ (12.0) (1.5) % $ 204.3 15.9 %
Asia-Pacific 213.3 25.0 202.1 22.1
Japan 113.6 32.2 167.0 35.6
Europe 20.7 8.3 44.1 13.4
Other (14.7) (52.8) (2.2) (3.2)
320.9 615.3
Unallocated corporate expenses (146.7) (6.3) (151.7) (4.9)
Other operating expenses (55.0) -
Earnings from operations $ 119.2 5.2 % $ 463.6 15.1 %
* Percentages represent earnings from operations as a percentage of each
segment's net sales.
On a segment basis, the earnings from operations to each segment's net sales in
the year-to-date of 2020 compared with 2019 was as follows:
•Americas - The ratio decreased due to sales deleverage on operating expenses,
which management attributed to the effects of COVID-19 on net sales, as
discussed above, and a decrease in gross margin;
•Asia-Pacific - The ratio increased due to a decrease in the SG&A expense ratio
and an increase in gross margin;
•Japan - The ratio decreased due to sales deleverage on operating expenses,
which management attributed to the effects of COVID-19 on net sales, as
discussed above, and a decrease in gross margin; and
•Europe - The ratio decreased due to sales deleverage on operating expenses,
which management attributed to the effects of COVID-19 on net sales, as
discussed above, and a decrease in gross margin.
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 in the third quarter
of 2020 were approximately unchanged from the prior year and decreased $5.0
million , or 3%, in the year-to-date of 2020 when compared to the prior year. The
decrease in the year-to-date was primarily due to a decrease in incentive
compensation expense and continued prudent management of the Company's operating
expenses, partly offset by a $12.3 million charge that was recorded to fully
reserve the asset related to an expected insurance recovery in respect of the
bankruptcy filing of a metal refiner to which the Company entrusted precious
scrap metal (see "Item 1. Financial Statements - Note 12. Commitments and
Contingencies").
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The third quarter of 2020 amount included in other operating expenses in the
table above represents costs incurred related to the pending Merger (see "Item
1. Financial Statements - Note 2. Merger Agreement"). The year-to-date of 2020
amount included in other operating expenses in the table above represents (i)
$43.0 million of costs incurred related to the pending Merger (see "Item 1.
Financial Statements - Note 2. Merger Agreement"), and (ii) $12.0 million of
expense for a charitable contribution to The Tiffany & Co. Foundation.
Interest Expense and Financing Costs
Interest expense and financing costs were$10.7 million in the third quarter of 2020, compared with$9.2 million in the prior year. Interest expense and financing costs were$31.6 million in the year-to-date of 2020, compared with$29.4 million the prior year. Other Expense (Income), net Other expense, net was$5.7 million in the third quarter of 2020, compared with$4.2 million in the prior year. Other income, net was$20.6 million in the year-to-date of 2020, compared with other expense, net of$2.2 million in the prior year. Other income, net in the year-to-date of 2020 included the recognition of a gain of$31.4 million related to amounts received as compensation for the previous acquisition of the premises containing one of the Company's leased retail stores and an administrative office inSydney, Australia under compulsory acquisition laws inAustralia . See "Item 1. Financial Statements - Note 12. Commitments and Contingencies" for additional information.
Provision for Income Taxes
The effective income tax rate for the third quarter of 2020 was 19.9% versus 25.4% in the prior year. The effective income tax rate for the year-to-date of 2020 was 20.3% versus 21.3% in the prior year. The effective income tax rate for the third quarter and year-to-date of 2020 was impacted by the reversal of previously established reserves for uncertain tax positions due to the favorable conclusion of a tax examination and the expiration of certain statutes of limitations, the impact of non-deductible transaction-related expenses, as well as the application of an updated estimated annual effective income tax rate, which is influenced by the jurisdictional mix of earnings taxed at the statutory tax rates applicable to each jurisdiction. The Company's effective income tax rate could be negatively impacted to the extent earnings are lower than anticipated in countries that have lower statutory tax rates and higher than anticipated in countries that have higher statutory tax rates. The effective income tax rate for the third quarter and year-to-date of 2019 was increased by an income tax expense of$5.8 million , or 550 basis points and 130 basis points, respectively, due to a reduction in the estimated Foreign Derived Intangible Income ("FDII") benefit for fiscal 2019. The effective income tax rate for the year-to-date of 2019 included the recognition of an income tax benefit of$7.5 million , or 170 basis points or$0.06 per diluted share, related to an increase in the estimated fiscal 2018 FDII benefit as a result ofU.S. Treasury guidance issued during the first quarter of 2019.
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. In response to the COVID-19 outbreak, the Company has taken steps to further strengthen its financial position and balance sheet, and to maintain financial liquidity and flexibility, which included drawing down$500.0 million on its Credit Facility (as defined in "Item 1. Financial Statements - Note 8. Debt") during the first quarter of 2020 as a precautionary measure in order to increase its cash position and maintain financial flexibility in light of the uncertainty in the global markets resulting from COVID-19. The Company monitors its covenant compliance carefully. The agreements governing certain of the Company's material debt instruments include covenants that incorporate a (i) debt incurrence test premised on a fixed charge coverage ratio, which is the ratio of the Company's EBIT (earnings before interest and taxes) plus rent expense to its interest expense plus rent expense, and (ii) leverage ratio, which is the ratio of the Company's total adjusted debt to its consolidated EBITDAR (earnings before interest, taxes, depreciation, amortization and rent expenses). Specifically, under the terms of the Company's Senior Notes due 2026 and 2042, the Company was, prior to the amendments described below, restricted from incurring, or permitting its subsidiaries to incur, indebtedness if, TIFFANY & CO. 48 -------------------------------------------------------------------------------- Table of Contents among other conditions, the Company's fixed charge coverage ratio was less than 2.0 to 1.0. Under the terms of the Credit Facility, the Guaranty in respect of the three-year, multi-bank revolving credit agreement entered into by the Company's wholly owned subsidiary,Tiffany & Co. (Shanghai )Commercial Company Limited (the "Shanghai Guaranty"), and the Company's Senior Notes due 2026 and 2042, the Company was, prior to the amendments described below, required to maintain a maximum leverage ratio of 3.50 to 1.00 for the four quarter period ending as of the end of each fiscal quarter. As a precautionary measure in order to maintain flexibility with respect to its liquidity sources and provide additional financial maintenance covenant headroom, the Company entered into amendments to its Credit Facility, the Shanghai Guaranty, and its Senior Notes due 2026 and 2042, in order to modify the leverage ratio financial maintenance covenant and, in the case of the Senior Notes due 2026 and 2042, the fixed charge coverage ratio test for debt incurrence, through and including the Company's fiscal quarter endingApril 30, 2021 . These amendments were executed onJune 8, 2020 and effect changes to certain provisions and covenants during the period beginning with the fiscal quarter endedJuly 31, 2020 and continuing through the fiscal quarter endingApril 30, 2021 (such period of time, the "Covenant Relief Period"), including, among others: (a) an increase in the maximum leverage ratio under the Credit Facility, the Shanghai Guaranty, and the 2026 and 2042 Senior Notes, to 4.50 to 1.00; and (b) a reduction of the fixed charge coverage ratio in the 2026 and 2042 Senior Notes to 0.75 to 1.00. During the Covenant Relief Period, the facility fee under the Credit Facility is increased by 5 basis points at all pricing levels, and the applicable margin is increased by (i) 10 basis points at all pricing levels through the quarter endedJuly 31, 2020 , (ii) 20 basis points at all pricing levels fromAugust 1, 2020 untilNovember 1, 2020 and (iii) 30 basis points at all pricing levels fromNovember 1, 2020 throughApril 30, 2021 . The coupon rate under the 2026 and 2042 Senior Notes is increased by 25 basis points during the Covenant Relief Period. The Company has the right to terminate the Covenant Relief Period under the Credit Facility, Shanghai Guaranty and the 2026 and 2042 Senior Notes, including the attendant covenant and pricing modifications referenced above, prior toApril 30, 2021 , subject to the Company's certification that its leverage ratio does not exceed 3.50 to 1.00 at such time. Management believes that cash on hand, internally generated cash flows and the funds available under its revolving credit facilities are sufficient to support the Company's liquidity and capital requirements for the foreseeable future, including the next 12 months. The following table summarizes cash flows from operating, investing and financing activities: Year-to-date (in millions) 2020 2019 Net cash provided by (used in): Operating activities$ 284.5 $ 263.7 Investing activities (188.2) (174.1) Financing activities 185.1 (392.9)
Effect of exchange rate changes on cash and cash equivalents (10.4)
0.3
Net increase (decrease) in cash and cash equivalents$ 271.0 $ (303.0) Operating Activities The Company had net cash inflows from operating activities of$284.5 million in the year-to-date of 2020 compared with$263.7 million in the year-to-date of 2019. The change in operating cash flows was primarily due to a decrease in cash outflows attributable to working capital, which was mostly offset by a decrease in earnings in the year-to-date of 2020, which management attributed to the effects of COVID-19. Additionally, the Company made a$30.0 million voluntary cash contribution to itsU.S. pension plan in the year-to-date of 2019. Working Capital. Working capital (current assets less current liabilities) was$2.9 billion atOctober 31, 2020 , compared with$2.9 billion atJanuary 31, 2020 and$2.7 billion atOctober 31, 2019 . TIFFANY & CO. 49 -------------------------------------------------------------------------------- Table of Contents Accounts receivable, net atOctober 31, 2020 were 17% lower than atJanuary 31, 2020 and 8% lower than atOctober 31, 2019 . The decrease in Accounts receivable, net atOctober 31, 2020 primarily reflected a decrease in Credit Receivables (as defined in "Item 1. Financial Statements - Note 4. Receivables and Revenue Recognition") due to a decrease in sales in 2020. Currency translation did not have a significant effect on the change compared toJanuary 31, 2020 orOctober 31, 2019 . Inventories, net atOctober 31, 2020 were 1% higher than atJanuary 31, 2020 and 4% lower than atOctober 31, 2019 . The decrease compared toOctober 31, 2019 was primarily due to decreases in work in process and raw materials inventories. Currency translation did not have a significant effect on the change compared toJanuary 31, 2020 orOctober 31, 2019 . Accounts payable and accrued liabilities atOctober 31, 2020 were 19% lower than atJanuary 31, 2020 and 11% lower than atOctober 31, 2019 . The decrease compared to bothJanuary 31, 2020 andOctober 31, 2019 included (i) declines in trade payables, (ii) a decrease in incentive compensation accruals and (iii) the recognition of a gain previously deferred related to amounts received as compensation for the previous acquisition of the premises containing one of the Company's leased retail stores and an administrative office inSydney, Australia under compulsory acquisition laws in that country (see "Item 1. Financial Statements - Note 12. Commitments and Contingencies" for additional information).
Investing Activities
The Company had net cash outflows from investing activities of$188.2 million in the year-to-date of 2020 compared with$174.1 million in the year-to-date of 2019. Year-over-year changes in cash flows from investing activities were primarily driven by an increase in capital expenditures.Marketable Securities and Short-Term Investments. The Company invests a portion of its cash in marketable securities and short-term investments. The Company had net proceeds from the sales of marketable securities and short-term investments of$22.2 million during the year-to-date of 2020, compared with$19.9 million during the year-to-date of 2019.
Financing Activities
The Company had net cash inflows from financing activities of$185.1 million in the year-to-date of 2020, compared with net cash outflows of$392.9 million in the year-to-date of 2019. Year-over-year changes in cash flows from financing activities were largely driven by changes in net borrowings and share repurchases. Recent Borrowings. The Company had net proceeds from (repayments of) borrowings as follows: Year-to-date (in millions) 2020 2019
Short-term borrowings:
Proceeds from credit facility borrowings, net
As noted above, during the first quarter of 2020, the Company drew down$500.0 million on its Credit Facility as a precautionary measure in order to increase its cash position and maintain financial flexibility in light of uncertainty in the global markets resulting from COVID-19. The drawdown proceeds from the Credit Facility can be repaid at any time. Under all of the Company's credit facilities, atOctober 31, 2020 , there were$543.1 million of borrowings outstanding,$2.0 million of letters of credit issued and$461.0 million available for borrowing. AtOctober 31, 2019 , there were$89.9 million of borrowings outstanding,$3.6 million of letters of credit issued and$892.7 million available for borrowing. The weighted-average interest rate for the amounts outstanding atOctober 31, 2020 and 2019 was 1.8% and 4.0%, respectively.TIFFANY & CO. 50
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The ratio of total debt (short-term borrowings and long-term debt) to
stockholders' equity was 44% at
At
Share Repurchases. InMay 2018 , the Registrant's Board of Directors approved a new share repurchase program (the "2018 Program"). The 2018 Program, which became effectiveJune 1, 2018 and expires onJanuary 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 or other structured repurchase transactions, and/or privately negotiated transactions. As ofOctober 31, 2020 ,$471.6 million remained available under the 2018 Program; however, pursuant to the terms of the Merger Agreement, and subject to certain limited exceptions, the Company may not repurchase its Common Stock other than in connection with the forfeiture provisions of Company equity awards or the cashless exercise or tax withholding provisions of such Company equity awards, in each case, granted under the Company's stock-based compensation plans. Accordingly, the Company did not repurchase any shares of its Common Stock during the year-to-date of 2020 pursuant to the 2018 Program, and does not expect to repurchase any shares of its Common Stock in connection with the 2018 Program prior to the Merger or earlier termination of the Merger Agreement.
The Company's share repurchase activity was as follows:
Third Quarter Year-to-date
(in millions, except per share amounts) 2020 2019 2020
2019
Cost of repurchases $ -$ 78.0 $ -$ 163.4 Shares repurchased and retired - 0.9 - 1.8 Average cost per share $ -$ 88.42 $ -$ 91.15 Contractual Obligations SinceJanuary 31, 2020 , the Company's contractual obligations as they relate to short-term borrowings have changed as a result of the drawdown of$500.0 million under the Credit Facility described above under "Financing Activities." The Company's remaining contractual cash obligations and commercial commitments atOctober 31, 2020 , and the effects such obligations and commitments are expected to have on the Company's liquidity and cash flows in future periods, have not changed significantly sinceJanuary 31, 2020 .
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.
Forward-Looking Statements
The historical trends and results reported in this quarterly report on Form 10-Q
should not be considered an indication of future performance. Further,
statements contained in this quarterly report on Form 10-Q 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 Section 27A of the Securities Act of 1933, Section 21E of the
Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act
of 1995, each as amended. Forward-looking statements by their nature address
matters that are, to different degrees, uncertain, such as statements about the
consummation of the pending Merger (as defined under "Item 2. Management's
Discussion and Analysis - Merger Agreement") and about the future plans,
assumptions and expectations for the Company's business and its results,
including the Company's expectations for fourth quarter results. Forward-looking
statements provide current expectations of future events and include any
statement that does not directly relate to any historical or current fact. Words
such as 'anticipates,' 'assumes,' 'believes,' 'can,' 'estimates,' 'expects,'
'forecasts,' 'intends,' 'may,' 'outlook,' 'plans,' 'projects,' 'pursues,'
'scheduled,' 'should,' 'will' or other similar expressions may identify such
forward-looking statements. Examples of forward-looking statements include, but
are not limited to, statements the Company makes regarding its plans,
assumptions, expectations, beliefs and objectives with respect to the pending
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Merger; the Company's assumptions, expectations and beliefs with respect to
COVID-19, including the continuing impact thereof on the Company's business,
sales, cash flows and results of operations; 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 relocation 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, including the need to incur additional
indebtedness; compliance with covenants under the Company's debt instruments,
including the financial ratio thresholds set forth therein; 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 and other forward-looking statements are not guarantees of future results
and are subject to risks, uncertainties and assumptions that could cause actual
results to differ materially from those discussed in forward-looking statements,
including as a result of factors, assumptions, risks and uncertainties, which
are outside of the Company's control. The inclusion of such statements should
not be regarded as a representation that any plans, estimates or expectations
will be achieved. You should not place undue reliance on such statements.
Important factors, risk and uncertainties that could cause actual results to
differ materially from such plans, estimates or expectations include, but are
not limited to, the following: the COVID-19 pandemic, including the duration and
scope thereof, the availability of a vaccine or cure that mitigates the effect
of the virus, the potential for additional waves of outbreaks and changes in
financial, business, travel and tourism, consumer discretionary spending and
other general consumer behaviors, political, public health and other conditions,
circumstances, requirements and practices resulting therefrom; 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; protest activity in the U.S. ; 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 the
Company's 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 the Company's competitive landscape; disruptions
impacting the Company's business and operations; failure to successfully
implement or make changes to the Company's information systems; changes in the
cost and timing estimates associated with the renovation of the Company's New
York Flagship store; delays caused by third parties involved in the
aforementioned renovation; any casualty, damage or destruction to the Company's
New York Flagship store or 6 East 57th Street location; 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;
conditions to the completion of the pending Merger, including stockholder
approval of the Merger proposal, may not be satisfied or the regulatory
approvals or waivers required for the pending Merger may not be obtained or
maintained, in each case, on the terms expected or on the anticipated schedule;
the occurrence of any event, change or other circumstance that could give rise
to the termination of the Merger Agreement (as defined under "Item 2.
Management's Discussion and Analysis - Merger Agreement") between the parties to
the pending Merger or affect the ability of the parties to recognize the
benefits of the pending Merger; the effect of the announcement or pendency of
the Merger on the Company's business relationships, operating results and
business generally; risks that the pending Merger disrupts the Company's current
plans and operations and potential difficulties in the Company's employee
retention; risks that the pending Merger may divert management's attention from
the Company's ongoing business operations; potential litigation that may be
instituted against the Company or its directors or officers related to the
pending Merger or the Merger Agreement between the parties to the pending Merger
and any adverse outcome of any such potential litigation; the amount and timing
of the costs, fees, expenses and other charges related to the pending Merger,
including in the event of any unexpected delays; other risks to consummation of
the pending Merger, including the risk that the pending Merger will not be
consummated within the expected time period, or at all, which may affect the
Company's business and the price of the common stock of the Company; and any
adverse effects on the Company by other general industry, economic, business
and/or competitive factors. The consequences of material
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Table of Contents differences in results as compared with those anticipated in the forward-looking statements could include, among other things, business disruption, operational problems, financial loss, legal liability to third parties and similar risks, any of which could have a significant negative effect on the Company's financial condition, results of operations, credit rating, liquidity or stock price. In addition, there can be no assurance that the pending Merger will be completed, or if it is completed, that it will close within the anticipated time period, or that the expected benefits of the Merger will be realized. 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 consequences and changes could also cause actual results to differ materially from the expected results expressed in, or implied by, the forward-looking statements. Forward-looking statements reflect the views and assumptions of management as of the date of this communication with respect to future events. The Company does not undertake, and hereby disclaims, any obligation, unless required to do so by applicable securities laws, to update any forward-looking statements as a result of new information, future events or other factors. The inclusion of any statement in this communication does not constitute an admission by the Company or any other person that the events or circumstances described in such statement are material. Additional information about potential risks and uncertainties that could affect the Company's business and financial results is included under "Item 1A. Risk Factors" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2020 , "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 1A. Risk Factors" in this quarterly report on Form 10-Q, the preliminary proxy statement on Schedule 14A that the Company filed onNovember 16, 2020 and in the Company's other filings made with theSEC from time to time, which are available via theSEC's website at www.sec.gov. Readers of this Quarterly Report on Form 10-Q should consider the risks, uncertainties and factors outlined above and in the aforementioned Form 10-K and in this Form 10-Q in evaluating, and are cautioned not to place undue reliance on, the forward-looking statements contained herein.
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