Tiffany & Co. said Thursday that third quarter net sales increased 7% to $461 million, versus $430 million in the prior year, and comparable stores sales rose 3%. On a constant-exchange-rate basis, which excludes the effect of translating local-currency-denominated sales into U.S. dollars, net sales and comparable store sales increased 5% and 1%. Net earnings for the quarter (ended Oct. 31) were $20.8 million, 26% lower than $28 million a year ago.

The luxury retailer said retail sales growth in the U.S. (including a 4% increase in comparable store sales) and in many international stores was partially offset by weaker-than-expected sales in Japan and the company’s Direct Marketing channel. In addition, higher precious metal and diamond costs were meaningful factors leading to a decline in consolidated gross margin.

In the nine-month period (year-to-date) ended Oct. 31, net sales rose 10% to $1.4 billion, compared with $1.27 billion in the prior year, and comparable store sales rose 8%. On a constant-exchange-rate basis, net sales and comparable store sales increased 7% and 5%. Net earnings were $97.7 million compared with $105 million.

“These disappointing results do not affect our long-term strategic direction,” said Michael J. Kowalski, Tiffany & Co. chairman and chief executive officer. “While the U.S. sales increase was geographically broad-based, we had to cope with softer demand in the early part of the quarter and faced a tough comparison with 2003’s third quarter, when we achieved a 16% comparable store sales increase. In Japan, we are continuing to reposition our product assortment and support new product introductions with additional marketing and the opening of two freestanding stores. We are seeing some traction from these initiatives, but results were still below our expectations and it would be premature to draw conclusions.”

Sales results in the company’s four channels of distribution, were as follows:

* U.S. retail sales of $216.5 million in the third quarter were 7% higher than a year ago and comparable store sales rose 4% (due to growth of 1% in New York flagship store sales and 5% in comparable branch store sales). In the year-to-date, U.S. retail sales of $666.9 million were 13% above the prior year and comparable store sales increased 11% (due to increases of 14% in New York flagship store sales and 10% in comparable branch store sales).

* International retail sales rose 10% to nearly $190.9 million in the third quarter and comparable stores sales increased 3% (an increase of 6% and a decline of 2% on a constant-exchange-rate basis). In the year-to-date, International Retail sales increased 10% to $556.5 million and comparable store sales rose 4% (up 3% and down 2% on a constant-exchange-rate basis). Sales results by major region on a constant-exchange-rate basis were as follows: in Japan, third quarter retail sales declined 2% in total and 5% on a comparable store basis primarily due to continued declines, although at a lesser rate than earlier in the year, in silver jewelry, while year-to-date retail sales declined 7% in total and 9% on a comparable store basis; in other Asia-Pacific markets, comparable store sales increased 6% in the quarter and 15% in the year-to-date; and in Europe, comparable store sales increased 1% in the quarter and 3% in the year-to-date.

* Direct marketing sales declined 6% to $36.86 million in the third quarter and 5% to $114 million in the year-to-date. Combined e-commerce and catalog sales declined 1% in the quarter and increased 5% in the year-to-date, due to an increase in the average order size but a decline in the number of orders for entry-level priced jewelry. Business sales declined 17% in the third quarter and 23% in the year-to-date, resulting from management’s decision to discontinue service-award program sales at the end of 2003.

* Specialty retail sales rose 17% in the third quarter to $17 million and rose 13% in the year-to-date to $57.2 million. The sales increase was primarily due to the startup of sales of rough diamonds purchased as part of larger assortments from certain mines but determined, in the normal course of business, to be unsuitable for Tiffany’s production. During the quarter, sales growth in LITTLE SWITZERLAND stores was affected by severely adverse weather in the Caribbean. In addition, in October the first IRIDESSE store opened in Tysons Galleria in McLean, Virg., and a second store will open this month in The Mall at Short Hills in New Jersey. IRIDESSE focuses exclusively on the pearl jewelry category.

“We are excited about initial customer reactions to the entire range of new products we’ve introduced this year and are equally encouraged with successful early results from our new stores,” Kowalski said. “Therefore, we continue to expect a healthy sales increase in the holiday season in the U.S. Nonetheless, we are slightly moderating our previous guidance to mid-single-digit comparable U.S. store sales growth to correspond with the pace of the third quarter. In Japan, we believe that our initiatives, combined with easier year-over-year comparisons, can enable us to improve to flat fourth quarter local-currency comparable store sales. We expect continued favorable results in other international markets and some improvement in direct marketing sales. In total, our target calls for high-single-digit worldwide sales growth in the fourth quarter. We now expect gross margin in the fourth quarter to be somewhat lower than the prior year due to a continuation of many of the third quarter factors, but expect only a mid-single-digit increase in SG&A expenses. As a result, we believe the Company can achieve 5%-10% net earnings growth in the fourth quarter.”

JCK