10-K 1 tif-2015131x10k.htm 10-K TIF-2015.1.31-10K
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, 2015
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
(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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 Form10-K or any amendment to this Form10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨
(Do not check if a smaller reporting company)
Smaller reporting company
 
¨
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, 2014, the aggregate market value of the registrant's voting and non-voting stock held by non-affiliates of the registrant was approximately $12,523,379,301 using the closing sales price on this day of $97.61. See Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
As of March 16, 2015, the registrant had outstanding 129,151,634 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 10, 2015 (Part III).



Tiffany & Co.
Table of Contents
Form 10-K for the fiscal year ended January 31, 2015
 
 
Page
 
 
Item 1.
K-3
Item 1A.
K-13
Item 1B.
K-19
Item 2.
K-19
Item 3.
K-20
Item 4.
K-22
 
 
 
 
 
Item 5.
K-23
Item 6.
K-26
Item 7.
K-28
Item 7A.
K-48
Item 8.
K-49
Item 9.
K-97
Item 9A.
K-97
Item 9B.
K-98
 
 
 
 
 
Item 10.
K-99
Item 11.
K-99
Item 12.
K-99
Item 13.
K-99
Item 14.
K-99
 
 
 
 
 
Item 15.
K-100






SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The statements in this Annual Report on Form 10-K, including documents incorporated herein by reference, that refer to plans and expectations for future periods are forward-looking statements that involve a number of risks and uncertainties. Words such as 'expects,' 'anticipates,' 'forecasts,' 'plans,' 'believes,' 'continues,' 'may,' 'will,' and variations of such words and similar expressions are intended to identify such forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements we make regarding the Company's objectives, expectations and beliefs with respect to store openings and closings, product introductions, sales, sales growth, retail prices, gross margin, expenses, operating margin, effective income tax rate, net earnings and net earnings per share, inventories, capital expenditures, cash flow, liquidity, currency translation and growth opportunities. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the Company's control, which could cause the Company's actual results to differ materially from those indicated in these forward-looking statements. Such factors include, but are not limited to, risks from global economic conditions, decreases in consumer confidence, the Company's significant operations outside of the United States, regional instability and conflict that could disrupt tourist travel and local consumer spending, weakening foreign currencies, changes in the Company's product or geographic sales mix and changes in costs or reduced supply availability of diamonds and precious metals. Please also see the Company's risk factors, as they may be amended from time to time, set forth in the Company's filings with the Securities and Exchange Commission, including in this Annual Report, particularly under "Item 1A. Risk Factors" for a discussion of these and other factors that could cause actual results to differ materially. 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-2


PART I

Item 1. Business.

GENERAL HISTORY OF BUSINESS

Tiffany & Co. (the "Registrant") is a holding company that operates through its subsidiary companies (collectively, the "Company"). The Registrant's principal subsidiary is Tiffany and Company ("Tiffany"). 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.


FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

The Company's segment information for the fiscal years ended January 31, 2015, 2014 and 2013 is reported in "Item 8. Financial Statements and Supplementary Data - Note P - Segment Information."


NARRATIVE DESCRIPTION OF BUSINESS

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; excellent customer service; an elegant store and online environment; upscale store locations; "classic" product positioning; distinctive and high-quality packaging materials (most significantly, the TIFFANY & CO. blue box); and sophisticated style and romance. 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 and to accept reduced overall gross margins; 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;
In-store display practices enable Tiffany to showcase fine jewelry in a manner consistent with the Brand's positioning but require sufficient space;
The classic positioning of much of Tiffany's product line supports the Brand, but limits the display space that can be allocated to new product introductions;
Tiffany's packaging supports consumer expectations with respect to the Brand but is expensive; and

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A significant amount of advertising is 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, advertising 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 the 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 distribution and marketing initiatives.


REPORTABLE SEGMENTS

Americas

Sales in the Americas were 48% of worldwide net sales in 2014, while sales in the U.S. represented 88% of net sales in the Americas.

Retail Sales. Retail sales in the Americas are transacted in 122 Company-operated TIFFANY & CO. stores in (number of stores at January 31, 2015 included in parentheses): the U.S. (95), Canada (11), Mexico (11) and Brazil (5). Included within these totals are 12 Company-operated stores located within various department stores in Canada and Mexico.

Internet and Catalog Sales. The Company distributes a selection of its products in the U.S. and Canada through the websites at www.tiffany.com and www.tiffany.ca. To a lesser extent, sales are also generated through catalogs that the Company distributes to its proprietary list of customers in the U.S. and Canada.

Business-to-Business Sales. Sales executives call on business clients, primarily in the U.S., selling products drawn from the retail product line and items specially developed for the business market, including trophies and items designed for the particular customer. Purchases may also be made through the Company's website at www.tiffany.com/business. Price allowances are given to business account holders for certain purchases.

Wholesale Distribution. Selected TIFFANY & CO. merchandise is sold to independent distributors for resale in markets in the Central/South American and Caribbean regions. Such sales represent less than 1% of worldwide net sales.

Asia-Pacific

Sales in Asia-Pacific represented 24% of worldwide net sales in 2014, while sales in Greater China represented more than half of Asia-Pacific's net sales.

Retail Sales. Retail sales in Asia-Pacific are transacted in 73 Company-operated TIFFANY & CO. stores in (number of stores at January 31, 2015 included in parentheses): China (26), Korea (14), Hong Kong (9), Taiwan (8), Australia (7), Singapore (5), Macau (2) and Malaysia (2). Included within these totals are 24 Company-operated stores located within various department stores.

Internet Sales. The Company offers a selection of TIFFANY & CO. merchandise for purchase in Australia through its website at www.tiffany.com.au.


TIFFANY & CO.
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Wholesale Distribution. Selected TIFFANY & CO. merchandise is sold to independent distributors for resale in certain markets. Such sales represent less than 1% of worldwide net sales.

Japan

Sales in Japan represented 13% of worldwide net sales in 2014.

Retail Sales. Retail sales in Japan are transacted in 56 Company-operated TIFFANY & CO. stores. Included within this total are 51 stores located within department stores, generating 75% of Japan's net sales. 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, 2015 included in parentheses): Isetan Mitsukoshi (14), J. Front Retailing Co. (Daimaru and Matsuzakaya department stores) (9), Takashimaya (9) and Seven & i Holding Co., Ltd. (Sogo and Seibu department stores) (5). The Company also operates 14 stores in other department stores.

Internet Sales. The Company offers a selection of TIFFANY & CO. merchandise for purchase in Japan through its website at www.tiffany.co.jp.

Business-to-Business Sales. Products drawn from the retail product line and items specially developed are sold to business customers.

Wholesale Distribution. Selected TIFFANY & CO. merchandise is sold to independent distributors for resale in Japan. Such sales represent less than 1% of worldwide net sales.

Europe

Sales in Europe represented 12% of worldwide net sales in 2014, while sales in the United Kingdom ("U.K.") represented more than 40% of European net sales.

Retail Sales. Retail sales in Europe are transacted in 38 Company-operated TIFFANY & CO. stores in (number of stores at January 31, 2015 included in parentheses): the U.K. (10), Germany (7), Italy (7), France (5), Spain (2), Switzerland (2), Austria (1), Belgium (1), the Czech Republic (1), Ireland (1) and the Netherlands (1). Included within these totals are seven Company-operated stores located within various department stores.

Internet Sales. The Company offers a selection of TIFFANY & CO. merchandise for purchase in the U.K., Austria, Belgium, France, Germany, Ireland, Italy, the Netherlands and Spain through its websites, which are accessible through www.tiffany.com.

Other

Other consists of all non-reportable segments, including: (i) retail sales and wholesale distribution in the Emerging Markets region (which represented approximately 75% of Other net sales in 2014); (ii) wholesale sales of diamonds; and (iii) licensing agreements.

Emerging Markets region. Retail sales are transacted in five Company-operated TIFFANY & CO. stores in the United Arab Emirates ("U.A.E.") and, beginning in February 2014, one Company-operated store in Russia. Additionally, selected TIFFANY & CO. merchandise is sold to independent distributors for resale in certain emerging markets (primarily in the Middle East and, through January 2014, in Russia). Such wholesale sales represent less than 1% of worldwide net sales.

Wholesale Sales of Diamonds. The Company regularly purchases parcels of rough diamonds for polishing and further processing. Some rough diamonds so purchased, and a small percentage of diamonds so polished, are found not to be suitable for the Company's needs; those diamonds are sold to third parties.

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K-5


Management's objective from such sales is to recoup its original costs, thereby earning minimal, if any, gross margin on those transactions.

Licensing Agreement. The Company receives earnings from a licensing agreement with Luxottica Group for the distribution of TIFFANY & CO. brand eyewear. The earnings received from this licensing agreement represented less than 1% of worldwide net sales in 2014, 2013 and 2012.

Expansion of Operations

Management regularly evaluates potential markets for new TIFFANY & CO. stores with a view to the demographics of the area 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 significant 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 2004:
 
Americas
 
 
 
 
 
Year:
U.S.

Canada &
Latin America

Asia-Pacific

Japan

Europe

Emerging Markets

Total

2004
55

7

24

53

12


151

2005
59

7

25

50

13


154

2006
64

9

28

52

14


167

2007
70

10

34

53

17


184

2008
76

10

39

57

24


206

2009
79

12

45

57

27


220

2010
84

12

52

56

29


233

2011
87

15

58

55

32


247

2012
91

24

66

55

34

5

275

2013
94

27

72

54

37

5

289

2014
95

27

73

56

38

6

295


As part of its long-term strategy to expand its store base, management plans to add approximately 12 - 15, net Company-operated stores in 2015, with the majority of expansion planned in Asia-Pacific and the balance in the Americas and Europe.

As noted above, the Company currently operates e-commerce enabled websites in 13 countries as well as informational websites in several additional countries. Sales transacted on those websites accounted for 6% of worldwide net sales in 2014, 2013 and 2012. The Company invests in ongoing website enhancements and intends to evaluate expanding its e-commerce sites to additional countries in
the future.

Products

The Company's principal product category is jewelry, which represented 92%, 92% and 90% of worldwide net sales in 2014, 2013 and 2012. 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).


TIFFANY & CO.
K-6


The Company also sells timepieces, leather goods, sterling silver goods (other than jewelry), china, crystal, stationery, fragrances and accessories, which represented, in total, 7%, 7% and 8% of worldwide net sales in 2014, 2013 and 2012. The remaining 1% - 2% of worldwide net sales were attributable to wholesale sales of diamonds and earnings received from a third-party licensing agreement.

Sales by Reportable Segment of TIFFANY & CO. Jewelry by Category
2014
% of total
Americas
 Sales

% of total
Asia-Pacific
Sales

% of total
Japan
Sales

% of total
Europe
Sales

% of total
Reportable
Segment Sales

Statement, fine & solitaire jewelry a 
23
%
24
%
20
%
17
%
22
%
Engagement jewelry & wedding bands b 
23
%
38
%
46
%
23
%
30
%
Fashion jewelry c 
44
%
37
%
27
%
56
%
41
%
2013
 
 
 
 
 
Statement, fine & solitaire jewelry a 
23
%
27
%
20
%
19
%
23
%
Engagement jewelry & wedding bands b 
23
%
36
%
47
%
25
%
30
%
Fashion jewelry c 
44
%
36
%
26
%
53
%
40
%
2012
 
 
 
 
 
Statement, fine & solitaire jewelry a 
20
%
24
%
17
%
16
%
20
%
Engagement jewelry & wedding bands b 
23
%
36
%
48
%
25
%
30
%
Fashion jewelry c 
46
%
37
%
28
%
54
%
42
%
a) This category includes statement, fine and solitaire jewelry (other than engagement jewelry). Most sales in this category are of items containing diamonds, other gemstones or both. Most jewelry in this category is constructed of platinum, although gold was used as the primary metal in approximately 13% of sales in 2014. The average price of merchandise sold in 2014, 2013 and 2012 in this category was approximately $5,400, $5,300 and $5,200 for total reportable segments.
b) This category includes engagement rings and wedding bands marketed to brides and grooms. Most sales in this category are of items containing diamonds. Most jewelry in this category is constructed of platinum, although gold was used as the primary metal in approximately 8% of sales in 2014. The average price of merchandise sold in 2014, 2013 and 2012 in this category was approximately $3,600, $3,600 and $3,500 for total reportable segments.
c) This category generally consists of non-gemstone, sterling silver (approximately 54% of the category in 2014), gold or RUBEDO® metal jewelry, although small gemstones are used as accents in some pieces. RUBEDO® metal is an alloy composed of copper, gold and silver which was developed by the Company. The average price of merchandise sold in 2014, 2013 and 2012 in this category was approximately $335, $300 and $295 for total reportable segments.

Certain reclassifications have been made to the prior years' classes of similar products to conform with management's current internal analysis of product sales.

TIFFANY & CO.
K-7


ADVERTISING, MARKETING, PUBLIC AND MEDIA RELATIONS

The Company regularly advertises in newspapers, magazines and through digital 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 2014, 2013 and 2012, the Company spent $283,648,000, $253,164,000 and $250,297,000, representing 6.7%, 6.3% and 6.6% 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 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 and urban parks.


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 ® 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 trademark rights in 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 has responded to Internet counterfeiting by engaging investigators and counsel to monitor the Internet and taking various actions to stop infringing activity, including sending cease and desist letters, 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, third parties have registered the name TIFFANY in the U.S. in the food services category, and in a number of foreign countries in respect of certain product categories (including, in a few countries, the categories of food, cosmetics, jewelry, clothing 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.



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K-8


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 10% of the Company's worldwide net sales in 2014, 2013 and 2012.

In December 2012, Tiffany entered into an Amended and Restated Agreement (the "Peretti Agreement") with Ms. Peretti. Pursuant to the Peretti Agreement, which largely reflects the long-standing rights and marketing and royalty obligations of the parties, Ms. Peretti granted 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 $8,000,000 and to take certain actions to protect the use and registration of Ms. Peretti's copyrights and trademarks.

The Peretti Agreement has a term of 20 years 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 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).


MERCHANDISE PURCHASING, MANUFACTURING AND RAW MATERIALS

The Company primarily manufactures jewelry in New York, Rhode Island, and Kentucky, and silver hollowware in Rhode Island. In 2014, the Company also established jewelry manufacturing operations in Thailand and jewelry polishing operations in the Dominican Republic. The Company processes, cuts and polishes diamonds at other facilities outside the U.S. In total, these internal manufacturing facilities produce more than half of the merchandise sold by the Company. The balance, including 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 product quality, gross margin, access to or mastery of various jewelry-making skills and technology, support for alternative capacity and the cost of capital investments.

Rough and Polished Diamonds. Of the world's largest diamond producing countries, the vast majority of diamonds purchased by the Company originate from Australia, Botswana, Canada, Namibia, Russia and Sierra Leone. The Company has established diamond processing operations that purchase, sort, cut and/or polish rough diamonds for its use. The Company has such operations in Belgium, Botswana, Mauritius, Namibia and Vietnam. The Company also established such operations in Cambodia in 2014. The Company's operations in Botswana and Namibia allow it to access rough diamond allocations reserved for local manufacturers as operations in those countries are conducted through companies in which local third-parties own minority, non-controlling interests. The Company maintains a relationship and has an arrangement with these local third-parties in each of those countries; however, if circumstances warrant, the Company could seek to replace its existing local partners.


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In order to acquire rough diamonds, the Company must purchase mixed assortments of rough diamonds. It is thus necessary to knowingly purchase some rough diamonds that cannot be cut and polished to meet the Company's quality standards and that must be sold to third-parties; such sales are reported in the Other non-reportable segment. To make such sales, the Company charges a market price and is, therefore, unable to earn a significant profit, if any, above its original cost. Sales of rough diamonds in the Other non-reportable segment have had and are expected to continue to have the effect of modestly reducing the Company's overall gross margins.

The Company, from time to time, secures supplies of rough diamonds by agreeing to purchase a defined portion of a mine's output at the market price prevailing at the time of production. Under such agreements, management anticipates that it will purchase approximately $160,000,000 of rough diamonds in 2015. However, the Company will also purchase rough diamonds from other suppliers, although it has no contractual obligations to do so. In certain instances, the Company has provided loans to, or made equity investments in, mining projects in order to secure diamond supplies.

In recent years, approximately 65% - 75% (by dollar value) of the polished diamonds used in jewelry have been produced from rough diamonds that the Company has purchased. The balance of the Company's needs for polished diamonds is purchased from polishers or polished-diamond dealers. It is the Company's intention to continue to supply the majority of its needs for diamonds by purchasing and polishing
rough diamonds.

The Company purchases polished diamonds principally from four key vendors. The Company generally enters into purchase orders for fixed quantities with its polished-diamond vendors. These relationships 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. However, were trade relations between the Company and one or more of these vendors to be disrupted, the Company's sales could be adversely affected in the short term until alternative supply arrangements could be established.

Products containing one or more diamonds of varying sizes, including diamonds used as accents, side-stones and center-stones, accounted for 58%, 58% and 55% of worldwide net sales in 2014, 2013 and 2012. Products containing one or more diamonds of one carat or larger accounted for 14%, 15% and 13% of worldwide net sales in each of those years.

Conflict Diamonds. Media attention has been drawn to the issue of "conflict" or "blood" diamonds. These terms are 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 conflict diamonds from diamonds produced in other regions once they have been polished. Therefore, concerned participants in the diamond trade, including the Company and nongovernment organizations, seek to exclude "conflict" or "blood" 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 underscore that the aforementioned system does not control diamonds produced in state-sanctioned mines under poor working conditions. The Company has informed its vendors that it does not intend to purchase Zimbabwean-produced diamonds. Accordingly, the Company has implemented the Diamond Source Warranty Protocol, which requires vendors to provide a warranty that loose polished diamonds were not obtained from Zimbabwean mines.

The Diamond Trading Company ("DTC"). The supply and prices of rough and polished diamonds in the principal world markets have been and continue to be influenced by the DTC, an affiliate of the De Beers Group. Over the past decade, the DTC's historical ability to control worldwide production has been

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significantly diminished due to its lower share of worldwide production, changing policies in diamond-producing countries and revised contractual arrangements with third-party mine operators. Although the market share of the DTC has diminished, the DTC continues to supply a meaningful portion of the world market for rough, gem-quality diamonds.

The DTC continues to exert influence on the demand for polished diamonds through the requirements it imposes on those ("sightholders") who purchase rough diamonds from the DTC. Some, but not all, of the Company's suppliers are DTC sightholders, and the Company estimates that a significant portion of the diamonds that it has purchased have had their source with the DTC. The Company is a DTC sightholder for rough diamonds through its operations in Belgium and its African joint ventures.

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.

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 fine white diamonds, in the color ranges D through I. Management does not foresee a shortage of diamonds in this color range 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.

Manufactured Diamonds. Manufactured diamonds are produced in small but growing quantities. Although significant questions remain as to the ability of producers to produce manufactured diamonds economically within a full range of sizes and natural diamond colors, and as to consumer acceptance of manufactured diamonds, manufactured diamonds are becoming a larger factor in the market. Should manufactured 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 manufactured diamonds.

Purchases of Other Polished Gemstones and Precious Metals. Other polished gemstones and precious metals used in making jewelry are purchased from a variety of sources. Most purchases are from suppliers with which Tiffany enjoys long-standing relationships.

The Company generally enters into purchase orders for fixed quantities with other polished gemstone and precious metals 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 the termination.

The Company purchases precious metals from several suppliers for use in its internal manufacturing operations and for use by third-party manufacturers contracted to supply Tiffany merchandise. 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 Tiffany-supplied precious metals.

In recent years, there has been substantial volatility in the prices of precious metals.


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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 55 manufacturers, most of which have long-standing relationships with the Company. However, the Company does not enter into long-term supply arrangements with its finished goods vendors. The Company does enter into written blanket purchase order agreements with nearly all of its finished goods 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 blanket purchase order 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 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. Prior to 2007, the Company arranged for the production of TIFFANY & CO. brand watches with various third-party Swiss component manufacturers and assemblers. In 2007, the Company entered into a 20-year license and distribution agreement (the "Agreement") with the Swatch Group for the manufacture and distribution of TIFFANY & CO. brand watches. In December 2013, an arbitral panel deemed the Agreement terminated at the request of the parties. The arbitration award stated that the effective date of termination was March 1, 2013. See "Item 3. Legal Proceedings" for additional information regarding the arbitration proceeding and the subsequent annulment action. Royalties payable to the Company under the Agreement were not significant in any year, and watches manufactured under the Agreement and sold in TIFFANY & CO. stores constituted 1% of worldwide net sales in 2013 and 2012.

The Company is proceeding with plans to design, produce, market and distribute TIFFANY & CO. brand watches through certain of its Swiss subsidiaries. Management expects to introduce new TIFFANY & CO. brand watches in April 2015. In support of this introduction, the Company has relationships with approximately 20 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. The effective development and growth of this watch business has required and will continue to require additional resources and involves risks and uncertainties. Under the Agreement, the Swatch Group retained the right to sell watches marked with the TIFFANY & CO. trademark for a period of time subsequent to the termination of the Agreement and had no obligation to reacquire any inventory sold to retailers during this period. As such, the continued presence in the retail market of TIFFANY & CO. brand watches produced under the Agreement may negatively impact the Company’s sales and marketing efforts for its new collection of watches.


COMPETITION

The global jewelry industry is competitively fragmented. The Company encounters significant competition in all product lines. 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 price for diamond jewelry reflects 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

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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, 2015, the Company employed an aggregate of approximately 12,000 full-time and
part-time persons. Of those employees, approximately 5,700 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. The public may read and copy these materials at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding Tiffany & Co. and other companies that electronically file materials with the SEC. Copies of the Company's reports on Form 10-K, Forms 10-Q and Forms 8-K may be obtained, free of charge, on the Company's website at http://investor.tiffany.com/financials.cfm.


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; changes in the market value of 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 because of its cost base and inventory investment.

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.


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The Company has invested in and operates a significant number of stores in Greater China and anticipates significant further expansion. Should the Chinese economy experience a significant economic slowdown, the sales and profitability of stores in Greater China as well as stores in other markets that serve Chinese tourists could be affected.    

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 would result in higher inventories in the short-term.

(iii) The Company conducts significant operations outside the United States, and the risks of doing business internationally could increase its costs, reduce its profits or disrupt its business.

The Company generates a majority of its worldwide net sales outside the United States. It also has foreign manufacturing operations, and relies on certain foreign third-party vendors and suppliers. In addition, the Company maintains investments in, and has provided loans to, certain foreign suppliers. As a result, the Company is subject to the risks of doing business outside the United States, including:
the laws, regulations and policies of foreign 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;
potential negative consequences from changes in taxation policies or currency restructurings;
import and export licensing requirements and regulations, as well as unforeseen changes in regulatory requirements;
economic instability in foreign countries;
the difficulty of managing an organization doing business in many jurisdictions;
uncertainties as to enforcement of certain contract and other rights;
the potential for rapid and unexpected changes in government, economic and political policies, political or civil unrest, acts of terrorism or the threat of international boycotts or U.S. anti-boycott legislation; and
inventory risk exposures.

While these factors and the effect of these factors 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.


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(iv) Weakening foreign currencies may negatively affect the Company's sales and profitability.

The Company operates retail stores in various countries outside of the U.S. and, as a result, is exposed to market risk from fluctuations in foreign currency exchange rates, particularly the Japanese Yen, Euro and British Pound. In 2014, sales in countries outside of the U.S. in aggregate represented more than half of the Company's net sales and earnings from operations. In order to maintain its worldwide relative pricing structure, a substantial weakening of foreign currencies against the U.S. dollar would require the Company to raise its retail prices or reduce its profit margins in various locations outside of the U.S. Consumers in those markets may not accept significant price increases on the Company's goods; thus, there is a risk that a substantial weakening of foreign currencies would result in reduced sales and profitability. In addition, a weakening in foreign currency exchange rates 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 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.

(v) Regional instability and conflict could disrupt tourist travel and local consumer spending.

Unsettled regional and global conflicts or crises such as military actions, terrorist activities, natural disasters, government regulations or other conditions may negatively affect spending by foreign tourists and local consumers in the various regions where the Company operates retail stores which would adversely affect its sales and earnings.

(vi) 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. 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.

(vii) Changes in costs of diamonds 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 and non-jewelry offerings are made with diamonds, gemstones and/or precious metals. Acquiring diamonds is difficult because of limited supply and the Company may not be able to maintain a comprehensive selection of diamonds in each retail location due to the broad assortment of sizes, colors, clarity grades and cuts demanded by customers. A significant change in the costs or 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 raw materials and/or high-quality rough and polished diamonds within the quality grades, colors and sizes that customers demand could affect, negatively or positively, customer demand, sales and gross profit margins. Additionally, should manufactured diamonds be offered in significant quantities and gain consumer acceptance, the supply of and prices for natural diamonds may be affected.


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If trade relationships between the Company and one or more of its significant vendors were disrupted, the Company's sales could be adversely affected in the short-term until alternative supply arrangements could be established.

(viii) Volatile global economic conditions may have a material adverse effect on the Company's liquidity and capital resources.

The global economy and the credit and equity markets have undergone significant disruption in recent years. Any prolonged economic weakness could have an adverse effect on the Company's cost of borrowing, could diminish its ability to service or maintain existing financing and could make it more difficult for the Company to obtain additional financing or to refinance existing long-term obligations. In addition, any significant deterioration in the equity markets could negatively affect the valuation of pension plan assets and result in increased minimum funding requirements.

(ix) The Company may be unable to lease sufficient space for its retail stores in prime locations.

The Company, positioned as a luxury goods retailer, has established its retail presence in choice store locations. If the Company cannot secure and retain locations on suitable terms in prime and desired luxury shopping locations, its expansion plans, sales and earnings could be jeopardized.

In Japan, many of the TIFFANY & CO. stores are located in department stores generating 75% of the net sales in Japan and 10% of worldwide net sales in 2014. The Company also has TIFFANY & CO. stores located in department stores in other markets. Should one or more department store operators elect or be required to close one or more stores now housing a TIFFANY & CO. store, the Company's sales and earnings would be reduced while alternative premises were being obtained. The Company's commercial relationships with department stores, and their respective abilities to continue as leading department store operators, have been and will continue to affect the Company's business in Japan and the other markets.

(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 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.

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

The TIFFANY & CO. brand's association with quality, luxury and exclusivity is integral to the success of the Company's business. The Company's expansion plans for retail and 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

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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. products or in respect of the Company's third-party vendors or the diamond or jewelry industry, and any media coverage resulting therefrom, may harm the TIFFANY & CO. brand and reputation, cause a loss of consumer confidence in the TIFFANY & CO. brand and the industry, and negatively affect the Company's results of operations. The considerable expansion in the use of social media over recent years has compounded the potential scope of the negative publicity that could be generated by such incidents.

(xii) If diamond mining and exploration companies, to which the Company or its subsidiaries have provided financing, were to experience financial difficulties, those funds might not be recovered, which would reduce the Company's earnings and could result in losing access to the mine's output.

The Company and its subsidiaries may, from time to time, provide financing to diamond mining and exploration companies in order to obtain rights to purchase mining output. As of January 31, 2015, the carrying amount of receivables was $59,345,000 under these arrangements, of which more than $40,000,000 was related to one mining and exploration company. Mining operations are inherently risky, and often occur in regions subject to additional political, social and environmental risks, such as the resurgence of the Ebola virus in 2014 in certain regions of Africa. Given these risks, there is no assurance that the diamond mining and exploration companies under these arrangements will be able to meet their obligations to the Company. If a diamond mining or exploration company defaults under these financings, the Company would be required to take a period charge in respect of all or a portion of the financing, which would affect the Company's earnings. Additionally, the Company could lose access to the mine's output under the related supply agreements. The Company has experienced such situations in the past.

(xiii) A significant data security or privacy breach of the Company's information systems could affect
its business.

The protection of customer, employee and company data is important to the Company, and the Company's customers and employees expect that their personal information will be adequately protected. In addition, the regulatory environment surrounding information security and privacy is becoming increasingly demanding, with evolving requirements in the various jurisdictions in which the Company does business. Although the Company has developed and implemented systems and processes that are designed to protect personal and Company information and prevent data loss and other security breaches, such measures cannot provide absolute security. Additionally, the Company’s 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 information, 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 and Company information may also be adversely impacted by data security or privacy breaches that occur at its third-party vendors. The Company cannot control these vendors and therefore cannot guarantee that a data security or privacy breach of their systems will not occur in the future. A significant breach of customer, employee or company data could damage the Company's reputation, its relationship with customers and the TIFFANY & CO. brand and could result in lost sales, sizable fines, significant breach-notification 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, or to comply with state, federal and international laws that may be enacted to address those threats.


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(xiv) 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, security breaches or natural disasters. Damage, disruption or shutdown of the Company’s information systems may require a systematic investment to fix 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 has commenced a 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 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 and could also affect the Company's reputation,
its relationship with customers and the TIFFANY & CO. brand, which could result in reduced sales
and profitability.

(xv) 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.

(xvi) 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 more than half of the merchandise 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.

(xvii) The Company is engaged in efforts to design, produce, market and distribute TIFFANY & CO. brand watches; however, there is no assurance that the Company will be able to effectively develop its new watch business or that such business will be successful.

The Company is proceeding with plans to design, produce, market and distribute TIFFANY & CO. brand watches through certain of its Swiss subsidiaries. Management expects to introduce new TIFFANY & CO. brand watches in April 2015. The effective development and growth of a watch business has required and

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will continue to require additional resources and involves risks and uncertainties, including: (i) upfront and ongoing expenditures; (ii) the need to employ highly specialized and experienced personnel; (iii) new regulatory requirements; (iv) dependence on relatively small supply partners; (v) production and distribution inefficiencies; and (vi) the need to efficiently integrate operations with the Company’s existing business models. In addition, as with any new business, the Company will be competing with businesses with stronger market positions and has invested and will continue to invest significant resources in marketing to build customer awareness and to establish product differentiation. Despite the Company's efforts, there is, however, no assurance that the Company will be able to effectively develop its new watch business or that such business will be successful in growing the Company's revenues or enhancing its profitability.


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, 2015:
 
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
121

664,900

600 - 17,600

5,500

Asia-Pacific
73

186,800

400 - 12,800

2,600

Japan:
 
 
 
 
Tokyo Ginza
1

12,000

12,000

12,000

Other stores
55

139,200

900 - 7,500

2,500

Europe:
 
 
 
 
London Old Bond Street
1

22,400

22,400

22,400

Other stores
37

114,600

600 - 9,600

3,100

Emerging Markets
6

13,000

400 - 5,900

2,200

Total
295

1,198,400

400 - 45,500

4,100



NEW YORK FLAGSHIP STORE

The Company owns 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. Currently, approximately 45,500 gross square feet of this 124,000 square foot building are devoted to retail sales, with the balance devoted to administrative offices, certain product services, jewelry manufacturing and storage. The New York Flagship store is the focal point for marketing and public relations efforts.

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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 FACILITIES

The Company owns and operates jewelry manufacturing facilities in Cumberland, Rhode Island, Mount Vernon, New York, and Lexington, Kentucky, and leases jewelry manufacturing facilities in Pelham, New York and Thailand as well as a jewelry polishing facility in the Dominican Republic. Lease expiration dates range from 2016 to 2023. The owned and leased facilities total approximately 251,000 square feet.

The Company leases a facility in Belgium and owns facilities in Botswana, Cambodia, Mauritius, Namibia and Vietnam (although the land in Cambodia, Namibia and Vietnam is leased) that sort, cut and/or polish rough diamonds for use by Tiffany. These facilities total approximately 264,000 square feet and the lease expiration dates range from 2015 to 2062.


Item 3. Legal Proceedings.

Arbitration Award. On December 21, 2013, an award was issued (the "Arbitration Award") in favor of The Swatch Group Ltd. ("Swatch") and its wholly-owned subsidiary Tiffany Watch Co. ("Watch Company"; Swatch and Watch Company, together, the "Swatch Parties") in an arbitration proceeding (the "Arbitration") between the Registrant and its wholly-owned subsidiaries, Tiffany and Company and Tiffany (NJ) Inc. (the Registrant and such subsidiaries, together, the "Tiffany Parties") and the Swatch Parties.

The Arbitration was initiated in June 2011 by the Swatch Parties, who sought damages for alleged breach of agreements entered into by and among the Swatch Parties and the Tiffany Parties in December 2007 (the "Agreements"). The Agreements pertained to the development and commercialization of a watch business and, among other things, contained various licensing and governance provisions and approval requirements relating to business, marketing and branding plans and provisions allocating profits relating to sales of the watch business between the Swatch Parties and the Tiffany Parties.

In general terms, the Swatch Parties alleged that the Tiffany Parties breached the Agreements by obstructing and delaying development of Watch Company’s business and otherwise failing to proceed in good faith. The Swatch Parties sought damages based on alternate theories ranging from CHF 73,000,000 (or approximately $79,000,000 at January 31, 2015) (based on its alleged wasted investment) to CHF 3,800,000,000 (or approximately $4,100,000,000 at January 31, 2015) (calculated based on alleged future lost profits of the Swatch Parties and their affiliates over the entire term of the Agreements).

The Registrant believes that the claims of the Swatch Parties are without merit. In the Arbitration, the Tiffany Parties defended against the Swatch Parties’ claims vigorously, disputing both the merits of the claims and the calculation of the alleged damages. The Tiffany Parties also asserted counterclaims for

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damages attributable to breach by the Swatch Parties, stemming from the Swatch Parties’ September 12, 2011 public issuance of a Notice of Termination purporting to terminate the Agreements due to alleged material breach by the Tiffany Parties, and for termination due to such breach. In general terms, the Tiffany Parties alleged that the Swatch Parties did not have grounds for termination, failed to meet the high standard for proving material breach set forth in the Agreements and failed to provide appropriate management, distribution, marketing and other resources for TIFFANY & CO. brand watches and to honor their contractual obligations to the Tiffany Parties regarding brand management. The Tiffany Parties’ counterclaims sought damages based on alternate theories ranging from CHF 120,000,000 (or approximately $130,000,000 at January 31, 2015) (based on its wasted investment) to approximately CHF 540,000,000 (or approximately $584,000,000 at January 31, 2015) (calculated based on alleged future lost profits of the Tiffany Parties).

The Arbitration hearing was held in October 2012 before a three-member arbitral panel convened in the Netherlands pursuant to the Arbitration Rules of the Netherlands Arbitration Institute (the "Rules"), and the Arbitration record was completed in February 2013.

Under the terms of the Arbitration Award, and at the request of the Swatch Parties and the Tiffany Parties, the Agreements were deemed terminated. The Arbitration Award stated that the effective date of termination was March 1, 2013. Pursuant to the Arbitration Award, the Tiffany Parties were ordered to pay the Swatch Parties damages of CHF 402,737,000 (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.

Prior to the ruling of the arbitral panel, no accrual was established in the Company's consolidated financial statements because management did not believe the likelihood of an award of damages to the Swatch Parties was probable. As a result of the ruling, in the fourth quarter of 2013, the Company recorded a charge of $480,211,000, which includes the damages, interest, and other costs associated with the ruling and which has been classified as Arbitration award expense in the consolidated statement of earnings.

On March 31, 2014, the Tiffany Parties took action in the District Court of Amsterdam to annul the Arbitration Award. Generally, arbitration awards are final; however, Dutch law does provide for limited grounds on which arbitral awards may be set aside. The Tiffany Parties petitioned to annul the Arbitration Award on these statutory grounds. These grounds include, for example, that the arbitral tribunal violated its mandate by changing the express terms of the Agreements.

A three-judge panel presided over the annulment hearing on January 19, 2015, and, on March 4, 2015, issued a decision in favor of the Tiffany Parties. Under this decision, the Arbitration Award is set aside. However, the Swatch Parties have the right to file an appeal of the District Court's decision, and the Arbitration Award may ultimately be upheld by the courts of the Netherlands. If the Swatch Parties assert their right to appeal, which expires on June 4, 2015, Registrant’s management expects that the annulment action will not be ultimately resolved for at least 18 months.

If the Arbitration Award is finally annulled, management anticipates that the claims and counterclaims that formed the basis of the Arbitration, and potentially additional claims and counterclaims, will be litigated in court proceedings between and among the Swatch Parties and the Tiffany Parties. The identity and location of the courts that would hear such actions have not been determined at this time. Management also anticipates that the Tiffany Parties would seek the return of the amounts paid by them under the Arbitration Award in court proceedings.

In any litigation regarding the claims and counterclaims that formed the basis of the arbitration, issues of liability and damages will be pled and determined without regard to the findings of the arbitral panel. As such, it is possible that the court could find that the Swatch Parties were in material breach of their

TIFFANY & CO.
K-21


obligations under the Agreements, that the Tiffany Parties were in material breach of their obligations under the Agreements or that neither the Swatch Parties nor the Tiffany Parties were in material breach. If the Swatch Parties’ claims of liability were accepted by the court, the damages award cannot be reasonably estimated at this time, but could exceed the Arbitration Damages and could have a material adverse effect on the Registrant’s consolidated financial statements or liquidity.

Although the District Court has issued a decision in favor of the Tiffany Parties, an amount will only be recorded for any return of amounts paid under the Arbitration Award when the District’s Court decision is final (i.e., after any right of appeal has been exhausted) and return of these amounts is deemed probable and collection is reasonably assured. As such, the Company has not recorded any amounts in its consolidated financial statements related to the District Court’s decision.

Additionally, management has not established any accrual in the Company's consolidated financial statements for the year ended January 31, 2015 related to the annulment process or any potential subsequent litigation because it does not believe that the final annulment of the Arbitration Award and a subsequent award of damages exceeding the Arbitration Damages is probable.

Royalties payable to the Tiffany Parties by Watch Company under the Agreements were not significant in any year and watches manufactured by Watch Company and sold in TIFFANY & CO. stores constituted 1% of worldwide net sales in 2013 and 2012.

The Company is proceeding with plans to design, produce, market and distribute TIFFANY & CO. brand watches through certain of its Swiss subsidiaries. Management expects to introduce new TIFFANY & CO. brand watches in April 2015. The effective development and growth of this watch business has required and will continue to require additional resources and involves risks and uncertainties.

Other 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 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.


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, 992,442 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 employee 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.

Performance of Company Stock

The Registrant's Common Stock is traded on the New York Stock Exchange. In consolidated trading, the high and low selling prices per share for shares of such Common Stock for 2014 were:
 
High

Low

First Quarter
$ 94.88

$ 80.38

Second Quarter
$ 103.38

$ 85.75

Third Quarter 
$ 105.66

$ 85.69

Fourth Quarter 
$ 110.60

$ 85.15


On March 16, 2015, the high and low selling prices quoted on such exchange were $86.86 and $85.38. On March 16, 2015, there were 15,241 holders of record of the Registrant's Common Stock.

In consolidated trading, the high and low selling prices per share for shares of such Common Stock for 2013 were:
 
High

Low

First Quarter
$ 74.20

$ 61.42

Second Quarter
$ 81.25

$ 70.70

Third Quarter 
$ 83.33

$ 73.63

Fourth Quarter 
$ 93.64

$ 78.15


TIFFANY & CO.
K-23


The following graph compares changes in the cumulative total shareholder return on the Company’s 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 on the New York Stock Exchange, plus the reinvestment of any dividends paid on the stock.
Assumes an investment of $100 on January 31, 2010 in the Company's common stock and in each of the two indices. The reinvestment of any subsequent dividends is also assumed.

Total returns are based on market capitalization; indices are weighted at the beginning of each period for which a return is indicated.

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 2013, a dividend of $0.32 per share of Common Stock was paid on April 10, 2013. On May 16, 2013, the Company announced a 6% increase in its regular quarterly dividend rate to a new rate of $0.34 per share of Common Stock which was paid on July 10, 2013, October 10, 2013 and January 10, 2014.

In 2014, a dividend of $0.34 per share of Common Stock was paid on April 10, 2014. On May 22, 2014, the Company announced a 12% increase in its regular quarterly dividend rate to a new rate of $0.38 per share of Common Stock which was paid on July 10, 2014, October 10, 2014 and January 12, 2015.

Issuer Purchases of Equity Securities

In March 2014, the Company's Board of Directors approved a share repurchase program which authorizes the Company to repurchase up to $300,000,000 of its Common Stock through open market transactions. Purchases are executed under a written plan for trading securities as specified under Rule 10b5-1 promulgated under the Securities and Exchange Act of 1934, as amended, the terms of which are within the Company's discretion, subject to applicable securities laws, and are based on market conditions and the Company's liquidity needs. The program will expire on March 31, 2017.

TIFFANY & CO.
K-24


The following table contains the Company's purchases of equity securities in the fourth quarter of 2014:
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

November 1, 2014 to November 30, 2014
9,611

$ 94.64

9,611

$ 276,860,000

December 1, 2014 to December 31, 2014



$ 276,860,000

January 1, 2015 to January 31, 2015
43,753

$ 88.85

43,753

$ 272,972,000

TOTAL
53,364

$ 89.89

53,364

$ 272,972,000



TIFFANY & CO.
K-25


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 2010-2014, which ended on January 31 of the following calendar year:
(in thousands, except per share amounts, percentages, ratios, stores and employees)
2014 a

2013 b

2012

2011 c

2010 d

EARNINGS DATA
 
 
 
 
 
Net sales
$
4,249,913

$
4,031,130

$
3,794,249

$
3,642,937

$
3,085,290

Gross profit
2,537,175

2,340,443

2,163,284

2,151,154

1,822,278

Selling, general & administrative expenses
1,645,746

1,555,903

1,466,067

1,442,728

1,227,497

Net earnings
484,179

181,369

416,157

439,190

368,403

Net earnings per diluted share
3.73

1.41

3.25

3.40

2.87

Weighted-average number of diluted common shares
129,918

128,867

127,934

129,083

128,406

BALANCE SHEET AND CASH FLOW DATA
 
 
 
 
 
Total assets
$
5,180,603

$
4,752,351

$
4,630,850

$
4,158,992

$
3,735,669

Cash and cash equivalents
729,957

345,778

504,838

433,954

681,591

Inventories, net
2,362,112

2,326,580

2,234,334

2,073,212

1,625,302

Short-term borrowings and long-term debt (including current portion)
1,116,548

1,003,519

959,272

712,147

688,240

Stockholders' equity
2,850,671

2,733,968

2,611,318

2,348,905

2,177,475

Working capital
2,953,354

2,531,648

2,564,997

2,262,998

2,204,632

Cash flows from operating activities
615,117

154,652

328,290

210,606

298,925

Capital expenditures
247,394

221,452

219,530

239,443

127,002

Stockholders' equity per share
22.04

21.31

20.57

18.54

17.15

Cash dividends paid per share
1.48

1.34

1.25

1.12

0.95

RATIO ANALYSIS AND OTHER DATA
 
 
 
 
 
As a percentage of net sales:
 
 
 
 
 
Gross profit
59.7
%
58.1
%
57.0
%
59.0
%
59.1
%
Selling, general & administrative expenses
38.7
%
38.6
%
38.6
%
39.6
%
39.8
%
Net earnings
11.4
%
4.5
%
11.0
%
12.1
%
11.9
%
Capital expenditures
5.8
%
5.5
%
5.8
%
6.6
%
4.1
%
Return on average assets
9.7
%
3.9
%
9.5
%
11.1
%
10.2
%
Return on average stockholders' equity
17.3
%
6.8
%
16.8
%
19.4
%
18.1
%
Total debt-to-equity ratio
39.2
%
36.7
%
36.7
%
30.3
%
31.6
%
Dividends as a percentage of net earnings
39.5
%
93.9
%
38.1
%
32.5
%
32.7
%
Company-operated TIFFANY & CO. stores
295

289

275

247

233

Number of employees
12,000

10,600

9,900

9,800

9,200



TIFFANY & CO.
K-26


NOTES TO SELECTED FINANCIAL DATA

a.
Financial information and ratios for 2014 include $93,779,000 of net pre-tax expense ($60,956,000 net after tax expense, or $0.47 per diluted share) associated with the redemption of $400,000,000 in aggregate principal amount of certain senior notes prior to their scheduled maturities. See "Item 8. Financial Statements and Supplementary Data - Note G - Debt" for additional information.
b.
Financial information and ratios for 2013 include the following amounts, totaling $482,101,000 of net pre-tax expense ($299,188,000 net after-tax expense, or $2.32 per diluted share):
$480,211,000 pre-tax expense associated with the Swatch arbitration award and $7,489,000 pre-tax income associated with a foreign currency transaction gain on this expense. See "Item 8. Financial Statements and Supplementary Data - Note J - Commitments and Contingencies" for additional information regarding the arbitration proceeding; and
$9,379,000 pre-tax expense 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 will be recovered.

c.
Financial information and ratios for 2011 include $42,719,000 of net pre-tax expense ($25,994,000 net after-tax expense, or $0.20 per diluted share) associated with the relocation of Tiffany's New York headquarters staff to a single location. This expense is primarily related to the fair value of the remaining non-cancelable lease obligations reduced by the estimated sublease rental income as well as the acceleration of the useful lives of certain property and equipment, incremental rent during the transition period and lease termination payments.

d.
Financial information and ratios for 2010 include the following amounts, totaling $17,635,000 of net pre-tax expense ($7,672,000 net after-tax expense, or $0.06 per diluted share):
$17,635,000 pre-tax expense associated with the relocation of Tiffany's New York headquarters staff to a single location. This expense is primarily related to the acceleration of the useful lives of certain property and equipment and incremental rent during the transition period; and
$3,096,000 net income tax benefit primarily due to a change in the tax status of certain subsidiaries associated with the acquisition in 2009 of additional equity interests in diamond sourcing and polishing operations.


TIFFANY & CO.
K-27


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 STRATEGIES

The Company's key strategies are:

To enhance customer awareness of the TIFFANY & CO. trademark (the “Brand”), its heritage, its products and its association with quality and luxury.

The Brand is the single most important asset of Tiffany and, indirectly, of the Company. Management intends to continue to invest in marketing and public relations programs designed to build awareness of the Brand, its heritage and its products with both new and existing customers, as well as to enhance the Brand’s association among consumers with quality and luxury. Management plans to continue to monitor these efforts and the strength of the Brand through market research.

To maintain an active product development program.

The Company continues to invest in product development in order to introduce new design collections and extensions of existing collections that are designed to appeal to the Company’s existing customer base as well as to new customers. The Company is also investing in the watch category, which it deems appropriate for the Brand and which presents incremental
growth opportunities.

To enhance the customer experience with superior customer service and through engaging
store environments.

To ensure a superior shopping experience, the Company employs highly-qualified sales and customer service professionals, focuses on enhancing sales and product training programs, and is investing in enhancing its information systems for customer relationship management. The Company also focuses 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.

To selectively expand global distribution without compromising the value of the Brand.

Management intends to continue to expand its global distribution by adding stores in both new and existing markets and through its e-commerce websites. Management recognizes that over-saturation of any market could diminish the distinctive appeal of the Brand, but believes that there are a significant number of potential worldwide locations remaining that meet financial and
Brand requirements.

To maintain substantial control over product supply through direct diamond sourcing and internal jewelry manufacturing.

The Company's diamond processing operations purchase, sort, cut and/or polish rough diamonds for use in merchandise. The Company intends to continue to seek additional sources of diamonds

TIFFANY & CO.
K-28


which, combined with continued focus on its internal manufacturing operations, are designed to secure adequate product supplies and favorable product costs.

Through the efforts above, management is committed to the following long-term financial objectives:

To increase store productivity.

Management is committed to growing sales per square foot by increasing both consumer traffic and the percentage of store visitors who make a purchase. In addition, the Company is increasing, through store renovations, the percentage of selling space in some of its stores, which is intended to contribute to higher store productivity.

To achieve improved operating margins.

Management's long-term objective is to improve operating margin through gross margin improvement, which includes controlling product input costs, realizing greater efficiencies in its product supply chain and adjusting retail prices when appropriate. Additionally, management is focused on enhancing productivity by controlling selling, general and administrative expenses and generating sales leverage on fixed costs. These efforts are intended to generate a higher rate of operating earnings growth relative to sales growth.

To improve 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 flexibility to pursue strategic initiatives and allows for the return of excess capital to shareholders.


2014 SUMMARY

Worldwide net sales increased 5% to $4,249,913,000. However, the Company experienced a 1% sales decline in the fourth quarter primarily due to softness in the Americas region.

On a constant-exchange-rate basis (see "Non-GAAP Measures" below), worldwide net sales in 2014 increased 7% due to sales growth in all regions, and comparable store sales increased 4%.

The Company added a net of 6 TIFFANY & CO. stores (opening three in the Americas, two in Japan and one each in Asia-Pacific, Europe and the Emerging Markets while closing two in the Americas).

The Company continued to introduce new product designs highlighted by the TIFFANY T collection.

Earnings from operations as a percentage of net sales ("operating margin") improved 13.5 percentage points. However, excluding certain expenses in 2013 (see "Non-GAAP Measures" below), operating margin improved 1.3 percentage points due to an increase in gross margin.


TIFFANY & CO.
K-29


Net earnings were $484,179,000, or $3.73 per diluted share. Excluding certain expenses recorded in 2014 and 2013 (see "Non-GAAP Measures" below), net earnings increased 13% to $545,135,000, or $4.20 per diluted share.

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

Free cash flow (see "Non-GAAP Measures" below) was an inflow of $367,723,000 in 2014, compared with an outflow of $66,800,000 in 2013 which was entirely due to the arbitration award payment.

Growth in inventories, net of 2%, or 6% when excluding the effect of foreign currency translation, was less than the rate of sales growth.

The Company issued $550,000,000 of senior notes and used the net proceeds primarily to redeem $400,000,000 in aggregate principal amount of existing senior notes. As a result of such issuances and redemptions, the Company's average interest rate on its outstanding long-term debt was reduced and long-term debt maturities were extended. Additionally, the Company entered into new credit facilities with greater borrowing capacities replacing certain previous credit facilities.


RESULTS OF OPERATIONS

Non-GAAP Measures

The Company reports information in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"). The Company's management does not, nor does it suggest that investors should, consider non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. The Company presents such non-GAAP financial measures in reporting its financial results to provide investors with an additional tool to evaluate the Company's operating results.


TIFFANY & CO.
K-30


Net Sales. The Company's reported net sales reflect either a translation-related benefit from strengthening foreign currencies or a detriment from a strengthening U.S. dollar. Internally, management monitors and measures its sales performance on a non-GAAP basis that eliminates the positive or negative effects that result from translating sales made outside the U.S. into U.S. dollars ("constant-exchange-rate basis"). Management believes this constant-exchange-rate basis provides a more representative assessment of sales performance and provides better comparability between reporting periods. The following table reconciles the sales percentage increases (decreases) from the GAAP to the non-GAAP basis versus the previous year:
 
2014
 
2013
 
GAAP 
Reported

 
Translation
Effect

 
Constant-
Exchange-
Rate Basis

 
GAAP 
Reported

 
Translation
Effect

 
Constant-
Exchange-
Rate Basis

Net Sales:
 
 
 
 
 
 
 
 
 
 
 
Worldwide
5
 %
 
(2
)%
 
7
 %
 
6
 %
 
(4
)%
 
10
%
Americas
6

 

 
6

 
5

 

 
5

Asia-Pacific
9

 
(1
)
 
10

 
17

 
(1
)
 
18

Japan
(4
)
 
(8
)
 
4

 
(9
)
 
(20
)
 
11

Europe
6

 

 
6

 
9

 
2

 
7

Other
26

 

 
26

 
53

 

 
53

 
 
 
 
 
 
 
 
 
 
 
 
Comparable Store Sales:
 
 
 
 
 
 
 
 
 
 
 
Worldwide
2
 %
 
(2
)%
 
4
 %
 
3
 %
 
(3
)%
 
6
%
Americas
5

 
(1
)
 
6

 
3

 

 
3

Asia-Pacific
3

 
(1
)
 
4

 
10

 
(1
)
 
11

Japan
(7
)
 
(8
)
 
1

 
(10
)
 
(20
)
 
10

Europe
(1
)
 

 
(1
)
 
6

 
2

 
4

Other
8

 

 
8

 
14

 

 
14


Statements of Earnings. Internally, management monitors and measures its earnings performance excluding certain items listed below. Management believes excluding such items presents the Company's results on a more comparable basis to the corresponding period in the prior year, thereby providing investors with an additional perspective to analyze the results of operations of the Company. The following tables reconcile certain GAAP amounts to non-GAAP amounts:
(in thousands, except per share amounts)
GAAP
 
Debt extinguishment a increase/(decrease)
 
Non-GAAP
Year Ended January 31, 2015
 
 
 
 
 
Loss on extinguishment of debt
$
93,779

 
$
(93,779
)
 
$

Provision for income taxes
253,358

 
32,823

 
286,181

Net earnings
484,179

 
60,956

 
545,135

Diluted earnings per share
3.73

 
0.47

 
4.20

a 
Expenses associated with the redemption of $400,000,000 in aggregate principal amount of certain senior notes prior to their scheduled maturities (see "Loss on Extinguishment of Debt" below).


TIFFANY & CO.
K-31


(in thousands, except per share amounts)
GAAP
 
Arbitration award b
increase/ (decrease)
 
Specific cost-reduction initiatives c
(decrease)/increase
 
Non-GAAP
Year Ended January 31, 2014
 
 
 
 
 
 
 
Selling, general and administrative expenses
$
1,555,903

 
$

 
$
(9,379
)
 
$
1,546,524

Earnings from operations
304,329

 
480,211

 
9,379

 
793,919

As a % of sales
7.5
%
 
 
 
 
 
19.7
%
Other income, net
13,191

 
(7,489
)
 

 
5,702

Provision for income taxes
73,497

 
179,319

 
3,594

 
256,410

Effective tax rate
28.8
%
 
 
 
 
 
34.8
%
Net earnings
181,369

 
293,403

 
5,785

 
480,557

As a % of sales
4.5
%
 
 
 
 
 
11.9
%
Diluted earnings per share
1.41

 
2.28

 
0.04

 
3.73

b 
Amounts associated with the award issued in arbitration between the Swatch Group Ltd. and the Company. See "Item 8. Financial Statements and Supplementary Data - Note J - Commitments and Contingencies" for further information.
c 
Expenses associated with specific cost-reduction initiatives which included severance related to staffing reductions and subleasing of certain office space for which only a portion of the Company's future rent obligations will be recovered.

Free Cash Flow. Internally, management monitors its cash flow on a non-GAAP basis. The ability to generate free cash flow demonstrates how much cash the Company has available for discretionary and non-discretionary items 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 more representative assessment of operating cash flows. The following table reconciles GAAP net cash provided by operating activities to non-GAAP free cash flow:
 
Years Ended January 31,
 
(in thousands)
2015

2014

Net cash provided by operating activities
        $
615,117

        $
154,652

Less: Capital expenditures
(247,394
)
(221,452
)
Free cash inflow (outflow)
        $
367,723

        $
(66,800
)

Comparable Store Sales
Comparable store sales include only sales transacted in Company-operated stores open for more than 12 months. Sales for relocated stores are included in comparable store sales if the relocation occurs within the same geographical market. Sales for a new store are not included if the store was relocated from one department store to another or from a department store to a free-standing location. In all markets, the results of a store in which the square footage has been expanded or reduced remain in the comparable store base.


TIFFANY & CO.
K-32


Net Sales

In 2014, worldwide net sales increased $218,783,000, or 5%, due to growth in most regions. By product category, the fashion jewelry category increased $137,039,000, or 8% (reflecting growth in gold jewelry); the engagement jewelry & wedding bands category increased $62,875,000, or 5% (reflecting growth in solitaire diamond rings and wedding bands); and the statement, fine & solitaire jewelry category increased $13,351,000, or 1%.

In 2013, worldwide net sales increased $236,881,000, or 6%, due to growth in most regions. By product category, the statement, fine & solitaire jewelry category increased $167,707,000, or 22% (reflecting growth throughout the category, along with growing demand for colored diamonds and other gemstones); the engagement jewelry & wedding bands category increased $49,469,000, or 4% (reflecting growth in solitaire diamond rings); and the fashion jewelry category increased $36,546,000, or 2% (primarily due to sales growth of gold jewelry). Certain reclassifications were made to these categories to conform with management's current internal analysis of product sales.
Net sales by segment were as follows: 
(in thousands)
2014

 
2013

 
2012

 
2014 vs. 2013 % Change

 
2013 vs. 2012 % Change

Americas
$
2,033,453

 
$
1,926,864

 
$
1,839,969

 
6
 %
 
5
 %
Asia-Pacific
1,025,169

 
944,676

 
810,420

 
9

 
17

Japan
554,258

 
578,571

 
639,185

 
(4
)
 
(9
)
Europe
497,287

 
469,784

 
432,167

 
6

 
9

Other
139,746

 
111,235

 
72,508

 
26

 
53

 
$
4,249,913

 
$
4,031,130

 
$
3,794,249

 
5
 %
 
6
 %

Americas. Americas currently includes sales in 122 Company-operated TIFFANY & CO. stores in the United States, Canada and Latin America, as well as sales of TIFFANY & CO. products in certain of those markets through business-to-business, Internet, catalog and wholesale operations. Americas represented 48% of worldwide net sales in 2014, 2013 and 2012, while sales in the U.S. represented 88%, 88% and 89% of net sales in the Americas in those same periods.

In 2014, total sales increased $106,589,000, or 6%, due to an 11% increase in the average price per jewelry unit sold, which management attributes to price increases and a shift in sales mix toward higher-priced products. A 5% decline in the number of jewelry units sold was entirely due to soft demand for entry-level price point silver jewelry. Included in the $106,589,000 increase is an $80,856,000, or 5%, increase in comparable store sales due to geographically broad-based growth across most of the region and a $27,824,000 increase in non-comparable store sales. On a constant-exchange-rate basis, both total sales and comparable store sales increased 6%.

In 2013, total sales increased $86,895,000, or 5%, due to a 10% increase in the average price per jewelry unit sold partly offset by a 4% decline in the number of jewelry units sold. Management attributes the increase in average price primarily to a shift in sales mix toward higher-priced products and the decrease in unit volume primarily to soft demand for entry-level price point silver jewelry. Included in the $86,895,000 increase is a $43,393,000, or 3%, increase in comparable store sales led by growth in New York Flagship store sales as well as modest growth in branch store sales and a $46,563,000 increase in non-comparable store sales. On a constant-exchange-rate basis, total sales increased 5%, and comparable store sales increased 3%.

Asia-Pacific. Asia-Pacific currently includes sales in 73 Company-operated TIFFANY & CO. stores, as well as sales of TIFFANY & CO. products in certain markets through Internet and wholesale operations. Asia-

TIFFANY & CO.
K-33


Pacific represented 24%, 23% and 21% of worldwide net sales in 2014, 2013 and 2012. Sales in Greater China represented more than half of Asia-Pacific's net sales in those same periods.

In 2014, total sales increased $80,493,000, or 9%, due to a 5% increase in the average price per jewelry unit sold as well as a 4% increase in the number of jewelry units sold. Management attributes the increase in the average price to price increases and a shift in sales mix toward higher-priced products. The increase in the number of jewelry units sold reflected growth in all product categories. Included in the $80,493,000 increase is a $39,705,000 increase in non-comparable store sales, a $23,959,000, or 3%, increase in comparable store sales and a $17,373,000 increase in wholesale sales of TIFFANY & CO. merchandise to independent distributors. On a constant-exchange-rate basis, total sales increased 10% and comparable store sales increased 4% due to growth in most markets.

In 2013, total sales increased $134,256,000, or 17%, due to an 11% increase in the number of jewelry units sold and a 6% increase in the average price per jewelry unit sold. The increase in the number of jewelry units sold reflected growth in all product categories. Management attributes the increase in average price primarily to a shift in sales mix toward higher-priced products. Included in the $134,256,000 increase is a $74,818,000, or 10%, increase in comparable store sales, a $44,519,000 increase in non-comparable store sales and a $15,232,000 increase in sales of TIFFANY & CO. merchandise to independent distributors. On a constant-exchange-rate basis, total sales increased 18% and comparable store sales increased 11% due to geographically broad-based sales growth across the region.

Japan. Japan currently includes sales in 56 Company-operated TIFFANY & CO. stores, as well as sales of TIFFANY & CO. products through business-to-business, Internet and wholesale operations. Japan represented 13%, 14% and 17% of worldwide net sales in 2014, 2013 and 2012.

In 2014, total sales decreased $24,313,000, or 4%, and comparable store sales decreased $35,173,000, or 7%, due to currency translation. On a constant-exchange-rate basis, total sales increased 4% due to a 9% increase in the average price per jewelry unit sold partly offset by a 5% decrease in the number of jewelry units sold due to decreases in all categories. Management attributes the increase in average price to price increases and a shift in sales mix toward higher-priced products within the fashion jewelry category. Comparable store sales on a constant-exchange-rate basis increased 1%. The overall sales performance reflected significant sales growth in the first quarter prior to an increase in the consumption tax in April 2014, offset by softness in sales in the remaining quarters.

In 2013, total sales decreased $60,614,000, or 9%, and comparable store sales decreased $57,525,000, or 10%, due to currency translation. On a constant-exchange-rate basis, total sales increased 11% primarily due to a 16% increase in the average price per jewelry unit sold partly offset by a 5% decrease in the number of jewelry units sold. Management attributes the increase in average price primarily to a shift in sales mix toward higher-priced products and the decrease in the number of jewelry units sold to reduced fashion jewelry unit sales. Comparable store sales on a constant-exchange-rate basis increased 10%.

Europe. Europe currently includes sales in 38 Company-operated TIFFANY & CO. stores, as well as sales of TIFFANY & CO. products in certain markets through the Internet. Europe represented 12%, 12% and 11% of worldwide net sales in 2014, 2013 and 2012. Sales in the United Kingdom ("U.K.") represent more than 40% of European net sales.

In 2014, total sales increased $27,503,000, or 6%, due to a 3% increase in both the number of jewelry units sold and in the average price per jewelry unit sold. Management attributes the increase in the number of jewelry units sold to fashion jewelry and the increase in average price to price increases and a shift in sales mix toward higher-priced products within the fashion jewelry category. Included in the $27,503,000 increase is a $26,994,000 increase in non-comparable store sales. On a constant-

TIFFANY & CO.
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exchange-rate basis, total sales increased 6% due to strength in continental Europe and comparable store sales decreased 1%.

In 2013, total sales increased $37,617,000, or 9%, due to a 5% increase in the number of jewelry units sold and a 4% increase in the average price per jewelry unit sold. Management attributes the increase in the number of jewelry units sold to fashion jewelry and the increase in average price primarily to sales of higher priced merchandise across all product categories. Included in the $37,617,000 increase is a $21,653,000, or 6%, increase in comparable store sales, a $10,927,000 increase in non-comparable store sales, and a $5,047,000 increase in Internet sales. On a constant-exchange-rate basis, total sales increased 7% and comparable store sales increased 4% reflecting growth in most countries.

Other. Other consists of all non-reportable segments. Other includes the Emerging Markets region, which consists of retail sales in five TIFFANY & CO. stores in the U.A.E. and, beginning in February 2014, one TIFFANY & CO. store in Russia, and wholesale sales of TIFFANY & CO. merchandise to independent distributors for resale in certain emerging markets (primarily in the Middle East and, through January 2014, in Russia). In addition, Other includes wholesale sales of diamonds obtained through bulk purchases that were subsequently deemed not suitable for the Company's needs as well as earnings received from third-party licensing agreements.

In 2014, total sales increased $28,511,000, or 26%, primarily due to retail sales growth in the Emerging Markets region of $20,443,000, reflecting the opening of the first Company-operated TIFFANY & CO. store in Russia and comparable store sales growth of 8%. The remainder of the increase was primarily related to higher wholesale sales of diamonds. In 2013, total sales increased $38,727,000, or 53%, primarily due to retail sales growth in the U.A.E., as well as higher wholesale sales of rough diamonds. Comparable store sales of five TIFFANY & CO. stores in the U.A.E. increased 14% in 2013.

Store Data. In 2014, the Company added a net of 6 stores: three in the Americas (two in the U.S. and one in Mexico), two in Japan, one in Asia-Pacific (in Australia), one in Europe (in France) and one in the Emerging Markets (in Russia) while closing two stores in the Americas.

In 2013, the Company added a net of 14 stores: six in the Americas (three in the U.S., one each in Canada, Mexico and Brazil), seven in Asia-Pacific (four in China, two in Taiwan and one in Hong Kong) and three in Europe (two in Italy and one in Germany) while closing one store each in Asia-Pacific and
in Japan.

Sales per gross square foot generated by all company-operated stores were approximately $3,100 in 2014, $3,100 in 2013 and $3,000 in 2012.

Gross Margin
 
2014

 
2013

 
2012

Gross profit as a percentage of net sales
59.7
%
 
58.1
%
 
57.0
%

Gross margin (gross profit as a percentage of net sales) increased by 1.6 percentage points in 2014 largely benefiting from favorable product input costs and price increases, and, to some extent, a shift in mix to higher-margin products, especially in the fashion jewelry category.

Gross margin increased by 1.1 percentage points in 2013 primarily benefiting from reduced product cost pressures and price increases taken in the first half of the year. A continued shift in sales mix toward higher-priced, lower-margin products offset a portion of these benefits.

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

TIFFANY & CO.
K-35


long-term strategy is to continue that approach. Among the market conditions that management considers are consumer demand for the product category involved, which may be influenced by consumer confidence, and competitive pricing conditions. Management uses derivative instruments to mitigate certain foreign exchange and precious metal price exposures (see "Item 8. Financial Statements and Supplementary Data – Note H - Hedging Instruments"). Management increased retail prices in both 2014 and 2013 across all geographic regions and product categories.

Selling, General and Administrative Expenses
 
2014

 
2013

 
2012

SG&A expenses as a percentage of net sales
38.7
%
 
38.6
%
 
38.6
%
SG&A expenses increased $89,843,000, or 6%, in 2014 and $89,836,000, or 6%, in 2013. SG&A expenses in those years are not comparable due to the inclusion of certain expenses associated with specific cost-reduction initiatives in 2013. See "Non-GAAP Measures" for further details.

Excluding the 2013 items noted in "Non-GAAP Measures", SG&A expenses in 2014 increased $99,222,000, or 6%, largely reflecting increased marketing expenses of $30,484,000, increased fixed labor costs of $26,019,000 (primarily increased store-related labor costs) and increased store occupancy and depreciation expenses of $22,551,000 (related to new and existing stores).

Excluding the 2013 items noted in "Non-GAAP Measures", SG&A expenses in 2013 increased $80,457,000, or 5%, primarily due to increased fixed and variable labor costs (such as sales commissions and incentive compensation) of $34,628,000 and increased store occupancy and depreciation expenses of $32,577,000 (related to new and existing stores). In 2013, changes in foreign currency exchange rates had the effect of decreasing SG&A expenses by 3%.

SG&A expenses as a percentage of net sales, excluding the items noted in "Non-GAAP Measures", would have been 38.4% in 2013.

The Company's SG&A expenses are largely fixed in nature. Variable costs (which include items such as variable store rent, sales commissions and fees paid to credit card companies) represent approximately one-fifth of total SG&A expenses.

Arbitration Award Expense

In the fourth quarter of 2013, the Company recorded a charge of $480,211,000, related to the adverse arbitration ruling between The Swatch Group Ltd. and the Company, which includes the damages, interest and other costs associated with the ruling. See "Item 8. Financial Statements and Supplementary Data - Note J - Commitments and Contingencies" for additional information.

Earnings from Operations

Earnings from operations increased 193% in 2014 and decreased 56% in 2013 primarily due to the impact of the Arbitration Award. Operating margin increased 13.5 percentage points in 2014 and decreased 10.9 percentage points in 2013.

Excluding other operating expenses in 2013 (see below), earnings from operations increased 12% and 14% in 2014 and 2013, and operating margin improved 1.3 percentage points in 2014 (due to an increase in gross margin) and 1.3 percentage points in 2013 (primarily due to an increase in gross margin as well as sales leverage on operating expenses).

TIFFANY & CO.
K-36


Results by segment are as follows:
(in thousands)
2014

 
% of Net
Sales

 
2013

 
% of Net
Sales

 
2012

 
% of Net
Sales

Earnings (losses) from operations*:
 
 
 
 
 
 
 
 
 
 
Americas
$
435,507

 
21.4
 %
 
$
374,342

 
19.4
 %
 
$
345,917

 
18.8
 %
Asia-Pacific
281,586

 
27.5

 
244,142

 
25.8

 
188,510

 
23.3

Japan
195,985

 
35.4

 
215,582

 
37.3

 
204,510

 
32.0

Europe
107,806

 
21.7

 
101,153

 
21.5

 
90,955

 
21.0

Other
7,610

 
5.4

 
(649
)
 
(0.6
)
 
(6,254
)
 
(8.6
)
 
1,028,494

 
 
 
934,570

 
 
 
823,638

 
 
Unallocated corporate
expenses
(137,065
)
 
(3.2
)%
 
(140,651
)
 
(3.5
)%
 
(126,421
)
 
(3.3
)%
Earnings from operations before other operating expenses
891,429

 
21.0
 %
 
793,919

 
19.7
 %
 
697,217

 
18.4
 %
Other operating expenses

 
 
 
(489,590
)
 
 
 

 
 
Earnings from operations
$
891,429

 
21.0
 %
 
$
304,329

 
7.5
 %
 
$
697,217

 
18.4
 %
*
Percentages represent earnings (losses) from operations as a percentage of each segment's net sales.
On a segment basis, the ratio of earnings (losses) from operations to each segment's net sales in 2014 compared with 2013 was as follows:
Americas – the ratio increased 2.0 percentage points resulting from an improvement in gross margin;
Asia-Pacific – the ratio increased 1.7 percentage points primarily due to an improvement in gross margin partly offset by increased spending for new and existing stores;
Japan – the ratio decreased 1.9 percentage points due to a decrease in gross margin (primarily resulting from a reduced benefit from the Company's ongoing program to utilize Yen forward contracts for a portion of forecasted merchandise purchases);
Europe – the ratio increased 0.2 percentage point due to an improvement in gross margin partly offset by increased spending for new and existing stores; and
Other – the ratio increased 6.0 percentage points due to an improvement in the performance of retail operations in the Emerging Markets region and lower charges associated with the write-down of wholesale diamond inventory deemed not suitable for the Company's needs.

On a segment basis, the ratio of earnings (losses) from operations to each segment's net sales in 2013 compared with 2012 was as follows:
Americas – the ratio increased 0.6 percentage point resulting from an improvement in gross margin as well as sales leveraging of operating expenses;
Asia-Pacific – the ratio increased 2.5 percentage points primarily due to an improvement in gross margin as well as sales leveraging of operating expenses;
Japan – the ratio increased 5.3 percentage points primarily due to an improvement in gross margin (which includes a benefit from the Company's ongoing program to utilize forward contracts for a portion of forecasted merchandise purchases) as well as sales leveraging of operating expenses;

TIFFANY & CO.
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Europe – the ratio increased 0.5 percentage point due to an improvement in gross margin partly offset by increased store-related operating expenses; and
Other – the ratio improved 8.0 percentage points due to improvement in the performance of retail operations in the Emerging Markets region partly offset by charges associated with the valuation of wholesale diamonds not suitable for the Company's needs.

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 decreased by $3,586,000 in 2014. Such expenses increased by $14,230,000 in 2013 primarily due to increases in management incentive and stock-based compensation.

Other operating expenses in 2013 represent $480,211,000 of expenses associated with the adverse arbitration ruling between the Swatch Group Ltd. and the Company and $9,379,000 of expenses associated with specific cost-reduction initiatives. See "Item 8. Financial Statements and Supplementary Data - Note J - Commitments and Contingencies."

Interest Expense and Financing Costs

Interest expense and financing costs increased $249,000, or less than 1%, in 2014. Such expenses increased $3,585,000, or 6%, in 2013, primarily due to increased borrowings.

Other Income, Net

Other income, net includes interest income, gains/losses on investment activities and foreign currency transactions. Other income, net decreased $10,401,000, or 79%, in 2014, and increased $7,763,000, or 143%, in 2013. However, when excluding $7,489,000 of foreign currency transaction gains related to the Arbitration Award expense recorded in 2013, other income, net declined $2,912,000 in 2014 primarily due to other foreign currency transaction losses but increased $274,000 in 2013. See "Item 8. Financial Statements and Supplementary Data - Note J - Commitments and Contingencies" and "Non-GAAP Measures" for further information.

Loss on Extinguishment of Debt

In 2014, the Company recorded a loss on extinguishment of debt of $93,779,000 associated with the redemption of all of the aggregate principal amount outstanding of the Company's (i) $100,000,000 principal amount of 9.05% Series A Senior Notes due December 23, 2015; (ii) $125,000,000 principal amount of 10.0% Series A-2009 Senior Notes due February 13, 2017; (iii) $50,000,000 principal amount of 10.0% Series A Senior Notes due April 9, 2018; and (iv) $125,000,000 principal amount of 10.0% Series B-2009 Senior Notes due February 13, 2019 (collectively, the "Private Placement Notes") prior to maturity in accordance with the respective note purchase agreements governing each series of Private Placement Notes, which included provisions for make-whole payments in the event of
early repayment.

Provision for Income Taxes

The effective income tax rate was 34.4% in 2014 compared with 28.8% in 2013 and 35.3% in 2012. In 2013, the effective income tax rate would have been 34.8% when excluding the effects of certain expenses noted in "Non-GAAP Measures".


TIFFANY & CO.
K-38


LIQUIDITY AND CAPITAL RESOURCES

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

As of January 31, 2015, the Company’s cash and cash equivalents totaled $729,957,000, of which approximately one-third was held in locations outside the U.S. where the Company has the intention to indefinitely reinvest any undistributed earnings to support its continued expansion and investments outside of the U.S. Such cash balances are not available to fund U.S. cash requirements unless the Company were to decide to repatriate such funds and incur applicable income tax charges. The Company has sufficient sources of cash in the U.S. to fund its U.S. operations without the need to repatriate any of those funds held outside the U.S.

The following table summarizes cash flows from operating, investing and financing activities:
(in thousands)
2014

 
2013

 
2012

Net cash provided by (used in):
 
 
 
 
 
Operating activities
$
615,117

 
$
154,652

 
$
328,290

Investing activities
(216,989
)
 
(246,781
)
 
(331,146
)
Financing activities
(23,375
)
 
(65,426
)
 
71,446

Effect of exchange rates on cash and cash equivalents
9,426

 
(1,505
)
 
2,294

Net increase (decrease) in cash and cash equivalents
$
384,179

 
$
(159,060
)
 
$
70,884


Operating Activities

The Company had a net cash inflow from operating activities of $615,117,000 in 2014, $154,652,000 in 2013 and $328,290,000 in 2012. The change from 2013 to 2014 was primarily due to the improvement in operating performance and the timing of income tax payments and other payables. The change from 2012 to 2013 was impacted by the payment of the Arbitration Award (see "Item 8. Financial Statements and Supplementary Data - Note J - Commitments and Contingencies"), a decelerated rate of inventory growth and the timing of income tax payments.

Working Capital. Working capital (current assets less current liabilities) and the corresponding current ratio (current assets divided by current liabilities) were $2,953,354,000 and 5.5 at January 31, 2015 compared with $2,531,648,000 and 4.6 at January 31, 2014.

Accounts receivable, less allowances at January 31, 2015 were 3% higher than at January 31, 2014 due to sales growth. When excluding the effect of foreign currency translation, primarily from the weaker Japanese yen, accounts receivable, less allowances would have been 10% higher than January 31, 2014. On a 12-month rolling basis, accounts receivable turnover was 21 times in 2014 and 22 times in 2013.

Inventories, net at January 31, 2015 were 2% higher than at January 31, 2014. Finished goods inventories rose 4% to support new store openings and expanded product assortments, while combined raw material and work-in-process inventories decreased 2%. Net inventories rose 6% from January 31, 2014 when excluding the effect of foreign currency translation.

TIFFANY & CO.
K-39


Investing Activities

The Company had a net cash outflow from investing activities of $216,989,000 in 2014, $246,781,000 in 2013 and $331,146,000 in 2012. The decreased outflow in 2014 was due to net proceeds received from the sale of marketable securities and short term investments partly offset by increased capital expenditures. The increased outflow in 2012 was primarily due to payments of $82,664,000 to acquire intangible assets as well as a $25,000,000 payment related to an acquisition.

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 received from the sale of marketable securities and short-term investments of $15,245,000 during 2014, net purchases of investments in marketable securities and short-term investments of $23,460,000 during 2013 and net proceeds received from the sale of marketable securities of $4,063,000 during 2012.

Capital Expenditures. Capital expenditures are typically related to the opening, renovation and/or relocation of stores (which represented approximately half of capital expenditures in 2014, 2013 and 2012), distribution and manufacturing facilities and ongoing investments in information technology. Capital expenditures were $247,394,000 in 2014, $221,452,000 in 2013 and $219,530,000 in 2012, representing 6%, 5% and 6% of net sales in those respective years. The increase in 2014 reflected incremental spending for information technology systems and internal manufacturing capacity.

Notes Receivable Funded. The Company has extended loans to diamond mining and exploration companies in order to obtain rights to purchase the mine's output. The Company loaned $3,050,000 and $8,015,000 in 2013 and 2012 to various companies.

Proceeds from Notes Receivable Funded. In 2014 and 2013, the Company received $15,160,000 and $1,181,000 of repayments associated with loans extended to diamond mining and exploration companies discussed in Notes Receivable Funded above.

Payments to acquire intangible assets. In 2012, the Company made a $47,059,000 payment in connection with maintaining an exclusive license for Peretti-designed jewelry and products. The Company also made a $35,605,000 payment to secure a prime retail location in Europe.

Payment for acquisition. In 2012, the Company made a $25,000,000 payment related to the acquisition of net assets associated with the five existing independently-operated TIFFANY & CO. stores located in the U.A.E.

Financing Activities

The Company had net cash outflows from financing activities of $23,375,000 in 2014 and $65,426,000 in 2013 compared with an inflow of $71,446,000 in 2012. Year-over-year changes in cash flows from financing activities are largely driven by borrowings. Additionally, the Company resumed repurchasing its Common Stock in 2014 under a new share repurchase program after it did not repurchase any of its Common Stock in 2013.


TIFFANY & CO.
K-40


Recent Borrowings. The Company had net proceeds from short-term and long-term borrowings as follows:
(in thousands)
2014

 
2013

 
2012

Short-term borrowings:
 
 
 
 
 
(Repayments of) proceeds from credit facility borrowings, net
$
(12,454
)
 
$
49,883

 
$
47,278

Proceeds from other credit facility borrowings
19,803

 
89,806

 
40,298

Repayments of other credit facility borrowings
(3,412
)
 
(69,737
)
 
(361
)
Net proceeds from short-term borrowings
3,937

 
69,952

 
87,215

Long-term borrowings:
 
 
 
 
 
Proceeds from issuances
548,037

 

 
250,000

Repayments
(400,000
)
 

 
(60,000
)
Net proceeds from long-term borrowings
148,037

 

 
190,000

Net proceeds from total borrowings
151,974

 
69,952

 
277,215

Payments of debt extinguishment costs (included in operating activities)
(93,378
)
 

 

Net proceeds
$
58,596

 
$
69,952

 
$
277,215


Credit Facilities. In October 2014, Tiffany & Co. entered into a four-year $375,000,000 and a five-year $375,000,000 multi-bank, multi-currency, committed unsecured revolving credit facility, including letter of credit subfacilities (collectively, the "New Credit Facilities"), resulting in a total borrowing capacity of $750,000,000. The New Credit Facilities replaced the previously existing $275,000,000 three-year unsecured revolving credit facility and $275,000,000 five-year unsecured revolving credit facility, which were terminated and repaid concurrently with Tiffany & Co.'s entry into the New Credit Facilities. See "Item 8. Financial Statements and Supplementary Data - Note G - Debt" for additional information.

Other Credit Facilities. In July 2013, Tiffany & Co.'s wholly-owned subsidiary, Tiffany & Co. (Shanghai) Commercial Company Limited ("Tiffany-Shanghai"), 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 930,000,000 ($148,879,000 at January 31, 2015). The Tiffany-Shanghai Credit Agreement is available for Tiffany-Shanghai's general working capital requirements, which included repayment of a portion of the indebtedness under Tiffany-Shanghai's existing bank loan facilities. The six lenders that are party to the Tiffany-Shanghai Credit Agreement will make loans, upon Tiffany-Shanghai's request, for periods of up to 12 months at the applicable interest rates as announced by the People's Bank of China. The Tiffany-Shanghai Credit Agreement matures in July 2016. See "Item 8. Financial Statements and Supplementary Data - Note G - Debt" for additional information.

Under all of the Company's credit facilities, there were $234,013,000 of borrowings, $5,671,000 of letters of credit issued but not outstanding and $772,155,000 available for borrowing at January 31, 2015. The weighted-average interest rate for the amount outstanding at January 31, 2015 was 3.28% compared with 3.37% at January 31, 2014.

Senior Notes. In September 2014, Tiffany & Co. issued $250,000,000 aggregate principal amount of 3.80% Senior Notes due 2024 (the "2024 Notes") and $300,000,000 aggregate principal amount of 4.90% Senior Notes due 2044 (the "2044 Notes" and, together with the 2024 Notes, the "Senior Notes") in a private placement conducted pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The Senior Notes were issued at a discount with aggregate net proceeds of $548,037,000 (with an effective yield of 3.836% for the 2024 Notes and an effective yield of 4.926% for the 2044 Notes). Tiffany & Co. used the net proceeds from the issuance of the Senior Notes to redeem $400,000,000 in aggregate principal amount of long-term debt prior to their scheduled maturities which

TIFFANY & CO.
K-41


ranged from 2015 to 2019 and paid $93,378,000 of debt extinguishment costs associated with the redemption. The Company used the remaining net proceeds from the sale of the Senior Notes for general corporate purposes. See "Item 8. Financial Statements and Supplementary Data - Note G - Debt" for additional information.

In 2012, Tiffany & Co. issued $250,000,000 of long-term debt due 2042 at an interest rate of 4.40%. Proceeds were used to repay $60,000,000 of 10-year term, 6.56% Series D Senior Notes that came due in July 2012 and for general corporate purposes.

The ratio of total debt (short-term borrowings, current portion of long-term debt and long-term debt) to stockholders' equity was 39% at January 31, 2015 and 37% at January 31, 2014.

At January 31, 2015, the Company was in compliance with all debt covenants.

Share Repurchases. In January 2011, the Company's Board of Directors approved a stock repurchase program ("2011 Program") and terminated a previously-existing program. The 2011 Program authorized the Company to repurchase up to $400,000,000 of its Common Stock through open market or private transactions. The timing of repurchases and the actual number of shares to be repurchased depended on a variety of discretionary factors such as stock price, cash-flow forecasts and other market conditions. The Company suspended share repurchases during the second quarter of 2012 in order to allow for a more effective allocation of resources consistent with the Company's growth strategies. In January 2013, the Board of Directors extended the expiration date of the 2011 Program to January 31, 2014. The 2011 Program expired on January 31, 2014 with $163,794,000 of unused capacity.

In March 2014, the Company's Board of Directors approved a share repurchase program which authorizes the Company to repurchase up to $300,000,000 of its Common Stock through open market transactions. Purchases are executed under a written plan for trading securities as specified under Rule 10b5-1 promulgated under the Securities and Exchange Act of 1934, as amended, the terms of which are within the Company's discretion, subject to applicable securities laws, and are based on market conditions and the Company's liquidity needs. The program will expire on March 31, 2017.

The Company's share repurchase activity was as follows:
 
(in thousands, except per share amounts)
2014

 
2013

 
2012

Cost of repurchases
$
27,028

 
$

 
$
54,107

Shares repurchased and retired
301

 

 
813

Average cost per share
$
89.91

 
$

 
$
66.54


At January 31, 2015, $272,972,000 remained available for share repurchases under this authorization.

Dividends. The cash dividend on the Company's Common Stock was increased once in each of 2014, 2013 and 2012. The Company's Board of Directors declared quarterly dividends which totaled $1.48, $1.34 and $1.25 per common share in 2014, 2013 and 2012 with cash dividends paid of $191,171,000, $170,312,000 and $158,594,000 in those respective years. The dividend payout ratio (dividends as a percentage of net earnings) was 39%, 94% and 38% in 2014, 2013 and 2012. Dividends as a percentage of adjusted net earnings (see "Non-GAAP Measures") were 35% in 2014
and 2013.

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.


TIFFANY & CO.
K-42


Proceeds from Non-controlling Interest. In 2012, the Company received proceeds of $12,750,000 associated with its venture with Damas Jewellery LLC that acquired the five existing independently-operated TIFFANY & CO. stores located in the U.A.E. as noted in Payment for acquisition above.

Contractual Cash Obligations and Commercial Commitments

The following is a summary of the Company's contractual cash obligations at January 31, 2015:
(in thousands)
Total

2015

2016-2017

2018-2019

Thereafter

Unrecorded contractual obligations:
 
 
 
 
Operating leases a
$
1,461,677

$
237,091

$
398,344

$
270,226

$
556,016

Inventory purchase obligations b
376,202

376,202




Interest on debt c
731,406

36,653

71,853

70,400

552,500

Other contractual obligations d
108,922

78,754

20,049

4,269

5,850

Recorded contractual obligations:
 
 
 
 
 
Short-term borrowings
234,013

234,013




Long-term debt e
884,470


84,470


800,000

 
$
3,796,690

$
962,713

$
574,716

$
344,895

$
1,914,366

a)
Operating lease obligations do not include obligations for contingent rent, property taxes, insurance and maintenance that are required by most lease agreements. Contingent rent for the year ended January 31, 2015 totaled $38,572,000. See "Item 8. Financial Statements and Supplementary Data - Note J - Commitment and Contingencies" for a discussion of the Company’s operating leases.
b)
The Company will, from time to time, secure supplies of rough diamonds by agreeing to purchase a defined portion of a mine's output. Inventory purchase obligations associated with these agreements have been estimated at approximately $160,000,000 for 2015 and included in this table. Purchases beyond 2015 that are contingent upon mine production have been excluded as they cannot be reasonably estimated.
c)
Excludes interest payments on amounts outstanding under available lines of credit, as the outstanding amounts fluctuate based on the Company's working capital needs.
d)
Consists primarily of technology licensing and service contracts, fixed royalty commitments, construction-in-progress and packaging supplies.
e)
Amounts exclude any unamortized discount or premium.

The summary above does not include the following items:

Cash contributions to the Company's pension plan and cash payments for other postretirement obligations. The Company funds the Qualified Plan's trust in accordance with regulatory limits to provide for current service and for the unfunded benefit obligation over a reasonable period and for current service benefit accruals. To the extent that these requirements are fully covered by assets in the Qualified Plan, the Company may elect not to make any contribution in a particular year. No cash contribution is required in 2015 to meet the minimum funding requirements of the Employee Retirement Income Security Act ("ERISA"). The Company periodically evaluates whether to make discretionary cash contributions to the Qualified Plan, and currently does not anticipate making such contributions in 2015. This expectation is subject to change based on management's assessment of a variety of factors, including, but not limited to, asset performance, interest rates and changes in actuarial assumptions. The Company estimates cash payments for postretirement health-care and life insurance benefit obligations to be $1,734,000 in 2015.


TIFFANY & CO.
K-43


Unrecognized tax benefits at January 31, 2015 of $8,333,000 and accrued interest and penalties of $6,010,000. The final outcome of tax uncertainties is dependent upon various matters including tax examinations, interpretation of the applicable tax laws or expiration of statutes of limitations. The Company believes that its tax positions comply with applicable tax law and that it has adequately provided for these matters. However, the examinations may result in proposed assessments where the ultimate resolution may result in the Company owing additional taxes. As of January 31, 2015, unrecognized tax benefits are not expected to change materially in the next 12 months. Future developments may result in a change in this assessment.

The following is a summary of the Company's outstanding borrowings and available capacity under its credit facilities at January 31, 2015:
(in thousands)
Total
Capacity

Borrowings Outstanding

Letters of Credit Issued

Available
Capacity

Four-year revolving credit facility a 
$
375,000

$
25,916

$

$
349,084

Five-year revolving credit facility b
375,000

66,603

5,671

302,726

Other credit facilities c
261,839

141,494


120,345

 
$
1,011,839

$
234,013

$
5,671

$
772,155

a Matures in October 2018.
b Matures in October 2019.
c Maturities range from 2015 through 2016.

In addition, the Company has other available letters of credit and financial guarantees of $72,194,000 of which $24,092,000 was outstanding at January 31, 2015. Of those available letters of credit and financial guarantees, $59,092,000 expires within one year.

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.

Critical Accounting Estimates

The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require management to make certain estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. Actual results could differ from those estimates and the differences could be material. Periodically, the Company reviews all significant estimates and assumptions affecting the financial statements and records any necessary adjustments.

The development and selection of critical accounting estimates and the related disclosures below have been reviewed with the Audit Committee of the Company's Board of Directors. The following critical accounting policies that rely on assumptions and estimates were used in the preparation of the Company's consolidated financial statements:

Inventory. The Company writes down its inventory for discontinued and slow-moving products. This write-down is equal to the difference between the cost of inventory and its estimated market value, and is based on assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs might be required. The Company has not made any material changes in the accounting methodology used to establish its reserve for discontinued and slow-moving products during the past three years. At January 31, 2015, a 10% change

TIFFANY & CO.
K-44


in the reserve for discontinued and slow-moving products would have resulted in a change of $6,325,000 in inventory and cost of sales.

Property, plant and equipment and intangibles assets and key money. The Company reviews its property, plant and equipment and intangibles assets and key money for impairment when management determines that the carrying value of such assets may not be recoverable due to events or changes in circumstances. Recoverability of these assets is evaluated by comparing the carrying value of the asset with estimated future undiscounted cash flows. If the comparisons indicate that the value of the asset is not recoverable, an impairment loss is calculated as the difference between the carrying value and the fair value of the asset and the loss is recognized during that period. The Company did not record any material impairment charges in 2014, 2013 or 2012.

Goodwill. The Company performs its annual impairment evaluation of goodwill during the fourth quarter of its fiscal year or when circumstances otherwise indicate an evaluation should be performed. A qualitative assessment is first performed for each reporting unit to determine whether it is more-likely-than-not that the fair value of the reporting unit is less than its carrying value. If it is concluded that this is the case, an evaluation, based upon discounted cash flows, is performed and requires management to estimate future cash flows, growth rates and economic and market conditions. The 2014, 2013 and 2012 evaluations resulted in no impairment charges.

Notes receivables and other financing arrangements. The Company has provided financing to diamond mining and exploration companies in order to obtain rights to purchase the mine's output. Management evaluates these financing arrangements for potential impairment by reviewing the parties' financial statements and projections along with business, operational and other economic factors on a periodic basis. If the analyses indicate that the financing receivable is not recoverable, an impairment loss is recognized, in respect to all or a portion of the financing, during that period. The Company did not record any material impairment charges in 2014, 2013 or 2012.

Income taxes. The Company is subject to income taxes in U.S. federal and state, as well as foreign jurisdictions. The calculation of the Company's tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across the Company's global operations. Significant judgments and estimates are required in determining consolidated income tax expense. The Company's income tax expense, deferred tax assets and liabilities and reserves for uncertain tax positions reflect management's best assessment of estimated future taxes to be paid.

Foreign and domestic tax authorities periodically audit the Company's income tax returns. These audits often examine and test the factual and legal basis for positions the Company has taken in its tax filings with respect to its tax liabilities, including the timing and amount of deductions and the allocation of income among various tax jurisdictions ("tax filing positions"). Management believes that its tax filing positions are reasonable and legally supportable. However, in specific cases, various tax authorities may take a contrary position. In evaluating the exposures associated with the Company's various tax filing positions, management records reserves using a more-likely-than-not recognition threshold for income tax positions taken or expected to be taken. Earnings could be affected to the extent the Company prevails in matters for which reserves have been established or is required to pay amounts in excess of established reserves.

In evaluating the Company's ability to recover its deferred tax assets within the jurisdiction from which they arise, management considers all available evidence. The Company records valuation allowances when management determines it is more likely than not that deferred tax assets will not be realized in the future.

Employee benefit plans. The Company maintains several pension and retirement plans, as well as provides certain postretirement health-care and life insurance benefits for retired employees. The Company makes certain assumptions that affect the underlying estimates related to pension and other postretirement

TIFFANY & CO.
K-45


costs. Significant changes in interest rates, the market value of securities and projected health-care costs would require the Company to revise key assumptions and could result in a higher or lower charge to earnings.

The Company used discount rates of 4.75% to determine 2014 expense for its U.S. Qualified Plan and 5.00% to determine 2014 expense for its Excess Plan/SRIP and postretirement plans. Holding all other assumptions constant, a 0.5% increase in the discount rate would have decreased 2014 pension and postretirement expenses by $5,266,000 and $581,000. A decrease of 0.5% in the discount rate would have increased the 2014 pension and postretirement expenses by $5,827,000 and $353,000. The discount rate is subject to change each year, consistent with changes in the yield on applicable high-quality, long-term corporate bonds. Management selects a discount rate at which pension and postretirement benefits could be effectively settled based on (i) an analysis of expected benefit payments attributable to current employment service and (ii) appropriate yields related to such cash flows.

The Company used an expected long-term rate of return on pension plan assets of 7.50% to determine its 2014 pension expense. Holding all other assumptions constant, a 0.5% change in the long-term rate of return would have changed the 2014 pension expense by approximately $1,600,000. The expected long-term rate of return on pension plan assets is selected by taking into account the average rate of return expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation. More specifically, consideration is given to the expected rates of return (including reinvestment asset return rates) based upon the plan's current asset mix, investment strategy and the historical performance of plan assets.

For postretirement benefit measurement purposes, 7.50% (for pre-age 65 retirees) and 6.50% (for post-age 65 retirees) annual rates of increase in the per capita cost of covered health care were assumed for 2015. The rates were assumed to decrease gradually to 4.75% by 2023 and remain at that level thereafter. A one-percentage-point increase in the assumed health-care cost trend rate would increase the Company's accumulated postretirement benefit obligation by approximately $6,200,000 for the year ended January 31, 2015. Decreasing the assumed health-care cost trend rate by one-percentage point would decrease the Company's accumulated postretirement benefit obligation by approximately $4,200,000 for the year ended January 31, 2015. A one-percentage-point change in the assumed health-care cost trend rate would not have a significant effect on the Company's aggregate service and interest cost components of the 2014 postretirement expense.


NEW ACCOUNTING STANDARDS

See "Item 8. Financial Statements and Supplementary Data - Note B - Summary of Significant Accounting Policies."


OFF-BALANCE SHEET ARRANGEMENTS

The Company does not have any off-balance sheet arrangements.



TIFFANY & CO.
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2015 Outlook

For the fiscal year ending January 31, 2016, management is forecasting minimal growth in net earnings per diluted share from the $4.20 (excluding the debt extinguishment charge noted in "Non-GAAP Measures") earned in fiscal 2014. This forecast anticipates a decline of approximately 30% in the first quarter’s net earnings and a more modest decline in the second quarter, followed by expected double-digit percentage net earnings increases in the third and fourth quarters. This forecast is based on the following assumptions, which are approximate and may or may not prove valid, and which should be read in conjunction with "Item 1A. Risk Factors" on page K-13:
Worldwide net sales increasing by a mid-single-digit percentage on a constant-exchange-rate basis with sales growth in all regions. The strong U.S. dollar is expected to have an adverse translation effect on sales throughout fiscal 2015 and, therefore, result in a low-single-digit percentage increase for the full year when reported in U.S. dollars.
Additionally, worldwide net sales in the first quarter are expected to decline by approximately 10%, as reported in U.S. dollars, primarily due to a difficult comparison to strong sales growth achieved in Japan in last year’s first quarter and continued softness currently being experienced in the Americas; worldwide net sales are expected to increase by a low-single-digit percentage, as reported in U.S. dollars, in the second quarter.
Increasing the number of Company-operated stores by 12-15, net, with the majority of expansion planned in Asia-Pacific and the balance in the Americas and Europe.
Selling, general and administrative expenses increasing at a greater rate than sales growth, partly due to expansion and higher marketing expenses. In addition, overall expense growth includes the effect of a noncash increase in employee-benefit-related expenses of $30,000,000, or $0.15 per diluted share after-tax, tied to changes in actuarial assumptions for the Company’s U.S. pension and postretirement benefit plans.
Earnings from operations equal to the prior year.
Interest and other expenses, net of $50,000,000.
An effective income tax rate equivalent to the prior year.
The assumptions for declines in net earnings in the first and second quarters are tied to the sales expectations noted above, and the related effects on gross margin, along with higher marketing spending tied to the launch of the watch collection.
Minimal growth in net inventories.
Capital expenditures of $260,000,000, versus $247,000,000 last year.
Free cash flow exceeding $400,000,000.



TIFFANY & CO.
K-47


Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The Company is exposed to market risk from fluctuations in foreign currency exchange rates, precious metal prices and interest rates, which could affect its consolidated financial position, earnings and cash flows. The Company manages its exposure to market risk through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. The Company uses derivative financial instruments as risk management tools and not for trading or speculative purposes.

Foreign Currency Risk

The Company uses foreign exchange forward contracts or put option contracts to offset a portion of the foreign currency exchange risks associated with foreign currency-denominated liabilities, intercompany transactions and forecasted purchases of merchandise between entities with differing functional currencies. The maximum term of the Company's outstanding foreign exchange forward contracts as of January 31, 2015 is 12 months. At January 31, 2015 and 2014, the fair value of the Company's outstanding foreign exchange forwards were net assets of $20,139,000 and $6,453,000, respectively. At January 31, 2015, a 10% depreciation in the hedged foreign exchange rates from the prevailing market rates would have resulted in a liability with a fair value of approximately $2,000,000.

Precious Metal Price Risk

The Company periodically hedges a portion of its forecasted purchases of precious metals for use in its internal manufacturing operations through the use of forward contracts in order to manage the effect of volatility in precious metal prices. The maximum term of the Company's outstanding precious metal forward contracts as of January 31, 2015 is 12 months. At January 31, 2015 and 2014, the fair value of the Company's outstanding precious metal derivative instruments were net liabilities of $2,900,000 and net assets of $1,599,000, respectively. At January 31, 2015, a 10% depreciation in precious metal prices from the prevailing market rates would have resulted in a liability with a fair value of approximately $12,000,000.


TIFFANY & CO.
K-48


Item 8. Financial Statements and Supplementary Data.

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Tiffany & Co.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, of comprehensive earnings, of stockholders' equity, and of cash flows present fairly, in all material respects, the financial position of Tiffany & Co. and its subsidiaries (the "Company") at January 31, 2015 and January 31, 2014, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2015 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting, appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/ PricewaterhouseCoopers LLP
New York, New York
March 20, 2015


TIFFANY & CO.
K-49


CONSOLIDATED BALANCE SHEETS
 
January 31,
 
(in thousands, except per share amounts)
2015

 
2014

ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
729,957

 
$
345,778

Short-term investments
1,500

 
21,257

Accounts receivable, less allowances of $10,599 and $10,337
195,168

 
188,814

Inventories, net
2,362,112

 
2,326,580

Deferred income taxes
102,613

 
101,012

Prepaid expenses and other current assets
220,037

 
244,947

Total current assets
3,611,387

 
3,228,388

 
 
 
 
Property, plant and equipment, net
899,507

 
855,095

Deferred income taxes
323,449

 
278,390

Other assets, net
346,260

 
390,478

 
$
5,180,603

 
$
4,752,351

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term borrowings
$
234,013

 
$
252,365

Accounts payable and accrued liabilities
318,023

 
342,090

Income taxes payable
39,859

 
31,976

Merchandise and other customer credits
66,138

 
70,309

Total current liabilities
658,033

 
696,740

 
 
 
 
Long-term debt
882,535

 
751,154

Pension/postretirement benefit obligations
524,218

 
268,112

Deferred gains on sale-leasebacks
64,471

 
81,865

Other long-term liabilities
200,675

 
220,512

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Stockholders' equity:
 
 
 
Preferred Stock, $0.01 par value; authorized 2,000 shares, none issued and outstanding

 

Common Stock, $0.01 par value; authorized 240,000 shares, issued and outstanding 129,326 and 128,312
1,293

 
1,283

Additional paid-in capital
1,173,625

 
1,095,304

Retained earnings
1,950,603

 
1,682,398

Accumulated other comprehensive loss, net of tax
(290,462
)
 
(58,548
)
Total Tiffany & Co. stockholders' equity
2,835,059

 
2,720,437

Non-controlling interests
15,612

 
13,531

Total stockholders' equity
2,850,671

 
2,733,968

 
$
5,180,603

 
$
4,752,351

 
 
 
 
See notes to consolidated financial statements.
 
 
 

TIFFANY & CO.
K-50


CONSOLIDATED STATEMENTS OF EARNINGS
 
Years Ended January 31,
 
 (in thousands, except per share amounts)
2015

2014

2013

Net sales
$
4,249,913

$
4,031,130

$
3,794,249

Cost of sales
1,712,738

1,690,687

1,630,965

Gross profit
2,537,175

2,340,443

2,163,284

Selling, general and administrative expenses
1,645,746

1,555,903

1,466,067

Arbitration award expense

480,211


Earnings from operations
891,429

304,329

697,217

Interest expense and financing costs
62,903

62,654

59,069

Other income, net
2,790

13,191

5,428

Loss on extinguishment of debt
93,779



Earnings from operations before income taxes
737,537

254,866

643,576

Provision for income taxes
253,358

73,497

227,419

Net earnings
$
484,179

$
181,369

$
416,157

Net earnings per share:
 
 
 
Basic
$
3.75

$
1.42

$
3.28

Diluted
$
3.73

$
1.41

$
3.25

Weighted-average number of common shares:
 
 
 
Basic
129,221

127,835

126,737

Diluted
129,918

128,867

127,934

 
 
 
 
See notes to consolidated financial statements.
 
 


TIFFANY & C