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Tiffany & Co (NYSE:TIF)Q4 2018 Earnings Conference CallMarch 22, 2019, 8:30 a.m. ET
Contents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks:Operator
Good day, everyone, and welcome to this Tiffany & Company Fourth Quarter 2018 Conference Call. Today's call is being recorded. Participating on today's call is Mr. Mark Aaron, Vice President of Investor Relations; Mr. Mark Erceg, Tiffany's, Executive Vice President and Chief Financial Officer; and Mr. Alessandro Bogliolo, Tiffany's Chief Executive Officer.
At this time, I'd like to turn the call over to Mr. Mark Aaron. Please go ahead.
Mark L. Aaron -- Vice President of Investor Relations
Thank you. Thank you, everyone for joining us on today's call. Earlier today, we issued Tiffany's fourth quarter and full year results with the news release and the filing of our Annual Report on Form 10-K. I hope you've had a chance to review at least some of the results. Following some comments from Alessandro and Mark, we will be pleased to take your questions.
Before continuing, please note that statements made on this call that are not historical facts are forward-looking statements. Actual results might differ materially from the planned, assumed or expected results, expressed in or implied by these forward-looking statements. The company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances, except as required by applicable law or regulation.
Additional information concerning factors, risks and uncertainties that could cause actual results to differ materially as well as the required reconciliations of the non-GAAP measures referenced in this presentation to their comparable GAAP measures is set forth in Tiffany's Form 10-K filed earlier today with the Securities and Exchange Commission, as well as the news release filed today under cover of Form 8-K. Those filings can be found on Tiffany's website https://investor.tiffany.com by selecting Financial Information.
I'm now pleased to turn the call over to Alessandro.
Alessandro Bogliolo -- Chief Executive Officer
Thanks, Mark, and hello, everyone. Mark Erceg and I will address these results in a broad sense and as they pertain to our key strategic priorities. And then we will allow plenty of time for your questions. The specific details of our financial results can be found in today's news release and 10-K filing. Broadly speaking, I'm pleased with Tiffany's annual results in 2018 and with what our global team accomplished.
For the full year, sales rose in the Americas, Asia Pacific, Japan and Europe and increased in most product capitals and we were encouraged to experience higher sales attributed to local customers in the full year, even though sales attributed to foreign tourists were volatile. As you know, our sales growth decelerated in the second half, we can talk about external factors that benefited us in the first half and then went against us in the second half. But I believe it is more productive to focus on the journey that we started exactly one-year ago. When we presented to you our six strategic priorities as well as our decision to increase investment spending in several areas to support sustainable long-term growth and we made substantial progress in the past year and at last is going to happen in 2019.
Our strategy to amplify and evolved brand message was highlighted with bolder messaging in the BELIEVE IN LOVE, "Believe in Dreams" and holiday campaigns. These campaigns came as a pleasant surprise to our audience and signal that something new and exciting was starting to happen at Tiffany. I'm pleased that as a result sales growth in 2018 came from our existing customer base as well as from new customers and former customers were not shopped at Tiffany in a number of years. Then since January 2019, we have strengthened our message on diamonds. A (inaudible) Tiffany diamond at a campaign on social media. Our leading innovation of providing to customers, the country, or region of origin of our individually registered diamond and the enormous visibility of the legendary 128 carat Tiffany yellow diamond with Lady Gaga at the Oscars are a synchronized ascertain of the beauty, traceability and glamour, of our superlative Tiffany diamonds.
Another strategy is to renew our product offerings at a faster pace. And in 2018, we unveiled the Paper Flowers jewelry line introduced numerous expansions of existing collections made a significant investment in high jewelry inventory to build a more powerful assortment in some of our key locations around the world. And we began to offer expensive jewelry customization through the Make It My Tiffany program. For Holiday 2018, we launched in the US, a limited assortment of the Tiffany True collection. We are now excited to roll-out the launch of the Tiffany True solitaire and boldly design jewelry in all the regions and with increasing new styles throughout 2019.
For our priority to deliver an exciting customer experience, in 2018, we expanded Tiffany's store presence with the opening of 10 stores in high potential markets around the world, while relocating a number of existing stores and closing four stores for a net increase of six stores. And of course, we announced a bold initiative to transform our New York flagship store into an exciting 21st century retail experience by the end of 2021.
In 2019, we will have some important openings in key cities. We just completed the relocation of our most important store in Australia, a significant market for Tiffany. It's a beautiful store in Sydney, at the corner of Pitt and King streets that has surprised customers, press and the entire industry for its stylish aesthetics, imposing size and the refine experience. And next week, we will celebrate the grand opening of our newest location in the US. The first -- our first store in Washington DC in City Center DC, a new luxury destination for local customers and tourists. We plan to announce other important new stores in key markets such as in Greater China during the course of the year.
In addition to opening new stores, we are also evolving our presentations within existing stores through our fresh and innovative global display announcement initiative in North America, which we are now pleased to extend in 2019 to the rest of the world. In terms of delivering a more exciting omni-channel experience, we are now upgrading our websites globally, which provides a number of benefits to both the consumer experience and Tiffany's ability to innovate. We are offering a rich blended experience of content and commerce, elevating the brand, while reducing the friction in the user's journey as much as possible. The announcements give Tiffany more agility in testing, personalizing and content optimization.
For example, on our US website, we have just begun offering for sale, select, love and engagement diamond rings online. US clients can now filter available inventory for purchase on tiffany.com, in addition to consulting a diamond expert to find the perfect ring. In recent years, Tiffany has been accepting phone orders for diamond rings from customers solely beyond our store distribution. So we believe this is a natural and complementary expansion of our in-store experience for the love and the engagement category. And we look forward to a process of continuous improvement in our digital capabilities going forward, including plans to introduce a company operated, e-commerce enabled website in China later this year.
In summary, we are still in the early stages of the long and exciting journey that I referred to one-year ago. The Tiffany brand is increasingly recognized and desired. Our talented organization is aligned with our strategic priorities and is getting more proactive and agile everyday. I believe that the long-term outlook is very promising.
I will now turn the call over to Mark Erceg.
Mark J. Erceg -- Executive Vice President and Chief Financial Officer
Thanks, Alex. From a financial perspective, fiscal 2018 results are consistent with what we hoped to achieve, when just a little over one-year ago, we shared our six strategic priorities and declared that in order to properly fund those priorities, fiscal 2018, would be an investment year. Since Alex has already commented on our sales performance, let me say just a few words about earnings from operations, diluted net earnings per share and free cash flow. You will recall us stating that fiscal 2018 operating earnings were expected to be flat or slightly down, in order to fund meaningful investments across a number of areas we felt were essential to support sustainable, long-term, mid-single digit sales growth. Consistent with that earnings from operations came in at $790 million versus $809 million, during fiscal 2017, a decline of approximately 2%.
We also passed along significant benefits associated with US tax reform. Specifically, we started the year expecting an overall 2018 effective tax rate somewhere in the high-20s and is more information became available and we completed our analysis, we ultimately ended the year at just a fraction over 21%. While our 2018 effective tax rate did include some one-time benefits, not directly associated with the lower US statutory tax rate, a lower effective tax rate was the primary driver that allowed us to finish the year with diluted net EPS at $4.75 per share, which was toward the higher end of the last guidance range we provided at $4.65 to $4.80 per share and well above our initial fiscal 2018 guidance of being somewhere between $4.25 to $4.45 per share.
Finally, we started the year projecting approximately $380 million of free cash flow and after revising our projections to account for higher inventory levels, including for high jewelry and increased cash payments for income taxes related to US tax reform, we ended the year at $250 million of free cash flow. So in total and across our key financial performance indicators of sales growth, operating earnings, net earnings and free cash flow, I think it is fair to say we delivered what we set out to achieve.
From a balance sheet perspective, we finished the year with $855 million of cash, cash equivalents and short-term investments versus roughly $1 billion of total short-term and long-term debt. This means that after spending more than $400 million to repurchase shares of our common stock and after increasing our quarterly dividend rate by 10%, which was the 17th increase in the past 16 years, our balance sheet remains a major source of strength and flexibility.
In terms of our outlook for 2019, we are maintaining the preliminary guidance we provided on January 18th, when we reported holiday sales results. Low single digit sales growth for the full year as reported and slightly higher on a constant exchange rate basis and a mid single-digit increase in diluted EPS.
It's worth noting that our forecast for mid single-digit EPS growth and our expectation of modest operating margin expansion includes a number of unique factors. First, incremental SG&A expense related to the New York flagship store project, which was $0.07 per share in 2018 is expected to be $0.10 per share to $0.15 per share in each of 2019, 2020 and 2021. Second, our 2019 forecast accounts for the fact that we will no longer be able to recognize an $8 million a year deferred gain on previous sale leasebacks due to a new accounting standard. Finally, we expect an all-in effective income tax rate of approximately 23% in 2019, which is roughly 200 basis points higher than fiscal 2018.
From a timing standpoint and consistent with January results, while we expect full year reported sales to grow by a low-single digit percentage, we expect sales in the first half to be adversely affected by several factors; a meaningful FX headwind, lower foreign tourist spending and a difficult comparison to strong base period comps. In addition to these items, first half earnings will also be negatively affected by incremental strategic investment spending that began in the second quarter of 2018 and has not yet fully annualized. We anticipate that these pressures will lessen throughout the year and as additional new products are introduced, our marketing message continues to resonate and our in-store experience becomes even stronger, we expect reported sales growth to strengthen and earnings growth to resume in the second half of the year.
That wraps up my brief remarks. So I'll turn the call back over to Mark.
Mark L. Aaron -- Vice President of Investor Relations
Thanks, Alessandro and Mark. Operator, we are ready to take some questions.
Questions and Answers:Operator
Thank you. (Operator Instructions) And our first question will come from Michael Binetti with Credit Suisse.
Michael Binetti -- Credit Suisse -- Analyst
Hey, guys. Good morning. Thanks for taking our questions here. Mark, could you speak to some of the puts and takes on the gross margin in the fourth quarter. I guess, I'm looking at it on a multi-year basis. Just trying to see, if I understand why the leverage slowed a bit of the comps got easier there, maybe you could help us with some of the puts and takes? And then I also was curious why the SG&A -- maybe a little help on why the SG&A growth rate slowed fairly significantly. I think, you know, when we talked previously you kind of said the big break point in that growth rate would be middle of this year to your comments about anniversarying some of the step-up for the investments?
Mark J. Erceg -- Executive Vice President and Chief Financial Officer
Yeah, sure. I think, on the gross margin point, I think the bigger story in 2018 is the fact that our gross margin was up 70 basis points for the full year. As far as you know what happens in any given quarter on gross margin, I don't think that's overly helpful to unpack. There's always mix effects, there is any number of things that can fall within that. And of course our sales growth in the fourth quarter was lower than the balance of the year and so there's going to be less fixed cost leverage even through the COGS line. As far as SG&A is concerned, I think one of the things that we've talked about a lot in the past is the need to ensure that our cost takeout programs are robust and strong and that takes a little bit of time to gear up. So to the extent that SG&A growth in the fourth quarter was lower than you might have seen throughout the year. I think that's a positive indicator. And as we think about the guidance we provided for 2019, we're basically saying that we're going to get operating margin expansion on a low single-digit sales growth. So I think again our cost takeout programs continue to ramp up and I think you're seeing some of that in the fourth quarter at this point.
Michael Binetti -- Credit Suisse -- Analyst
Great. Thank you. Thank you very much.
Operator
And next we will hear from Paul Lejuez with Citi.
Paul Lejuez -- Citi -- Analyst
Hey, thanks, guys. I'm curious, what you might be able to point to that makes you feel confident that the amplification of the brand message is working and that you just hit a macro speed bump. Anything you could share with us that you're looking at, any data that you can provide. Also curious, if you think about what was the biggest disappointment to you this quarter relative to what you were thinking before it started and also curious if there any positive surprises? Thanks.
Alessandro Bogliolo -- Chief Executive Officer
Thank you, Paul for your question. Well, about the messaging, it was a big change in 2018, and we are pleased to see that the sales, both to existing customers as well as new customers are increasing. And so we are happy with it and we have seen also in the last quarter, even if it was softer, a nice result in terms of sales to existing customers, which is reassuring that the new message is not putting away customers from our brand, but on the contrary, bringing them back. Now, in terms of disappointment, well, of course, the last quarter, I think it was a mix of external factors, we have seen it also in general in the industry, especially in (inaudible) that the last quarter has not been as fantastic as the first part of the year. So Tiffany was affected by this. But on the other side, there were surely internal factors because we are really at the first year of our transformative journey and we are working very hard on it, but we are far from having all the pieces of the puzzle put together. So we are working on it going ahead, but we were not perfect. We have done a lot of new things. Also things where we have made some mistakes and we are learning and we are addressing it. So I would say it's a mix of external, but also reasonably expected internal factors.
Paul Lejuez -- Citi -- Analyst
Alex, anything you can share on those internal factors? What you would have done better?
Alessandro Bogliolo -- Chief Executive Officer
Well, for example, I would have started holiday campaign three weeks earlier to give you an example. I mean, many other detailed things that you know, if the life -- the operational life of the company. And I think this is all good experience, because it was a year of innovation. And so we are -- the most important thing for us is that, we have a very good analysis of these results of our fourth quarter and we have adjusted plans in order to keep on surprising customers. When it comes to communication, so for example, the communication that we have seen in 2018, I think it was appropriate, because it was communicating that something big and new was happening at Tiffany. Now, don't expect the same communication in 2019, because we want to keep on surprising our customers. And this is one example among many others.
Paul Lejuez -- Citi -- Analyst
Got you. Thank you. Good luck.
Alessandro Bogliolo -- Chief Executive Officer
Thank you.
Operator
And now we will hear from Oliver Chen with Cowen and Company.
Oliver Chen -- Cowen and Company -- Analyst
Hi, good morning. Alessandro, I would love your thoughts on bala
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