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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, 2018
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
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12133121&doc=20
(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 Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x 
As of July 31, 2017, the aggregate market value of the registrant's voting and non-voting stock held by non-affiliates of the registrant was approximately $11,993,601,775 using the closing sales price on July 31, 2017 of $95.51. See Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
As of March 12, 2018, the registrant had outstanding 124,398,512 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 6, 2018 (Part III).

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Tiffany & Co.
Table of Contents
Form 10-K for the fiscal year ended January 31, 2018
 
 
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The historical trends and results reported in this annual report on Form 10-K should not be considered an indication of future performance. Further, statements contained in this annual report on Form 10-K that are not statements of historical fact, including those that refer to plans, assumptions and expectations for future periods, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, the statements under "2018 Outlook" as well as statements that can be identified by the use of words such as 'expects,' 'projects,' 'anticipates,' 'assumes,' 'forecasts,' 'plans,' 'believes,' 'intends,' 'estimates,' 'pursues,' 'scheduled,' 'continues,' 'outlook,' 'may,' 'will,' 'can,' 'should' and variations of such words and similar expressions. Examples of forward-looking statements include, but are not limited to, statements we make regarding the Company's plans, assumptions, expectations, beliefs and objectives with respect to store openings and closings; product introductions; sales; sales growth; sales trends; store traffic; the Company's strategy and initiatives and the pace of execution thereon; the Company's objectives to compete in the global luxury market and to improve financial performance; retail prices; gross margin; operating margin; expenses; interest expense and financing costs; effective income tax rate; the nature, amount or scope of charges resulting from recent revisions to the U.S. tax code; net earnings and net earnings per share; share count; inventories; capital expenditures; cash flow; liquidity; currency translation; macroeconomic conditions; growth opportunities; litigation outcomes and recovery related thereto; contributions to Company pension plans; and certain ongoing or planned real estate, product, marketing, retail, customer experience, manufacturing, supply chain, information systems development, upgrades and replacement, and other operational initiatives and strategic priorities.

These forward-looking statements are based upon the current views and plans of management, speak only as of the date on which they are made and are subject to a number of risks and uncertainties, many of which are outside of our control. Actual results could therefore differ materially from the planned, assumed or expected results expressed in, or implied by, these forward-looking statements. While we cannot predict all of the factors that could form the basis of such differences, key factors include, but are not limited to: global macroeconomic and geopolitical developments; changes in interest and foreign currency rates; changes in taxation policies and regulations (including changes effected by the recent revisions to the U.S. tax code) or changes in the guidance related to, or interpretation of, such policies and regulations; shifting tourism trends; regional instability; violence (including terrorist activities); political activities or events; weather conditions that may affect local and tourist consumer spending; changes in consumer confidence, preferences and shopping patterns, as well as our ability to accurately predict and timely respond to such changes; shifts in the Company's product and geographic sales mix; variations in the cost and availability of diamonds, gemstones and precious metals; adverse publicity regarding the Company and its products, the Company’s third-party vendors or the diamond or jewelry industry more generally; any non-compliance by third-party vendors and suppliers with the Company’s sourcing and quality standards, codes of conduct, or contractual requirements as well as applicable laws and regulations; changes in our competitive landscape; disruptions impacting the Company's business and operations; failure to successfully implement or make changes to the Company's information systems; gains or losses in the trading value of the Company's stock, which may impact the amount of stock repurchased; and the Company's ability to successfully control costs and execute on, and achieve the expected benefits from, the operational initiatives and strategic priorities referenced above. Developments relating to these and other factors may also warrant changes to the Company's operating and strategic plans, including with respect to store openings, closings and renovations, capital expenditures, information systems development, inventory management, and continuing execution on, or timing of, the aforementioned initiatives and priorities. Such changes could also cause actual results to differ materially from the expected results expressed in, or implied by, the forward-looking statements.

Additional information about potential risks and uncertainties that could affect the Company’s business and financial results is included under "Item 1A. Risk Factors" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in this annual report on Form 10-K for the fiscal year ended January 31, 2018. Readers of this annual report on Form 10-K should consider the risks, uncertainties and factors outlined above and in this Form 10-K in evaluating, and are cautioned not to place undue reliance on, the forward-looking statements contained herein. The Company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances, except as required by applicable law or regulation.

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PART I

Item 1. Business.

GENERAL HISTORY AND NARRATIVE DESCRIPTION OF BUSINESS

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

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


MAINTENANCE OF THE TIFFANY & CO. BRAND

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

Management believes that consumers associate the Brand with high-quality gemstone jewelry, particularly diamond jewelry; sophisticated style and romance; excellent customer service; an elegant store and online environment; upscale store locations; "classic" product positioning; and distinctive and high-quality packaging materials (most significantly, the TIFFANY & CO. blue box). Tiffany's business plan includes expenses to maintain the strength of the Brand, such as the following:
Maintaining its position within the high-end of the jewelry market requires Tiffany to invest significantly in diamond and gemstone inventory, which carries a lower overall gross margin; it also causes some consumers to view Tiffany as beyond their price range;
To provide excellent service, stores must be well staffed with knowledgeable professionals;
Elegant stores in the best "high street" and luxury mall locations are more expensive and difficult to secure and maintain, but reinforce the Brand's luxury connotations through association with other luxury brands;
While the classic positioning of much of Tiffany's product line supports the Brand and requires sufficient display space in its stores, management's strategic priorities also include the accelerated introduction of new design collections primarily in jewelry, but also in non-jewelry products, which could result in a necessary reallocation of product display space;
Tiffany's packaging supports consumer expectations with respect to the Brand but is expensive; and
A significant amount of 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, marketing or distribution initiatives will unduly and negatively affect the strength of the Brand, such initiatives have been and will be curtailed or modified appropriately. At the same time, Brand maintenance suppositions are regularly questioned by management to determine if any tradeoff between sales and earnings is truly worth the positive effect on the Brand. At times, management has determined, and may in the future determine, that the strength of the Brand warranted, or that it will permit, more aggressive and profitable product, marketing or distribution initiatives.


FINANCIAL INFORMATION ABOUT REPORTABLE SEGMENTS

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

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the retail product line and items specially developed for the business market) and (v) wholesale distribution (merchandise sold to independent distributors for resale). The Company's segment information for the fiscal years ended January 31, 2018, 2017 and 2016 is reported in "Item 8. Financial Statements and Supplementary Data - Note P. Segment Information."

Americas

Sales in the Americas represented 45% of worldwide net sales in 2017, while sales in the United States ("U.S.") represented approximately 90% of net sales in the Americas. Sales are transacted through the following channels: retail (in the U.S., Canada and Latin America), Internet and catalog (in the U.S. and Canada), business-to-business (in the U.S.) and wholesale distribution (in Latin America and the Caribbean).

Retail sales in the Americas are transacted in 124 Company-operated TIFFANY & CO. stores in (number of stores at January 31, 2018 included in parentheses): the U.S. (94), Canada (13), Mexico (11), Brazil (5) and Chile (1). Included within these totals are 10 Company-operated stores located within various department stores in Canada and Mexico. Included in the U.S. retail stores is the New York Flagship store, which represented less than 10% of worldwide net sales in 2017.

Asia-Pacific

Sales in Asia-Pacific represented 26% of worldwide net sales in 2017, while sales in Greater China represented approximately 60% of Asia-Pacific's net sales. Sales are transacted through the following channels: retail, Internet (in Australia) and wholesale distribution.

Retail sales in Asia-Pacific are transacted in 87 Company-operated TIFFANY & CO. stores in (number of stores at January 31, 2018 included in parentheses): China (31), Korea (15), Australia (11), Hong Kong (10), Taiwan (7), Singapore (5), Macau (4), Malaysia (2), New Zealand (1) and Thailand (1). Included within these totals are 34 Company-operated stores located within various department stores.

Japan

Sales in Japan represented 14% of worldwide net sales in 2017. Sales are transacted through the following channels: retail, Internet, business-to-business and wholesale distribution.

Retail sales in Japan are transacted in 54 Company-operated TIFFANY & CO. stores. Included within this total are 49 stores located within department stores, generating approximately 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, 2018 included in parentheses): Isetan Mitsukoshi Ltd. (13), J. Front Retailing Co., Ltd. (Daimaru and Matsuzakaya department stores) (8), Takashimaya Co., Ltd. (8) and Seven & i Holding Co., Ltd. (Sogo and Seibu department stores) (5). The Company also operates 15 stores in other department stores.

Europe

Sales in Europe represented 12% of worldwide net sales in 2017, while sales in the United Kingdom ("U.K.") represented approximately 40% of European net sales. Sales are transacted through the following channels: retail, Internet and wholesale distribution.

Retail sales in Europe are transacted in 46 Company-operated TIFFANY & CO. stores in (number of stores at January 31, 2018 included in parentheses): the U.K. (11), Italy (10), Germany (6), France (5), Spain (3), Switzerland (3), the Netherlands (2), Russia (2), Austria (1), Belgium (1), the Czech Republic (1) and Ireland (1). Included within these totals are nine Company-operated stores located within various department stores. The Company currently operates e-commerce enabled websites within the following countries: U.K., Austria, Belgium, France, Germany, Ireland, Italy, the Netherlands and Spain.


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Other

Other consists of all non-reportable segments, including: (i) retail sales transacted in four Company-operated TIFFANY & CO. stores in the United Arab Emirates ("U.A.E.") and wholesale distribution in the Emerging Markets region (which represented approximately 50% of Other net sales in 2017); (ii) wholesale sales of diamonds (see "PRODUCT SUPPLY CHAIN – Supply of Diamonds" below); and (iii) licensing agreements.

Licensing Agreements. The Company receives earnings from a licensing agreement with Luxottica Group, for the development, production and distribution of TIFFANY & CO. brand eyewear, and from a licensing agreement with Coty Inc., for the development, production and distribution of a new line of TIFFANY & CO. brand fragrances. The earnings received from these licensing agreements represented less than 1% of worldwide net sales in 2017.

Retail Distribution Base

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

The following chart details the number of TIFFANY & CO. retail locations operated by the Company since 2013:
 
Americas
 
 
 
 
 
Year:
U.S.

Canada &
Latin America

Asia-Pacific

Japan

Europe

Emerging Markets

Total

2013
94

27

72

54

37

5

289

2014
95

27

73

56

39

5

295

2015
95

29

81

56

41

5

307

2016
95

30

85

55

43

5

313

2017
94

30

87

54

46

4

315


As part of the Company's long-term objectives, management plans to increase gross retail square footage by approximately 2%, net through the addition of new stores, relocations, renovations and closings in 2018. For a summary of the Company's existing retail square footage, see "Item 2. Properties".

E-Commerce, Catalog and Phone Orders

The Company currently operates e-commerce enabled websites in 13 countries as well as informational websites in several additional countries. To a lesser extent, sales are also generated through catalogs that the Company distributes in certain countries as well as orders placed via telephone in certain markets. Sales transacted on those websites, through catalogs or via telephone accounted for 7% of worldwide net sales in 2017, 2016 and 2015. The Company invests in ongoing website enhancements and is evaluating opportunities to expand its e-commerce sites to additional countries. In addition, management believes that these websites serve an important marketing role in attracting customers to the Company's stores.

Products

The Company's principal product category is jewelry, which represented 91%, 92% and 93% of worldwide net sales in 2017, 2016 and 2015. The Company offers an extensive selection of TIFFANY & CO. brand jewelry at a wide range of prices. Designs are developed by employees, suppliers, independent designers and independent "named" designers (see "MATERIAL DESIGNER LICENSE" below).

The Company also sells timepieces, leather goods, sterling silver goods (other than jewelry), china, crystal, stationery, eyewear, fragrances and other accessories, which represented, in total, 7% of worldwide net sales in 2017, 2016 and 2015. The remainder of worldwide net sales were attributable to wholesale sales of diamonds and earnings received from third-party licensing agreements.

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Sales by Reportable Segment of TIFFANY & CO. Jewelry by Category
2017
% of total
Americas
 Sales

% of total
Asia-Pacific
Sales

% of total
Japan
Sales

% of total
Europe
Sales

% of total
Reportable
Segment Sales

Jewelry collections a 
54
%
61
%
31
%
61
%
53
%
Engagement jewelry b 
21
%
30
%
38
%
24
%
26
%
Designer jewelry c
14
%
8
%
22
%
12
%
14
%
2016
 
 
 
 
 
Jewelry collections a
54
%
56
%
31
%
59
%
52
%
Engagement jewelry b 
22
%
35
%
39
%
26
%
28
%
Designer jewelry c
14
%
7
%
23
%
11
%
13
%
2015
 
 
 
 
 
Jewelry collections a 
53
%
56
%
33
%
60
%
52
%
Engagement jewelry b 
23
%
35
%
39
%
25
%
28
%
Designer jewelry c
14
%
8
%
21
%
11
%
13
%
a) This category includes jewelry in a wide range of prices within the Company's high jewelry and named jewelry collections such as Tiffany Victoria®, Tiffany Soleste®, Tiffany Keys, Tiffany T, Tiffany HardWear and Return to Tiffany®, among others. Jewelry in this category is primarily crafted using precious metals (platinum, gold or sterling silver) and may contain diamonds and/or other gemstones.
b) This category includes engagement rings (approximately 60% of the category) and wedding bands. Most jewelry in this category contains diamonds and is constructed of platinum and/or gold.
c)
This category includes only jewelry that is attributed to one of the Company’s "named" designers: Elsa Peretti (refer to "MATERIAL DESIGNER LICENSE" below), Paloma Picasso and Jean Schlumberger. Jewelry in this category is primarily crafted using precious metals (platinum, gold or sterling silver) and may contain diamonds and/or other gemstones.

The Jewelry collections category reflects the combination of the previously reported high, fine & solitaire jewelry and fashion jewelry categories. Additionally, jewelry bearing the name of and attributed to Jean Schlumberger, which was previously reported within the high, fine & solitaire jewelry category, has been reclassified into the Designer jewelry category. Such changes or reclassifications have been made to conform with management's current internal analysis of product sales and are reflected for each of the periods presented in the table above.


ADVERTISING, MARKETING, PUBLIC AND MEDIA RELATIONS

The Company's strategy is to invest in marketing and public relations programs designed to build awareness of the Brand, its heritage and its products, as well as to enhance the Brand’s association among consumers with quality and luxury. 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 2017, 2016 and 2015, the Company spent $314.9 million, $299.0 million and $302.0 million, representing 7.6%, 7.5% and 7.4% of worldwide net sales in those respective years, on advertising, marketing and public and media relations, which include costs for media, production, catalogs, Internet, visual merchandising (in-store and window displays), marketing events and other related items.

In addition, management believes that the Brand is enhanced by a program of charitable sponsorships, grants and merchandise donations. The Company also periodically makes donations to The Tiffany & Co. Foundation, a private

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foundation organized to support 501(c)(3) charitable organizations. The efforts of this Foundation are primarily focused on environmental conservation.


TRADEMARKS

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

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

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

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

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


MATERIAL DESIGNER LICENSE

Since 1974, Tiffany has been the sole licensee for the intellectual property rights necessary to make and sell jewelry and other products designed by Elsa Peretti and bearing her trademarks. The designs of Ms. Peretti accounted for 9%, 9% and 8% of the Company's worldwide net sales in 2017, 2016 and 2015.

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

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trademark registrations reasonably necessary to sell the licensed products in the markets in which the licensed products are sold by Tiffany.

The Peretti Agreement has a term that expires in 2032 and is binding upon Ms. Peretti, her heirs, estate, trustees and permitted assignees. During the term of the Peretti Agreement, Ms. Peretti may not sell, lease or otherwise dispose of her copyrights and trademarks unless the acquiring party expressly agrees with Tiffany to be bound by the provisions of the Peretti Agreement. The Peretti Agreement is terminable by Ms. Peretti only in the event of a material breach by Tiffany (subject to a cure period) or upon a change of control of Tiffany or the Company. It is terminable by Tiffany only in the event of a material breach by Ms. Peretti or following an attempt by Ms. Peretti to revoke the exclusive license (subject, in each case, to a cure period).


PRODUCT SUPPLY CHAIN

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

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

The Company secures supplies of rough diamonds primarily through arrangements with diamond producers and, to a lesser extent, on the secondary market. Most of this supply comes from arrangements in which the Company accesses rough diamonds that are offered for sale (including as a sightholder or through the right to purchase a defined portion of a mine's output), although with no contractual purchase obligation for such rough diamonds. A smaller portion of rough diamond purchases is made through agreements in which the Company is required to purchase a minimum volume of rough diamonds (anticipated to be approximately $45.0 million in 2018). All such supply arrangements are generally at the market price prevailing at the time of purchase.

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

In recent years, approximately 65% – 75% (by dollar value) of the polished diamonds used in the Company's 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 generally through purchase orders for fixed quantities. 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. It is the Company's intention to continue to supply the majority of its needs for diamonds by purchasing and polishing rough diamonds.


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Products containing one or more diamonds of varying sizes, including diamonds used as accents, side-stones and center-stones, accounted for 57%, 59% and 59% of worldwide net sales in 2017, 2016 and 2015.

Conflict Diamonds. Media attention has been drawn to the issue of "conflict" diamonds. This term is used to refer to diamonds extracted from war-torn geographic regions and sold by rebel forces to fund insurrection. Allegations have also been made that trading in such diamonds supports terrorist activities. Management believes that it is not possible in most purchasing scenarios to distinguish diamonds produced in conflict regions from diamonds produced in other regions once they have been polished. Therefore, concerned participants in the diamond trade, including the Company and nongovernment organizations, seek to exclude "conflict" diamonds, which represent a small fraction of the world's supply, from legitimate trade through an international system of certification and legislation known as the Kimberley Process Certification Scheme. All rough diamonds the Company buys, crossing an international border, must be accompanied by a Kimberley Process certificate and all trades of rough and polished diamonds must conform to a system of warranties that references the aforesaid scheme. It is not expected that such efforts will substantially affect the supply of diamonds. In addition, concerns over human rights abuses in Zimbabwe, Angola and the Democratic Republic of the Congo underscore that the aforementioned system has not deterred the production of diamonds in state-sanctioned mines under poor working conditions. The Company has informed its vendors that it does not intend to purchase Zimbabwean, Angolan or Congolese-produced diamonds. Accordingly, the Company has implemented the Diamond Source Warranty Protocol, which requires vendors to provide a warranty, and a qualified independent audit certificate, that loose polished diamonds were not obtained from Zimbabwean, Angolan or Congolese mines.

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

In addition, the supply and prices of rough and polished diamonds in the principal world markets have been and continue to be influenced by the Diamond Trading Company ("DTC"), an affiliate of the De Beers Group. Although the DTC's historical ability to control worldwide production has diminished due to its lower share of worldwide production and changing policies in diamond-producing countries, the DTC continues to supply a meaningful portion of the world market for rough, gem-quality diamonds and continues to impact diamond supply through its marketing and advertising initiatives. A significant portion of the diamonds that the Company purchased in 2017 had their source with the DTC.

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

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

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

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

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circumstances, whether the finished goods provided by such manufacturer were actually produced with Company-supplied precious metals.

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

Finished Jewelry. Finished jewelry is purchased from approximately 50 manufacturers. However, the Company does not enter into long-term supply arrangements with its finished goods vendors. The Company does enter into merchandise vendor agreements with nearly all of its finished goods vendors. The merchandise vendor agreements establish non-price terms by which the Company may purchase and by which vendors may sell finished goods to the Company. These terms include payment terms, shipping procedures, product quality requirements, merchandise specifications and vendor social responsibility requirements. The Company generally enters into purchase orders for fixed quantities of merchandise with its vendors. These relationships may be terminated at any time by either party; such termination would not discharge either party's obligations under unfulfilled purchase orders accepted prior to termination. The Company actively seeks alternative sources for its best-selling jewelry items to mitigate any potential disruptions in supply. However, due to the craftsmanship involved in a small number of designs, the Company may have difficulty finding readily available alternative suppliers for those jewelry designs in the short term.

Watches. The Company sells TIFFANY & CO. brand watches, which are designed, produced, marketed and distributed through certain of the Company's Swiss subsidiaries. The Company has relationships with approximately 30 component and subassembly vendors to manufacture watches. The terms of the Company's contractual relationships with these vendors are substantially similar to those described under "Finished Jewelry" above. Sales of these TIFFANY & CO. brand watches represented approximately 1% of worldwide net sales in 2017, 2016 and 2015.


COMPETITION

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

Competition for engagement jewelry sales is particularly and increasingly intense. The Company's retail 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 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, 2018, the Company employed an aggregate of approximately 13,100 full-time and part-time persons. Of those employees, approximately 5,600 are employed in the United States.

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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 Securities and Exchange Commission's ("SEC") 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, Form 10-Q and Form 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; political uncertainties and/or developments; changes in the market value of equity securities and real estate; inflation; interest rates and the availability of consumer credit; tax rates; and expectations of future economic conditions and employment prospects.

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

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

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

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

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

The Company's business is seasonal in nature, with the fourth quarter typically representing approximately one-third of annual net sales and a higher percentage of annual net earnings. Poor sales results during the fourth quarter would have an adverse effect on annual earnings and inventories in the short term.


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

The Company operates globally and generates a majority of its worldwide net sales outside the United States. It also has both U.S. and foreign manufacturing operations, and relies on certain U.S. and foreign third-party vendors and suppliers. 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 globally, including:
the laws, regulations and policies of governments relating to investments, loans and operations, the costs or desirability of complying with local practices and customs and the impact of various anti-corruption and other laws affecting the activities of U.S. companies abroad;
uncertainties from changes in U.S. or foreign taxation policies, including, for example, as a result of recent revisions to the U.S. tax code;
compliance by third party vendors and suppliers with the Company's sourcing and quality standards, codes of conduct, or contractual requirements as well as applicable laws and regulations;
import and export licensing requirements and regulations, as well as unforeseen changes in regulatory requirements;
political or economic instability in foreign countries, including the potential for rapid and unexpected changes in government, economic and political policies (including diplomatic and trade relations or agreements with other countries), political or civil unrest, acts of terrorism or the threat of international boycotts or U.S. anti-boycott legislation – as a result of, for example, (1) the United Kingdom's ("U.K.") referendum vote to exit the European Union ("E.U."), as discussed below, or (2) changes in government policies resulting from the change in the U.S. Presidential administration in 2017;
challenges inherent in oversight of foreign operations, systems and controls;
potential negative consequences from foreign governments' currency management practices;
uncertainties as to enforcement of certain contract and other rights; and
inventory risk exposures.

In June 2016, voters in the U.K. approved an advisory referendum to withdraw from the E.U., commonly referred to as "Brexit." Negotiations have commenced to determine the U.K.'s future relationship with the E.U., including terms of trade. However, there can be no assurance regarding the duration of such negotiations or the terms thereof. A withdrawal could significantly disrupt the free movement of goods, services, and people between the U.K. and the E.U., and result in increased legal and regulatory complexities, as well as potential higher costs of conducting business in Europe. There may be similar referendums or votes in other European countries in which the Company does business. The uncertainty surrounding the terms of the U.K.'s withdrawal and its consequences, as well as the impact of any similar circumstances that may arise elsewhere in Europe, could increase the Company's costs and adversely impact consumer and investor confidence, and the level of consumer discretionary purchases, including purchases of the Company’s products.

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.

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

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

Changes in tax law are accounted for in the period of enactment. As a result, the Company's 2017 consolidated financial statements reflect provisional estimates of the immediate tax effect of the 2017 Tax Act. As the Company

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refines its provisional estimate calculations, further analyzes provisions of the 2017 Tax Act and any subsequent guidance related thereto, these provisional estimates could be affected, which could have a material impact on the Company's future financial results, including its fiscal 2018 results (see "Item 7. Management's Discussion and Analysis - 2018 Outlook"). Additionally, further regulatory or GAAP accounting guidance regarding the 2017 Tax Act could also materially affect the Company's future financial results.

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

The Company operates retail stores in more than 20 countries outside of the U.S. and, as a result, is exposed to market risk from fluctuations in foreign currency exchange rates, including, among others, the Japanese Yen, Euro, British Pound and Chinese Yuan. In 2017, sales in countries outside of the U.S. in aggregate represented a substantial portion of the Company's net sales and earnings from operations. A strengthening of the U.S. dollar against foreign currencies would require the Company to raise its retail prices in various locations outside of the U.S. in order to maintain its worldwide relative pricing structure, or reduce its profit margins. Consumers in those markets may not accept significant price increases on the Company's goods; thus, there is a risk that a strengthening of the U.S. dollar would result in reduced sales and profitability. In addition, a weakening of any foreign currency relative to other currencies may negatively affect spending by foreign tourists in the various regions where the Company operates retail stores which would adversely affect its net sales and profitability.

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

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

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

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

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

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

Most of the Company's jewelry offerings are made with diamonds, other gemstones and/or precious metals. A significant increase in the costs or change in the supply of these commodities could adversely affect the Company's business, which is vulnerable to the risks inherent in the trade for such commodities. A substantial increase or

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decrease in the cost or supply of precious metals, high-quality rough and polished diamonds (within the quality grades, colors and sizes that customers demand) and/or other gemstones could affect, negatively or positively, customer demand, sales and gross profit margins. Additionally, should synthetic diamonds (diamonds manufactured but not naturally occurring) and/or treated diamonds (naturally occurring diamonds subject to treatment processes, such as irradiation) be offered in significant quantities and gain consumer acceptance, the supply of, demand for and prices for natural diamonds may be affected.

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

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

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

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

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

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

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

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

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quality testing in 2016, the Company identified a potential breach of the Company's sourcing and quality standards applicable to third party vendors. The Company assessed the composition of certain of its gold products manufactured primarily by certain U.S. third-party vendors, which contained gold solder manufactured by other U.S. vendors, to determine whether such products were in compliance with applicable consumer products requirements and regulations. Following this assessment, management determined that no liability was required to be recorded.

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

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

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

The Company is increasingly dependent on its information systems to operate its business, including in designing, manufacturing, marketing and distributing its products, as well as processing transactions, managing inventory and accounting for and reporting its results. Given the complexity of the Company's global business, it is critical that the Company maintain the uninterrupted operation of its information systems. Despite the Company’s preventative efforts, its information systems may be vulnerable to damage, disruption or shutdown due to power outages, computer and telecommunications failures, computer viruses, systems failures, security breaches or natural disasters. Damage, disruption or shutdown of the Company’s information systems may require a significant investment to 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 is in the process of executing its multi-year effort to evaluate and, where appropriate, to upgrade and/or replace certain of its information systems, including systems for global customer relationship management, order management and inventory management. These system changes and upgrades can require significant capital investments and dedication of resources. While the Company follows a disciplined methodology when evaluating and making such changes, there can be no assurances that the Company will successfully implement such changes, that such changes will occur without disruptions to its operations or that the new or upgraded systems will achieve the desired business objectives. For example, in 2016 the Company recorded a pre-tax impairment charge of $25.4 million related to software costs capitalized in connection with the development of a new finished goods inventory management and merchandising information system. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Information Systems Assessment" for a discussion of this impairment charge.

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

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

The protection of customer, employee and Company information is important to the Company, and its customers and employees expect that their personal data will be adequately protected. In addition, the regulatory environment surrounding information security and data privacy is becoming increasingly demanding, with evolving requirements in respect of personal data use and processing, including significant penalties for non-compliance, in the various jurisdictions in which the Company does business. Although the Company has developed and implemented systems, policies, procedures and controls that are designed to protect personal data and Company information, prevent data loss and other security breaches, and otherwise identify, assess and analyze cybersecurity risks, such measures cannot provide absolute security. For example, the Company faces a complex and evolving threat landscape in which cybercriminals, nation-states and "hacktivists" employ a complex array of techniques designed to access personal data and other information, including the use of stolen access credentials, malware, ransomware, phishing, structured query language ("SQL") injection attacks and distributed denial-of-service attacks, which may penetrate

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the Company's systems despite its extensive and evolving protective information security measures. Further, the Company relies on its software and hardware providers to issue timely patches for known vulnerabilities; however, the failure of software and hardware companies to release or to timely release effective patching and the Company's reliance on patches or inability to patch software and hardware vulnerabilities, could expose it to increased risk of attack, data loss and data breach.

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

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

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

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

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

The Company's internal manufacturing facilities produce approximately 60% of the 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.

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

The Company sells TIFFANY & CO. brand watches, which are designed, produced, marketed and distributed through certain of the Company's Swiss subsidiaries. Sales of these TIFFANY & CO. brand watches represented approximately 1% of worldwide net sales in 2017, 2016 and 2015. The development of this watch business has required and will continue to require additional resources and involves risks and uncertainties, including: (i) significant ongoing expenditures; (ii) the need to employ highly specialized and experienced personnel; (iii) dependence on relatively small supply partners; and (iv) production and distribution inefficiencies. In addition, the Company is competing with businesses with stronger market positions and has invested and will continue to invest in marketing to build customer awareness and to establish product differentiation. There is, however, no assurance that the Company will be able to effectively grow its watch business or that such business will be successful in growing the Company's revenues or enhancing its profitability.


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

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

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

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

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

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

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

(xix) Recent changes in the Company's executive management team may be disruptive to, or cause uncertainty in, its business, results of operations and the price of the Company's common stock.

Certain members of the Company's executive management team have left the Company in recent years, which has required the Company to focus time and resources on recruiting new members of its executive management team. For example, in February 2017, Frederic Cumenal stepped down from his position as Chief Executive Officer ("CEO") of the Company, and the Company’s Board of Directors appointed Michael J. Kowalski (Chairman of the Board and former CEO at the time of appointment) as the Company’s Interim CEO. In October 2017, Alessandro Bogliolo joined the Company as CEO replacing Mr. Kowalski, who stepped down from that role. Any further changes in the Company's executive management team may be disruptive to, or cause uncertainty in, the Company's business, and could have a negative impact on the Company's ability to manage and grow its business effectively, its results of operations and the price of the Company's common stock.


TIFFANY & CO.
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(xx) Environmental and climate changes could affect the Company's business.

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


Item 1B. Unresolved Staff Comments.

NONE


Item 2. Properties.

The Company leases its various store premises (other than the New York Flagship store, which is owned by the Company) under arrangements that generally range from 3 to 10 years. The following table provides information on the number of locations and square footage of Company-operated TIFFANY & CO. stores as of January 31, 2018:
 
Total Stores

Total Gross Retail Square Footage

Gross Retail Square Footage Range

Average Gross Retail Square Footage

Americas:
 
 
 
 
New York Flagship
1

45,500

45,500

45,500

Other stores
123

684,700

1,000 - 17,600

5,600

Asia-Pacific
87

245,900

400 - 12,800

2,800

Japan:
 
 
 
 
Tokyo Ginza
1

13,300

13,300

13,300

Other stores
53

141,800

1,600 - 7,500

2,700

Europe:
 
 
 
 
London Old Bond Street
1

22,400

22,400

22,400

Other stores
45

160,700

600 - 18,200

3,600

Emerging Markets
4

6,900

400 - 3,600

1,700

Total
315

1,321,200

400 - 45,500

4,200


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


TIFFANY & CO.
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Table of Contents

NEW YORK FLAGSHIP STORE

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

RETAIL SERVICE CENTER

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

CUSTOMER FULFILLMENT CENTER

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

MANUFACTURING AND DESIGN FACILITIES

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

The Company leases a facility in Belgium and owns facilities in Botswana, Cambodia, Mauritius and Vietnam (although the land in Botswana, Cambodia and Vietnam is leased) that prepare, cut and/or polish rough diamonds for use by Tiffany. These facilities total approximately 280,000 square feet and the lease expiration dates range from 2018 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 73.0 million (or approximately $78.0 million at January 31, 2018) (based on its alleged wasted investment) to CHF 3.8 billion (or approximately $4.1 billion at

TIFFANY & CO.
K-19

Table of Contents

January 31, 2018) (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 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 120.0 million (or approximately $129.0 million at January 31, 2018) (based on its wasted investment) to approximately CHF 540.0 million (or approximately $578.0 million at January 31, 2018) (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 402.7 million (the "Arbitration Damages"), as well as interest from June 30, 2012 to the date of payment, two-thirds of the cost of the Arbitration and two-thirds of the Swatch Parties' legal fees, expenses and costs. These amounts were paid in full in January 2014.

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 $480.2 million, which included the damages, interest, and other costs associated with the ruling and which was classified as Arbitration award expense in the consolidated statement of earnings.

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 was set aside. However, the Swatch Parties took action in the Dutch courts to appeal the District Court's decision, and a three-judge panel of the Appellate Court of Amsterdam presided over an appellate hearing in respect of the annulment, and the related claim by the Tiffany Parties for the return of the Arbitration Damages and related costs, on June 29, 2016. The Appellate Court issued its decision on April 25, 2017, finding in favor of the Swatch Parties and ordering the Tiffany Parties to reimburse the Swatch Parties EUR 6,340 in legal costs. The Tiffany Parties have taken action to appeal the decision of the Appellate Court to the Supreme Court of the Netherlands. As such, the Arbitration Award may ultimately be set aside by the Supreme Court. Registrant's management believes it is likely that the Supreme Court will issue its decision during Registrant's fiscal year ending January 31, 2019. However, it is possible that such decision could be later issued or that such decision could require the Appellate Court to reconsider certain elements of the dispute and, as such, the annulment action may not be ultimately resolved until, at the earliest, Registrant's fiscal year ending January 31, 2020.

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.

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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 a court could find that the Swatch Parties were in material breach of their 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.

Management has not established any accrual in the Company's consolidated financial statements for the year ended January 31, 2018 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.

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

Gain Contingency. On February 14, 2013, Tiffany and Company and Tiffany (NJ) LLC (collectively, the "Tiffany plaintiffs") initiated a lawsuit against Costco Wholesale Corp. ("Costco") for trademark infringement, false designation of origin and unfair competition, trademark dilution and trademark counterfeiting (the "Costco Litigation"). The Tiffany plaintiffs sought injunctive relief, monetary recovery and statutory damages on account of Costco's use of "Tiffany" on signs in the jewelry cases at Costco stores used to describe certain diamond engagement rings that were not manufactured by Tiffany. Costco filed a counterclaim arguing that the TIFFANY trademark was a generic term for multi-pronged ring settings and seeking to have the trademark invalidated, modified or partially canceled in that respect. On September 8, 2015, the U.S. District Court for the Southern District of New York (the "Court") granted the Tiffany plaintiffs' motion for summary judgment of liability in its entirety, dismissing Costco's genericism counterclaim and finding that Costco was liable for trademark infringement, trademark counterfeiting and unfair competition under New York law in its use of "Tiffany" on the above-referenced signs. On September 29, 2016, a civil jury rendered its verdict, finding that Costco's profits on the sale of the infringing rings should be awarded at $5.5 million, and further finding that an award of punitive damages was warranted. On October 5, 2016, the jury awarded $8.25 million in punitive damages. The aggregate award of $13.75 million was not final, as it was subject to post-verdict motion practice and ultimately to adjustment by the Court. On August 14, 2017, the Court issued its ruling, finding that the Tiffany plaintiffs are entitled to recover (i) $11.1 million in respect of Costco's profits on the sale of the infringing rings (which amount is three times the amount of such profits, as determined by the Court), (ii) prejudgment interest on such amount (calculated at the applicable statutory rate) from February 15, 2013 through August 14, 2017, (iii) an additional $8.25 million in punitive damages, and (iv) Tiffany's reasonable attorneys' fees (which will be determined at a later date), and, on August 24, 2017, the Court entered judgment in the amount of $21.0 million in favor of the Tiffany plaintiffs (reflecting items (i) through (iii) above). Costco has filed an appeal from the judgment, as well as a motion in the Court for a new trial. The appeal has been automatically stayed pending determination of the Court motion. Costco has also filed an appeal bond to secure the amount of the judgment entered by the Court pending appeal, so the Tiffany plaintiffs will be unable to enforce the judgment while the motion for a new trial and the appeal are pending. As such, the Company has not recorded any amount in its consolidated financial statements related to this gain contingency as of January 31, 2018, and expects that this matter will not ultimately be resolved until, at the earliest, the Company's fiscal year ending January 31, 2019.


Item 4. Mine Safety Disclosures.

Not Applicable.

TIFFANY & CO.
K-21

Table of Contents

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, 1,062,096 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, as amended.

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 2017 were:
 
High

Low

First Quarter
$ 97.29

$ 77.52

Second Quarter
$ 96.94

$ 84.15

Third Quarter 
$ 97.10

$ 86.15

Fourth Quarter 
$ 111.44

$ 90.46


On March 12, 2018, the high and low selling prices quoted on such exchange were $102.75 and $99.78. On March 12, 2018, there were 13,756 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 2016 were:
 
High

Low

First Quarter
$ 74.06

$ 59.75

Second Quarter
$ 72.18

$ 56.99

Third Quarter 
$ 74.81

$ 58.77

Fourth Quarter 
$ 85.44

$ 71.86


TIFFANY & CO.
K-22

Table of Contents

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 and such indices, plus the reinvestment of any dividends paid. The graph assumes an investment of $100 on January 31, 2013 in the Company's common stock and in each of the two indices as well as the reinvestment of any subsequent dividends.
Total returns are based on market capitalization; indices are weighted at the beginning of each period for which a return is indicated. The stock performance shown in the graph is not intended to forecast or to be indicative of future performance.
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12133121&doc=19
 
1/31/13

1/31/14

1/31/15

1/31/16

1/31/17

1/31/18

Tiffany & Co.
$ 100.00

$ 128.74

$ 136.13

$ 102.24

$ 129.23

$ 178.67

S&P 500 Stock Index
100.00

121.52

138.80

137.88

165.51

209.22

S&P 500 Consumer Discretionary Index
100.00

127.37

143.94

155.13

180.69

233.09



TIFFANY & CO.
K-23

Table of Contents

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 2016, a dividend of $0.40 per share of Common Stock was paid on April 11, 2016. On May 26, 2016, the Company announced a 12.5% increase in its regular quarterly dividend rate to a new rate of $0.45 per share of Common Stock which was paid on July 11, 2016, October 11, 2016 and January 10, 2017.

In 2017, a dividend of $0.45 per share of Common Stock was paid on April 10, 2017. On May 25, 2017, the Company announced an 11% increase in its regular quarterly dividend rate to a new rate of $0.50 per share of Common Stock which was paid on July 10, 2017, October 10, 2017 and January 10, 2018.

Issuer Purchases of Equity Securities

In January 2016, the Registrant's Board of Directors approved a new share repurchase program (the "2016 Program") and terminated the Company's then-existing share repurchase program, which was approved in March 2014 and had authorized the Company to repurchase up to $300.0 million of its Common Stock through open market transactions (the "2014 Program"). The 2016 Program, which will expire on January 31, 2019, authorizes the Company to repurchase up to $500.0 million of its Common Stock through open market transactions, block trades or privately negotiated transactions. Purchases under the 2014 Program were, and purchases under the 2016 Program have been, 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. As of January 31, 2018, $211.2 million remained available for repurchase under the 2016 Program.

The following table contains the Company's purchases of equity securities in the fourth quarter of 2017:
Period
(a) Total Number of Shares (or Units) Purchased

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

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

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

November 1, 2017 to November 30, 2017
141,881

$ 93.18

141,881

$ 237.1

December 1, 2017 to December 31, 2017
128,020

$ 98.32

128,020

$ 224.5

January 1, 2018 to January 31, 2018
122,985

$ 107.53

122,985

$ 211.2

TOTAL
392,886

$ 99.35

392,886

$ 211.2





TIFFANY & CO.
K-24

Table of Contents

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 2013-2017, which ended on January 31 of the following calendar year:
(in millions, except per share amounts, percentages, ratios, stores and employees)
2017 a

2016 b

2015 c

2014 d

2013 e

EARNINGS DATA
 
 
 
 
 
Net sales
$
4,169.8

$
4,001.8

$
4,104.9

$
4,249.9

$
4,031.1

Gross profit
2,604.7

2,490.3

2,491.3

2,537.2

2,340.4

Selling, general & administrative expenses
1,810.2

1,769.1

1,731.2

1,645.8

1,555.9

Net earnings
370.1

446.1

463.9

484.2

181.4

Net earnings per diluted share
2.96

3.55

3.59

3.73

1.41

Weighted-average number of diluted common shares
125.1

125.5

129.1

129.9

128.9

BALANCE SHEET AND CASH FLOW DATA
 
 
 
 
 
Total assets
$
5,468.1

$
5,097.6

$
5,121.6

$
5,171.8

$
4,745.1

Cash and cash equivalents
970.7

928.0

843.6

730.0

345.8

Inventories, net
2,253.5

2,157.6

2,225.0

2,362.1

2,326.6

Short-term borrowings and long-term debt (including current portion)
1,003.5

1,107.1

1,095.8

1,107.8

996.3

Stockholders' equity
3,248.2

3,028.4

2,929.5

2,850.7

2,734.0

Working capital
3,258.5

2,940.8

2,778.5

2,850.8

2,431.1

Cash flows from operating activities *
932.2

705.7

817.4

633.5

174.1

Capital expenditures
239.3

222.8

252.7

247.4

221.4

Stockholders' equity per share
26.10

24.33

23.10

22.04

21.31

Cash dividends paid per share
1.95

1.75

1.58

1.48

1.34

RATIO ANALYSIS AND OTHER DATA
 
 
 
 
 
As a percentage of net sales:
 
 
 
 
 
Gross profit
62.5
%
62.2
%
60.7
%
59.7
%
58.1
%
Selling, general & administrative expenses
43.4
%
44.2
%
42.2
%
38.7
%
38.6
%
Earnings from operations
19.1
%
18.0
%
18.5
%
21.0
%
7.5
%
Net earnings
8.9
%
11.1
%
11.3
%
11.4
%
4.5
%
Capital expenditures
5.7
%
5.6
%
6.2
%
5.8
%
5.5
%
Return on average assets
7.0
%
8.7
%
9.0
%
9.8
%
3.9
%
Return on average stockholders' equity
11.8
%
15.0
%
16.1
%
17.3
%
6.8
%
Total debt-to-equity ratio
30.9
%
36.6
%
37.4
%
38.9
%
36.4
%
Dividends as a percentage of net earnings
65.5
%
49.0
%
43.8
%
39.5
%
93.9
%
Company-operated TIFFANY & CO. stores
315

313

307

295

289

Number of employees
13,100

11,900

12,200

12,000

10,600


*
The Company adopted ASU No. 2016-09 – Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting, as of February 1, 2017. Accordingly, cash payments made to taxing authorities on employees' behalf for shares withheld for taxes were reclassified retrospectively from operating activities to financing activities on the Consolidated Statements of Cash Flows in each of the years presented. Additionally, the Company elected to classify excess tax benefits as an operating activity instead of as a financing activity on the Consolidated Statements of Cash Flows and such amounts were reclassified retrospectively in each of the years presented. See "Item 8. Financial Statements and Supplementary Data - Note B. Summary of Significant Accounting Policies" for additional information.

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NOTES TO SELECTED FINANCIAL DATA
a.
Financial information and ratios for 2017 include $146.2 million, or $1.17 per diluted share, of net tax expense related to the enactment of the 2017 U.S. Tax Cuts and Jobs Act. See "Item 8. Financial Statements and Supplementary Data - Note O. Income Taxes" for additional information.
b.
Financial information and ratios for 2016 include the following amounts, totaling $38.0 million of pre-tax expense ($24.0 million after tax expense, or $0.19 per diluted share):
$25.4 million of pre-tax expense ($16.0 million after tax expense, or $0.13 per diluted share) associated with an asset impairment charge related to software costs capitalized in connection with the development of a new finished goods inventory management and merchandising information system. See "Item 8. Financial Statements and Supplementary Data - Note B. Summary of Significant Accounting Policies" and "Note E. Property, Plant and Equipment" for additional information; and
$12.6 million of pre-tax expense ($8.0 million after tax expense, or $0.06 per diluted share) associated with impairment charges related to financing arrangements with diamond mining and exploration companies. See "Item 8. Financial Statements and Supplementary Data - Note B. Summary of Significant Accounting Policies" for additional information.
c.
Financial information and ratios for 2015 include the following amounts, totaling $46.7 million of pre-tax expense ($29.9 million after tax expense, or $0.24 per diluted share):
$37.9 million of pre-tax expense ($24.3 million after tax expense, or $0.19 per diluted share) associated with impairment charges related to a financing arrangement with Koidu Limited. See "Item 8. Financial Statements and Supplementary Data - Note B. Summary of Significant Accounting Policies" for additional information; and
$8.8 million of pre-tax expense ($5.6 million after tax expense, or $0.05 per diluted share) associated with severance related to staffing reductions and subleasing of certain office space for which only a portion of the Company's future rent obligations will be recovered.
d.
Financial information and ratios for 2014 include $93.8 million of net pre-tax expense ($60.9 million net after tax expense, or $0.47 per diluted share) associated with the redemption of $400.0 million in aggregate principal amount of certain senior notes prior to their scheduled maturities. See "Item 8. Financial Statements and Supplementary Data - Note G. Debt" for additional information.
e.
Financial information and ratios for 2013 include the following amounts, totaling $482.1 million of net pre-tax expense ($299.2 million net after-tax expense, or $2.32 per diluted share):
$480.2 million pre-tax expense associated with the Swatch arbitration award and $7.5 million 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
$9.4 million 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.

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Table of Contents

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

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


KEY STRATEGIC PRIORITIES

The Company's key strategic priorities are to:

Amplify an evolved brand message.

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

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

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

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

Deliver an exciting omnichannel customer experience.

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

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

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

Cultivate a more efficient operating model.

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

Inspire an aligned and agile organization to win.

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

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

To achieve sustainable sales growth.

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

To increase retail productivity and profitability.

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

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

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

To improve inventory and other asset productivity and cash flow.

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

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


2017 SUMMARY

Worldwide net sales increased 4% to $4.2 billion, reflecting sales growth in most reportable segments. Comparable store sales were unchanged from the prior year. There was no significant impact from currency translation (see "Non-GAAP Measures").

The Company added a net of two TIFFANY & CO. stores (opening five in Asia-Pacific, three in Europe and one in the Americas, while closing three in Asia-Pacific, two in the Americas and one each in Japan and the Emerging Markets and relocating seven stores), resulting in a 3% net increase in gross retail square footage.

The Company expanded its product offerings, including by introducing the new TIFFANY HARDWEAR jewelry collection, through additions to several existing jewelry collections, such as the TIFFANY T collection, and by introducing its new Home and Accessories collection, new watch designs and a new fragrance.

Earnings from operations as a percentage of net sales ("operating margin") increased 110 basis points, which includes the impact of certain impairment charges recorded in 2016, as described below under "Non-GAAP Measures". Excluding these charges, operating margin increased 10 basis points.

Net earnings decreased 17% to $370.1 million, or $2.96 per diluted share. However, net earnings in 2017 included a net charge of $146.2 million, or $1.17 per diluted share related to the enactment of the 2017 U.S. Tax Cuts and Jobs Act (the "2017 Tax Act") (see "Non-GAAP Measures"). Net earnings in 2016 included impairment charges of $0.19 per diluted share (see "Non-GAAP Measures"). Excluding these charges, net earnings per diluted share increased 10% to $4.13.


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Inventories, net increased 4%, with the majority of the increase attributed to currency translation.

Cash flow from operating activities was $932.2 million in 2017, compared with $705.7 million in 2016. Free cash flow (see "Non-GAAP Measures") was $692.9 million in 2017, compared with $482.9 million in 2016.

The Company returned capital to shareholders by paying regular quarterly dividends (which were increased 11% effective July 2017 to $0.50 per share, or an annualized rate of $2.00 per share) and by repurchasing 1.0 million shares of its Common Stock for $99.2 million.


RESULTS OF OPERATIONS

Non-GAAP Measures

The Company reports information in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"). Internally, management also monitors and measures its performance using certain sales and earnings measures that include or exclude amounts, or are subject to adjustments that have the effect of including or excluding amounts, from the most directly comparable GAAP measure ("non-GAAP financial measures"). The Company presents such non-GAAP financial measures in reporting its financial results to provide investors with useful supplemental information that will allow them to evaluate the Company's operating results using the same measures that management uses to monitor and measure its performance. The Company's management does not, nor does it suggest that investors should, consider non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. These non-GAAP financial measures presented here may not be comparable to similarly-titled measures used by other companies.


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Net Sales. The Company's reported net sales reflect either a translation-related benefit from strengthening foreign currencies or a detriment from a strengthening U.S. dollar. Internally, management monitors and measures its sales performance on a non-GAAP basis that eliminates the positive or negative effects that result from translating sales made outside the U.S. into U.S. dollars ("constant-exchange-rate basis"). Sales on a constant-exchange-rate basis are calculated by taking the current year's sales in local currencies and translating them into U.S. dollars using the prior year's foreign currency exchange rates. Management believes this constant-exchange-rate basis provides a useful supplemental basis for the assessment of sales performance and of comparability between reporting periods. The following table reconciles the sales percentage increases (decreases) from the GAAP to the non-GAAP basis versus the previous year:
 
2017
 
2016
 
GAAP 
Reported

 
Translation
Effect

 
Constant-
Exchange-
Rate Basis

 
GAAP 
Reported

 
Translation
Effect

 
Constant-
Exchange-
Rate Basis

Net Sales:
 
 
 
 
 
 
 
 
 
 
 
Worldwide
4
 %
 
 %
 
4
 %
 
(3
)%
 
 %
 
(3
)%
Americas
2

 
1

 
1

 
(5
)
 

 
(5
)
Asia-Pacific
10

 
2

 
8

 

 
(1
)
 
1

Japan
(1
)
 
(2
)
 
1

 
12

 
12

 

Europe
6

 
3

 
3

 
(10
)
 
(7
)
 
(3
)
Other
26

 

 
26

 
(8
)
 

 
(8
)
 
 
 
 
 
 
 
 
 
 
 
 
Comparable Store Sales:
 
 
 
 
 
 
 
 
 
 
 
Worldwide
 %
 
 %
 
 %
 
(5
)%
 
 %
 
(5
)%
Americas
1

 
1

 

 
(6
)
 
(1
)
 
(5
)
Asia-Pacific
(1
)
 
1

 
(2
)
 
(9
)
 
(2
)
 
(7
)
Japan
(1
)
 
(3
)
 
2

 
16

 
11

 
5

Europe
(2
)
 
2

 
(4
)
 
(14
)
 
(5
)
 
(9
)
Other
2

 

 
2

 
(15
)
 

 
(15
)

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

 
$
(146.2
)
 
$
244.2

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

 
146.2

 
516.3

Diluted earnings per share*
2.96

 
1.17

 
4.13

a 
Net expense recognized in 2017 related to the estimated impact of the 2017 Tax Act. See "Provision for Income Taxes" and "Item 8. Financial Statements and Supplementary Data - Note O. Income Taxes" for additional information.

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(in millions, except per share amounts)
GAAP
 
Impairment charges b
 
Non-GAAP
Year Ended January 31, 2017
 
 
 
 
 
SG&A expenses
$
1,769.1

 
$
(38.0
)
 
$
1,731.1

As a % of sales
44.2
%
 
 
 
43.3
%
Earnings from operations
721.2

 
38.0

 
759.2

As a % of sales
18.0
%
 
 
 
19.0
%
Provision for income taxes c
230.5

 
14.0

 
244.5

Net earnings
446.1

 
24.0

 
470.1

Diluted earnings per share*
3.55

 
0.19

 
3.75


*Amounts may not add due to rounding.
b 
Expenses associated with the following:
$25.4 million of pre-tax expense ($16.0 million after tax expense, or $0.13 per diluted share) associated with an asset impairment charge related to software costs capitalized in connection with the development of a new finished goods inventory management and merchandising information system (see "Information Systems Assessment"); and
$12.6 million of pre-tax expense ($8.0 million after tax expense, or $0.06 per diluted share) associated with impairment charges related to financing arrangements with diamond mining and exploration companies (see "Financing Arrangements with Diamond Mining and Exploration Companies").
c 
The income tax effect resulting from the adjustments has been calculated as both current and deferred tax benefit (expense), based upon the tax laws and statutory income tax rates applicable in the tax jurisdiction(s) of the underlying adjustment.
(in millions, except per share amounts)
GAAP
 
Impairment charges d
 
Specific cost-reduction initiatives e
 
Non-GAAP
Year Ended January 31, 2016
 
 
 
 
 
 
 
SG&A expenses
$
1,731.2

 
$
(37.9
)
 
$
(8.8
)
 
$
1,684.5

As a % of net sales
42.2
%
 
 
 
 
 
41.0
%
Earnings from operations
760.1

 
37.9

 
8.8

 
806.8

As a % of net sales
18.5
%
 
 
 
 
 
19.7
%
Provision for income taxes c
246.0

 
13.6

 
3.2

 
262.8

Net earnings
463.9

 
24.3

 
5.6

 
493.8

Diluted earnings per share
3.59

 
0.19

 
0.05

 
3.83

d 
Expenses associated with impairment charges related to a financing arrangement with Koidu Limited (see "Financing Arrangements with Diamond Mining and Exploration Companies").
e 
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.


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Free Cash Flow. Internally, management monitors its cash flow on a non-GAAP basis. Free cash flow is calculated by deducting capital expenditures from net cash provided by operating activities. The ability to generate free cash flow demonstrates how much cash the Company has available for discretionary and non-discretionary purposes after deduction of capital expenditures. The Company's operations require regular capital expenditures for the opening, renovation and expansion of stores and distribution and manufacturing facilities as well as ongoing investments in information technology. Management believes this provides a useful supplemental basis for assessing the Company's operating cash flows. The following table reconciles GAAP net cash provided by operating activities to non-GAAP free cash flow:
(in millions)
2017

2016

Net cash provided by operating activities
        $
932.2

        $
705.7

Less: Capital expenditures
(239.3
)
(222.8
)
Free cash flow a
        $
692.9

        $
482.9


a 
Net cash provided by operating activities and free cash flow in 2017 reflected more effective management and timing of payables and reduced payments for income taxes, partly offset by increased inventory purchases. Additionally, net cash provided by operating activities and free cash flow in 2017 and 2016 reflected a voluntary cash contribution of $15.0 million and $120.0 million, respectively, made by the Company to its U.S. pension plan (See "Item 8. Financial Statements and Supplementary Data - Note N. Employee Benefit Plans").

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 in comparable store sales if that 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.

Net Sales

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

Net sales by segment were as follows:
(in millions)
 
2017

% of Total Net Sales

 
2016

% of Total Net Sales

 
2015

% of Total Net Sales

 
2017 vs 2016
% Change in Net Sales

 
2016 vs 2015
% Change in Net Sales

Americas
 
$
1,870.9

45
%
 
$
1,841.9

46
%
 
$
1,947.0

47
%
 
2
 %
 
(5
)%
Asia-Pacific
 
1,095.0

26

 
999.1

25

 
1,003.1

24

 
10

 

Japan
 
596.3

14

 
604.4

15

 
541.3

13

 
(1
)
 
12

Europe
 
482.9

12

 
457.6

11

 
505.7

12

 
6

 
(10
)
Other
 
124.7

3

 
98.8

3

 
107.8

4

 
26

 
(8
)
 
 
$
4,169.8

 
 
$
4,001.8

 
 
$
4,104.9

 
 
4
 %
 
(3
)%


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Net Sales — 2017 compared with 2016. In 2017, worldwide net sales increased $168.0 million, or 4%, reflecting an increase in net sales in most reportable segments. There was no impact from foreign currency translation on worldwide net sales.

In 2017, jewelry sales represented 91% of worldwide net sales. Changes in jewelry sales by product category relative to the prior year were as follows:
(in millions)
$ Change

 
% Change

Jewelry collections
$
149.3

 
7
 %
Engagement jewelry
(56.6
)
 
(5
)
Designer jewelry
22.1

 
4


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

The Jewelry collections category reflects the combination of the previously reported high, fine & solitaire jewelry and fashion jewelry categories. Additionally, jewelry bearing the name of and attributed to Jean Schlumberger, which was previously reported within the high, fine & solitaire jewelry category, has been reclassified into the Designer jewelry category. Such changes or reclassifications have been made to conform with management's current internal analysis of product sales.

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

 
Non-comparable Store Sales

 
Wholesale/
E-Commerce/Other

 
Total

Americas
$
8.3

 
$
(0.8
)
 
$
21.5

 
$
29.0

Asia-Pacific
(8.0
)
 
38.8

 
65.1

 
95.9

Japan
(5.1
)
 
(2.5
)
 
(0.5
)
 
(8.1
)
Europe
(6.3
)
 
22.1

 
9.5

 
25.3


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

 
Impact of Currency Translation

 
Number of
Units Sold

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

 
21

Japan

 
(3
)
 
(3
)
Europe
2

 
2

 
4


Americas. In 2017, total net sales increased $29.0 million, or 2%, which included comparable store sales increasing $8.3 million, or 1%. The total net sales increase was primarily due to increased e-commerce sales growth in the U.S. and comparable store sales growth. Management attributed performance in this region to an increase in spending by local customers. On a constant-exchange-rate basis, total net sales increased 1% and comparable store sales were unchanged.

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

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Asia-Pacific. In 2017, total net sales increased $95.9 million, or 10%, which included comparable store sales decreasing $8.0 million, or 1%. Total net sales growth was due to increased wholesale sales, primarily in Korea, and the effect of new stores, while comparable store sales reflected growth in mainland China offset by declines in most other countries. Management attributed the declines in other Asia-Pacific countries partly to lower spending by Chinese tourists. On a constant-exchange-rate basis, total net sales increased 8% and comparable store sales decreased 2%.

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

Japan. In 2017, total net sales decreased $8.1 million, or 1%, which included comparable store sales decreasing $5.1 million, or 1%. The sales declines reflected the negative effect of currency translation. On a constant-exchange-rate basis, total net sales increased 1% and comparable store sales increased 2%.

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

Europe. In 2017, total net sales increased $25.3 million, or 6%, which included comparable store sales decreasing $6.3 million, or 2%, each benefiting from the positive effect of currency translation. Total net sales growth also reflected the effect of new stores and e-commerce sales growth. Management attributed retail sales growth to higher spending by local customers. On a constant-exchange-rate basis, total net sales increased 3% while comparable store sales decreased 4%, due to similar trends noted above.

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

Other. In 2017, total net sales increased $25.9 million, or 26%, primarily due to an increase in wholesale sales of diamonds.

Net Sales — 2016 compared with 2015. In 2016, worldwide net sales decreased $103.1 million, or 3%, reflecting declines in the Americas and Europe, an increase in Japan and unchanged sales in Asia-Pacific. There was no significant impact from foreign currency translation on worldwide net sales.

In 2016, jewelry sales represented 92% of worldwide net sales. Changes in jewelry sales by product category relative to the prior year were as follows:
(in millions)
$ Change

 
% Change

Jewelry collections
$
(85.3
)
 
(4
)%
Engagement jewelry
(20.2
)
 
(2
)
Designer jewelry
2.7

 
1


The decrease in sales in the Jewelry collections category reflected declines across the category, while the Engagement jewelry category decreased due to a shift in sales mix towards wedding bands.

The Jewelry collections category reflects the combination of the previously reported high, fine & solitaire jewelry and fashion jewelry categories. Additionally, jewelry bearing the name of and attributed to Jean Schlumberger, which was previously reported within the high, fine & solitaire jewelry category, has been reclassified into the Designer jewelry category. Such changes or reclassifications have been made to conform with management's current internal analysis of product sales.


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

 
Non-comparable Store Sales

 
Wholesale/
E-commerce/
Other

 
Total

Americas
$
(96.1
)
 
$
2.3

 
$
(11.3
)
 
$
(105.1
)
Asia-Pacific
(80.1
)
 
59.8

 
16.3

 
(4.0
)
Japan
78.8

 
(1.3
)
 
(14.4
)
 
63.1

Europe
(59.7
)
 
13.1

 
(1.5
)
 
(48.1
)

In 2016, jewelry sales represented 90%, 98%, 93% and 96% of total net sales in the Americas, Asia-Pacific, Japan and Europe, respectively. Changes in jewelry sales relative to the prior year were as follows:
 
Average Price per Unit Sold
 
 
 
As Reported

 
Impact of Currency Translation

 
Number of
Units Sold

Change in Jewelry Sales
 
 
 
 
 
Americas
1
 %
 
 %
 
(6
)%
Asia-Pacific
(5
)
 
(2
)
 
4

Japan
(2
)
 
11

 
13

Europe
(1
)
 
(6
)
 
(9
)

Americas. In 2016, total net sales decreased $105.1 million, or 5%, which management attributed to lower sales to U.S. customers and foreign tourist spending (primarily Chinese tourists). Comparable store sales decreased $96.1 million, or 6%. On a constant-exchange-rate basis, both total net sales and comparable store sales decreased 5%.

The decrease in the number of jewelry units sold reflected declines across all categories.

Asia-Pacific. In 2016, total net sales were approximately equal to the prior year, decreasing $4.0 million, partly reflecting new stores and increased wholesale sales; comparable store sales decreased $80.1 million, or 9%. Management attributed performance in this region to increased purchasing by local customers and declines in spending by foreign tourists. In addition, total net sales growth included sales growth in China, increased wholesale sales in Korea, a decelerating rate of retail sales declines in Hong Kong and varying performance in other countries. On a constant-exchange-rate basis, total net sales increased 1% and comparable store sales decreased 7%.

The increase in the number of jewelry units sold reflected increases in the Jewelry collections category and in wedding bands within the Engagement jewelry category. Management attributed the decrease in the average price per jewelry unit sold to a shift in mix within the Jewelry collections category and within the Engagement jewelry category toward wedding bands.

Japan. In 2016, total net sales increased $63.1 million, or 12%, and comparable store sales increased $78.8 million, or 16%. On a constant-exchange-rate basis, total net sales were in line with prior year and comparable store sales increased 5%. Management attributed this performance to higher spending by local customers and lower spending by Chinese tourists, as well as lower wholesale sales.

The increase in number of jewelry units sold reflected increases across all categories. Management attributed the decrease in the average price per jewelry unit sold to a shift in sales mix to the Designer jewelry category, as well as a shift in sales mix within the Jewelry collections category.

Europe. In 2016, total net sales decreased $48.1 million, or 10%, and comparable store sales decreased $59.7 million, or 14%, which management attributed to lower spending by foreign tourists and local customers across continental Europe. On a constant-exchange-rate basis, total net sales decreased 3% and comparable store sales

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decreased 9%, as softness across continental Europe was partially offset by sales increases in the U.K. (particularly in the second half of the year, largely attributable to foreign tourist spending).

The decrease in the number of jewelry units sold reflected decreases across all categories. Management attributed the decrease in average price per unit sold to the negative effect of currency translation, which offset a favorable shift toward higher-priced products within the Engagement jewelry category.

Other. In 2016, total net sales decreased $9.0 million, or 8%, partly due to a $16.9 million, or 22%, sales decline in the Emerging Markets region, partly offset by an increase in wholesale sales of diamonds.

Store Data. In 2017, the Company increased gross retail square footage by 3%, net, through store openings, closings and relocations. The Company opened nine stores and closed seven: opening five in Asia-Pacific (two in China, two in Australia and one in Korea), three in Europe (one each in Italy, Russia and the U.K.) and one in the Americas (in the U.S.) while closing three stores in Asia-Pacific (one each in China, Korea and Taiwan), two stores in the Americas (in the U.S.) and one each in Japan and the Emerging Markets. In addition, the Company relocated seven existing stores.

In 2016, the Company increased gross retail square footage by 3%, net, through store openings, closings and relocations. The Company opened 11 stores and closed five: opening seven in Asia-Pacific (three in China, two in Australia and one each in Korea and New Zealand), three in Europe (two in Italy and one in the Netherlands) and one in the Americas (in Canada) while closing three stores in Asia-Pacific (two in China and one in Singapore) and one each in Japan and Europe (in Germany). In addition, the Company relocated five existing stores.

Sales per gross square foot generated by all company-operated stores were approximately $2,700 in 2017, $2,700 in 2016 and $2,900 in 2015. The decline in 2016 reflected the effects of decreased sales and growth in retail square footage.

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


Gross Margin
(in millions)
2017

 
2016

 
2015

Gross profit
$
2,604.7

 
$
2,490.3

 
$
2,491.3

Gross profit as a percentage of net sales
62.5
%
 
62.2
%
 
60.7
%

Gross margin (gross profit as a percentage of net sales) increased 30 basis points in 2017 due to favorable product input costs, partly offset by the dilutive effects from increases in sales for wholesale distribution (merchandise sold to independent distributors for resale) and in wholesale sales of diamonds, as well as increases in certain product-related costs, including inventory reserves and distribution and logistics.

Gross margin increased 150 basis points in 2016 reflecting favorable product input costs and the effect of price increases, and, to a lesser extent, favorable changes in product sales mix.

Management periodically reviews and adjusts its retail prices when appropriate to address product input cost increases, specific market conditions and changes in foreign currencies/U.S. dollar relationships. Its long-term strategy is to continue that approach, although significant increases in product input costs or weakening foreign currencies can affect gross margin negatively over the short-term until management makes necessary price adjustments. Among the market conditions that management considers are consumer demand for the product category involved, which may be influenced by consumer confidence, and competitive pricing conditions. Management uses derivative instruments to mitigate certain foreign exchange and precious metal price exposures (see "Item 8. Financial Statements and Supplementary Data – Note H. Hedging Instruments"). Management increased retail prices in both 2017 and 2016 across most geographic regions and product categories, some of which were intended to mitigate foreign currency fluctuations.


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Selling, General and Administrative Expenses
(in millions)
2017

 
2016

 
2015

As reported:
 
 
 
 
 
SG&A expenses
$
1,810.2

 
$
1,769.1

 
$
1,731.2

SG&A expenses as a percentage of net sales ("SG&A expense ratio")
43.4
%
 
44.2
%
 
42.2
%
Excluding other operating expenses*:
 
 
 
 
 
SG&A expenses
$
1,810.2

 
$
1,731.1

 
$
1,684.5

SG&A expense ratio
43.4
%
 
43.3
%
 
41.0
%
*See "Non-GAAP Measures" above for a description of such excluded operating expenses.
SG&A expenses increased $41.1 million, or 2%, in 2017 and $37.9 million, or 2%, in 2016. SG&A expenses in 2016 and 2015 included certain other operating expenses. See "Non-GAAP Measures" for further details.

SG&A expenses in 2017 increased $79.1 million, or 5%, compared to 2016 (excluding the 2016 items noted in "Non-GAAP Measures"), largely reflecting increased labor and incentive compensation costs, store occupancy and depreciation expenses and marketing costs. There was no significant effect on SG&A expense changes from foreign currency translation.

SG&A expenses in 2016 increased $46.6 million, or 3%, compared to 2015 (excluding the 2016 and 2015 items noted in "Non-GAAP Measures"), largely reflecting increased store occupancy and depreciation expenses and labor and incentive compensation costs. There was no significant effect on SG&A expense changes from foreign currency translation.

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

Earnings from Operations
(dollars in millions)
2017

 
2016

 
2015

As reported:
 
 
 
 
 
Earnings from operations
$
794.5

 
$
721.2

 
$
760.1

Operating margin
19.1
%
 
18.0
%
 
18.5
 %
Basis point change from prior year
110

 
(50
)
 
(250
)
Excluding other operating expenses*:
 
 
 
 
 
Earnings from operations
$
794.5

 
$
759.2

 
$
806.8

Operating margin
19.1
%
 
19.0
%
 
19.7
 %
Basis point change from prior year
10

 
(70
)
 
(130
)
*See "Non-GAAP Measures" above for a description of such excluded operating expenses.

The increase in operating margin in 2017 reflected impairment charges recorded in 2016 (see "Non-GAAP Measures"). When excluding such charges, the slight increase in 2017 resulted from a higher gross margin partly offset by an increase in the SG&A expense ratio. The decline in operating margin in 2016 resulted from sales deleveraging of SG&A expenses, which were only partly offset by higher gross margins.


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Results by segment are as follows:
(in millions)
2017

 
% of Net
Sales

 
2016

 
% of Net
Sales

 
2015

 
% of Net
Sales

Earnings from operations*:
 
 
 
 
 
 
 
 
 
 
Americas
$
390.3

 
20.9
 %
 
$
373.0

 
20.3
 %
 
$
390.8

 
20.1
 %
Asia-Pacific
286.1

 
26.1

 
256.0

 
25.6

 
264.4

 
26.4

Japan
207.3

 
34.8

 
204.6

 
33.9

 
199.9

 
36.9

Europe
86.3

 
17.9

 
81.6

 
17.8

 
97.4

 
19.3

Other
6.3

 
5.1

 
5.9

 
6.0

 
6.4

 
6.0

 
976.3

 
 
 
921.1

 
 
 
958.9

 
 
Unallocated corporate
expenses
(181.8
)
 
(4.4
)%
 
(161.9
)
 
(4.0
)%
 
(152.1
)
 
(3.7
)%
Earnings from operations before other operating expenses
794.5

 
19.1
 %
 
759.2

 
19.0
 %
 
806.8

 
19.7
 %
Other operating expenses

 
 
 
(38.0
)
 
 
 
(46.7
)
 
 
Earnings from operations
$
794.5

 
19.1
 %
 
$
721.2

 
18.0
 %
 
$
760.1

 
18.5
 %
*
Percentages represent earnings from operations as a percentage of each segment's net sales.
On a segment basis, the ratio of earnings from operations to each segment's net sales in 2017 compared with 2016 was as follows:
Americas – the ratio increased 60 basis points due to an improvement in gross margin, partly offset by sales deleverage on operating expenses;
Asia-Pacific – the ratio increased 50 basis points due to sales leverage on operating expenses, partly offset by a decrease in gross margin, both attributable to increased wholesale sales in the region;
Japan – the ratio increased 90 basis points due to an increase in gross margin (which includes the effect of changes in foreign currency exchange rates on inventory purchases), partly offset by sales deleverage on operating expenses; and
Europe – the ratio increased 10 basis points due to an increase in gross margin, largely offset by a sales deleverage on operating expenses.

On a segment basis, the ratio of earnings from operations to each segment's net sales in 2016 compared with 2015 was as follows:
Americas – the ratio increased 20 basis points due to an improvement in gross margin, largely offset by a lack of sales leverage on operating expenses resulting from a decrease in net sales;
Asia-Pacific – the ratio decreased 80 basis points due to a lack of sales leverage on operating expenses, primarily attributable to new store-related expenses, partly offset by an improvement in gross margin;
Japan – the ratio decreased 300 basis points primarily due to a decrease in gross margin that reflected an unfavorable impact tied to the strengthening of the Yen on the Company's program to utilize Yen forward contracts for a portion of its forecasted merchandise purchases; and
Europe – the ratio decreased 150 basis points due to a decrease in net sales resulting in a lack of sales leverage on operating expenses, partly offset by an improvement in gross margin.

Unallocated corporate expenses include costs related to administrative support functions which the Company does not allocate to its segments. Such unallocated costs include those for centralized information technology, finance, legal and human resources departments. Unallocated corporate expenses increased by $19.9 million in 2017 due

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to an increase in charitable donations to the Tiffany & Co. Foundation, a private foundation organized to support 501(c)(3) charitable organizations, increased costs associated with upgrades to the Company's information technology systems and higher severance costs associated with changes in corporate management. Such expenses increased $9.8 million in 2016, primarily due to increased costs, including depreciation and amortization expense, associated with upgrades to the Company's information technology systems as well as increased incentive compensation expense.

Included in other operating expenses in the table above, the 2016 amount represented $25.4 million associated with an impairment charge related to software costs capitalized in connection with the development of a new finished goods inventory management and merchandising information system (see "Item 8. Financial Statements and Supplementary Data - Note B. Summary of Significant Accounting Policies and Note E. Property, Plant and Equipment") and $12.6 million associated with impairment charges related to financing arrangements with diamond mining and exploration companies (see "Item 8. Financial Statements and Supplementary Data - Note B. Summary of Significant Accounting Policies").

Included in other operating expenses in the table above, the 2015 amount represented $37.9 million associated with impairment charges related to a financing arrangement with Koidu Limited (see "Item 8. Financial Statements and Supplementary Data - Note B. Summary of Significant Accounting Policies") and $8.8 million 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 decreased $4.0 million, or 9%, in 2017 and $3.0 million, or 6%, in 2016.

Other (Income) Expense, Net

Other (income) expense, net includes interest income as well as gains/losses on investment activities and foreign currency transactions. Net other income of $8.0 million in 2017 compared with net other income of $1.4 million in 2016. The $6.6 million increase in 2017 was primarily due to gains on sales of marketable securities and an increase in interest income. Net other income of $1.4 million in 2016 compared with net other expense of $1.2 million in 2015. The $2.6 million change was primarily due to reduced foreign currency transaction losses.

Provision for Income Taxes

On December 22, 2017, the 2017 Tax Act was enacted in the U.S. This enactment resulted in a number of significant changes to U.S. federal income tax law for U.S. taxpayers. On the same date, the SEC issued Staff Accounting Bulletin No. 118 ("SAB 118"), which addresses the application of U.S. GAAP in situations in which a registrant does not have necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. Changes in tax law are accounted for in the period of enactment. As such, the 2017 consolidated financial statements reflect the estimated immediate tax effect of the 2017 Tax Act. See "Item 8. Financial Statements and Supplementary Data - Note O. Income Taxes" for additional information on the provisions and impacts of the 2017 Tax Act and SAB 118.

The effective income tax rate was 51.3% in 2017 compared with 34.1% in 2016 and 34.7% in 2015. The effective income tax rate in 2017 reflected the impact of a $146.2 million net charge, or $1.17 per diluted share, related to the enactment of the 2017 Tax Act in December 2017. The net charge recorded includes:

Estimated tax expense of $94.8 million, or $0.76 per diluted share, for the impact of the reduction in the U.S. tax rate on the Company’s deferred tax assets and liabilities,

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

A tax benefit of $4.6 million, or $0.04 per diluted share, resulting from the effect of the 21% statutory tax rate for the month of January 2018 on the Company’s annual statutory tax rate for the year ended January

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31, 2018. Because the Company’s fiscal year ended on January 31, 2018, the Company’s statutory tax rate for fiscal 2017 is 33.8%, rather than 35.0%.

Excluding this net charge, the effective income tax rate was 32.1% (see "Non-GAAP Measures"). This differs from the effective tax rate in 2016 of 34.1% primarily due to an increase in the domestic manufacturing deduction, the implementation of ASU 2016-09, which now requires excess tax benefits and/or shortfalls related to exercises and vesting of share-based compensation to be recorded in the provision for income taxes rather than in additional paid-in capital and lower state taxes, partially offset by the impact of a change in uncertain tax positions primarily attributable to the conclusion of a tax examination during the first quarter of 2016.

In connection with the implementation of ASU 2016-09, the Company recognized an income tax benefit of $6.8 million, or $0.05 per diluted share, in 2017. In connection with the conclusion of the tax examination during the first quarter of 2016, the Company recognized an income tax benefit of $6.6 million, or $0.05 per diluted share.


LIQUIDITY AND CAPITAL RESOURCES

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

At January 31, 2018, the Company's cash and cash equivalents totaled $970.7 million, of which approximately 25% was held in locations outside the U.S. where, prior to the enactment of the 2017 Tax Act, the Company had asserted to indefinitely reinvest any undistributed earnings to support its continued expansion and investments in such foreign locations. As a result of the 2017 Tax Act, the Company is currently evaluating such assertion. This evaluation is incomplete and will be completed during the measurement period allowed for under SAB 118. If the Company's assertion to indefinitely reinvest earnings is maintained, such cash balances would not be available to fund U.S. cash requirements unless the Company were to decide to repatriate such funds and incur applicable tax charges. The applicable tax charges may include withholding taxes and tax on foreign currency gains and losses. The Company believes it has sufficient sources of cash in the U.S. to fund its U.S. operations without the need to repatriate any of those funds held outside the U.S. See "Item 8. Financial Statements and Supplementary Data - Note O. Income Taxes" for additional information. In addition, the Company had Short-term investments of $320.5 million at January 31, 2018 compared with $57.8 million at January 31, 2017.

The following table summarizes cash flows from operating, investing and financing activities:
(in millions)
2017

 
2016

 
2015

Net cash provided by (used in):
 
 
 
 
 
Operating activities
$
932.2

 
$
705.7

 
$
817.4

Investing activities
(481.1
)
 
(236.8
)
 
(278.2
)
Financing activities
(421.1
)
 
(386.4
)
 
(426.1
)
Effect of exchange rates on cash and cash equivalents
12.7

 
1.9

 
0.5

Net increase in cash and cash equivalents
$
42.7

 
$
84.4

 
$
113.6



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Operating Activities

The Company had net cash inflows from operating activities of $932.2 million in 2017, $705.7 million in 2016 and $817.4 million in 2015. The increase in 2017 compared to 2016 reflected more effective management and timing of payables and reduced payments for income taxes, partly offset by increased inventory purchases. Additionally, the Company made a $15.0 million voluntary cash contribution to its U.S. pension plan in the third quarter of 2017. The decrease in 2016 compared to 2015 was primarily due to a $120.0 million voluntary contribution made by the Company to its U.S. pension plan in 2016.

Working Capital. Working capital (current assets less current liabilities) increased to $3.3 billion at January 31, 2018 from $2.9 billion at January 31, 2017. The increase in 2017 was due to an increase in Short-term investments and a decrease in Short-term borrowings.

Accounts receivable, less allowances at January 31, 2018 were 2% higher than at January 31, 2017. Currency translation had the effect of increasing accounts receivable, less allowances by 4% from January 31, 2017.

Inventories, net at January 31, 2018 were 4% higher than at January 31, 2017, which reflected similar increases in both finished goods inventories and combined raw material and work-in-process inventories. Currency translation had the effect of increasing inventories, net by 3% from January 31, 2017.

Accounts payable and accrued liabilities at January 31, 2018 were 40% higher than at January 31, 2017, which reflected more effective management of payables, as well as the timing of payments.

Investing Activities

The Company had net cash outflows from investing activities of $481.1 million in 2017, $236.8 million in 2016 and $278.2 million in 2015. The increase in net cash outflows in 2017 compared to 2016 was driven by increased net purchases of marketable securities and short-term investments. The decrease in net cash outflows in 2016 compared to 2015 was driven by decreased capital expenditures as well as reduced net purchases of marketable securities and short-term investments.

Marketable Securities and Short-Term Investments. The Company invests a portion of its cash in marketable securities and short-term investments. The Company had $246.6 million of net purchases of marketable securities and short-term investments during 2017, compared with $15.7 million during 2016 and $26.4 million during 2015.

Capital Expenditures. Capital expenditures are typically related to the opening, renovation and/or relocation of stores (which represented approximately 60%, 60% and 50% of capital expenditures in 2017, 2016 and 2015, respectively), as well as distribution and manufacturing facilities and ongoing investments in information technology. Capital expenditures were $239.3 million in 2017, $222.8 million in 2016 and $252.7 million in 2015, representing 6% of worldwide net sales in each year.

Financing Activities

The Company had net cash outflows from financing activities of $421.1 million in 2017, $386.4 million in 2016 and $426.1 million in 2015.


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Recent Borrowings. The Company had net (repayments of) proceeds from short-term and long-term borrowings as follows:
(in millions)
2017

 
2016

 
2015

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

 
$
(11.3
)
Proceeds from other credit facility borrowings
39.2

 
76.8

 
24.8

Repayments of other credit facility borrowings
(96.1
)
 
(83.1
)
 
(16.0
)
Net (repayments of) proceeds from short-term borrowings
(124.7
)
 
7.9

 
(2.5
)
Long-term borrowings:
 
 
 
 
 
Proceeds from the issuance of long-term debt

 
98.1

 

Repayment of long-term debt

 
(97.1
)
 

Net proceeds from long-term borrowings

 
1.0

 

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

 
$
(2.5
)

Credit Facilities. In 2014, the Registrant entered into a four-year $375.0 million and a five-year $375.0 million multi-bank, multi-currency, committed unsecured revolving credit facility, including letter of credit subfacilities (collectively, the "Credit Facilities"), resulting in a total borrowing capacity of $750.0 million. In October 2016, the maturity for each of the Credit Facilities was extended for one additional year pursuant to the terms set forth in the respective agreements governing the Credit Facilities. Therefore, the four-year and five-year Credit Facilities will mature in October of 2019 and 2020, respectively.

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

Other Credit Facilities. In 2016, the Registrant's wholly owned subsidiary, Tiffany & Co. (Shanghai) Commercial Company Limited ("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 990.0 million ($156.5 million at January 31, 2018) and matures in July 2019.

Under all of the Company's credit facilities and the Commercial Paper Program, at January 31, 2018, there were $120.6 million of borrowings outstanding, $6.8 million of letters of credit issued but not outstanding and $918.1 million available for borrowing. At January 31, 2017, there were $228.7 million of borrowings outstanding, $4.0 million of letters of credit issued but not outstanding and $798.4 million available for borrowing. The weighted-average interest rate for borrowings outstanding was 4.35% at January 31, 2018 and 2.71% at January 31, 2017.

Senior Notes. In August 2016, the Registrant issued ¥10.0 billion ($91.9 million at January 31, 2018) of 0.78% Senior Notes due August 2026 (the "Yen Notes") in a private transaction. The Yen Notes bear interest at a rate of 0.78% per annum, payable semi-annually on February 26 and August 26 of each year, commencing February 26, 2017. The proceeds from the issuance of the Yen Notes were used to repay the Registrant's ¥10.0 billion 1.72% Senior Notes due September 2016 upon the maturity thereof.

The ratio of total debt (short-term borrowings and long-term debt) to stockholders' equity was 31% at January 31, 2018 and 37% at 2017.

At January 31, 2018, the Company was in compliance with all debt covenants.

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

Share Repurchases. In March 2014, the Company's Board of Directors approved a share repurchase program (the "2014 Program"), which authorized the Company to repurchase up to $300.0 million of its Common Stock through open market transactions. The 2014 Program had an expiration date of March 31, 2017, but was terminated in January 2016 in connection with the authorization of a new program with increased repurchase capacity (as described in more detail below). Approximately $58.6 million remained available for repurchase under the 2014 Program at the time of its termination.

In January 2016, the Company's Board of Directors approved a new share repurchase program (the "2016 Program"), which authorizes the Company to repurchase up to $500.0 million of its Common Stock through open market transactions, block trades or privately negotiated transactions and terminated the 2014 Program. Purchases under the 2014 Program were, and purchases under the 2016 Program have been, 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 2016 Program will expire on January 31, 2019. At January 31, 2018, $211.2 million remained available for repurchase under the 2016 Program.

The Company's share repurchase activity was as follows:
 
(in millions, except per share amounts)
2017

 
2016

 
2015

Cost of repurchases
$
99.2

 
$
183.6

 
$
220.4

Shares repurchased and retired
1.0

 
2.8

 
2.8

Average cost per share
$
94.86

 
$
65.24

 
$
78.40


Proceeds from exercised stock options. The Company's proceeds from exercised stock options were $54.6 million, $15.3 million and $2.0 million in 2017, 2016 and 2015, respectively.

Dividends. The cash dividend on the Company's Common Stock was increased once in each of 2017, 2016 and 2015. The Company's Board of Directors declared quarterly dividends which totaled $1.95, $1.75 and $1.58 per common share in 2017, 2016 and 2015, respectively, with cash dividends paid of $242.6 million, $218.8 million and $203.4 million in those respective years. The dividend payout ratio (dividends as a percentage of net earnings) was 66%, 49% and 44% in 2017, 2016 and 2015, respectively. Dividends as a percentage of adjusted net earnings (see "Non-GAAP Measures") were 47%, 47% and 41% in 2017, 2016 and 2015, respectively.

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

Financing Arrangements with Diamond Mining and Exploration Companies

The Company provided financing to diamond mining and exploration companies in order to obtain rights to purchase the output from mines owned by these companies. At January 31, 2017, there was $43.8 million of principal outstanding under a financing arrangement (the "Loan") with Koidu Limited (previously Koidu Holdings S.A.) ("Koidu"). However, the Company recorded impairment charges totaling $4.2 million and $37.9 million during the fiscal years ended January 31, 2017 and 2016, respectively, related to the Loan and ceased accruing interest income on the loan as of July 2015, resulting in a net carrying amount of the Loan of $1.7 million at January 31, 2017. In 2017, the Company sold its interest in the Loan to Koidu's largest creditor for $1.7 million. Additionally, the Company and Koidu entered into an agreement to terminate the supply agreement between the parties, pursuant to which Laurelton Diamonds, Inc., a wholly owned subsidiary of the Company, had previously been required to purchase at fair market value certain diamonds recovered from the mine operated by Koidu that met Laurelton's quality standards.

The Company also recorded an impairment charge of $8.4 million during the fiscal year ended January 31, 2017 related to a separate financing arrangement with another diamond mining and exploration company.


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Impairment charges recorded on such arrangements were not significant during the fiscal year ended January 31, 2018.

Information Systems Assessment

The Company is engaged in a multi-year program to evaluate and, where appropriate, upgrade and/or replace certain of its information systems. As part of this program, the Company identified opportunities to enhance its finished goods inventory management and merchandising capabilities, and began development efforts to replace certain of its existing systems and provide these enhanced capabilities. In 2016, the Company completed an assessment of the replacement system that was under development to evaluate whether the continued development of this system would deliver sufficiently improved operating capabilities. Following the completion of this assessment, in the fourth quarter of 2016, the Company concluded that the development of this system should be modified such that the finished goods inventory management and merchandising capabilities that were intended to be delivered utilizing this new system will instead be delivered through further development of the Company's current Enterprise Resource Planning system and continued implementation of a new order management system. Accordingly, the Company evaluated the costs capitalized for the development of the replacement system for impairment in accordance with its policy on the review of long-lived assets, and determined, based on specific identification of costs capitalized pertaining to the development of specific capabilities in the new system, that $25.4 million of such capitalized costs related to software functionality which will not be utilized, and therefore will not have future benefit to the Company. As such, the Company recorded a pre-tax impairment charge of $25.4 million as a component of Selling, General and Administrative expenses in the fourth quarter of 2016. This multi-year program is ongoing and, as previously disclosed, may require significant capital expenditures and dedication of resources in both current and future periods, though management believes that the modified approach referenced above will ultimately result in a lower overall cost to the Company in delivering these capabilities.

Contractual Cash Obligations and Commercial Commitments

The following is a summary of the Company's contractual cash obligations at January 31, 2018:
(in millions)
Total

2018

2019-2020

2021-2022

Thereafter

Unrecorded contractual obligations:
 
 
 
 
Operating leases a
$
1,685.7

$
313.6

$
458.9

$
349.4

$
563.8

Inventory purchase obligations b
268.4

268.4




Interest on debt c
629.2

35.9

71.8

70.7

450.8

Other contractual obligations d
86.6

58.1

17.8

4.1

6.6

Recorded contractual obligations:
 
 
 
 
 
Short-term borrowings
120.6

120.6




Long-term debt e
891.9



50.0

841.9

2017 Tax Act - Transition Tax liability f
56.5

5.9

8.8

8.8

33.0

 
$
3,738.9

$
802.5

$
557.3

$
483.0

$
1,896.1

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, 2018 totaled $32.7 million. See "Item 8. Financial Statements and Supplementary Data - Note J. Commitments and Contingencies" for a discussion of the Company's operating leases.
b)
The Company will, from time to time, enter into arrangements to purchase rough diamonds that contain minimum purchase obligations. Inventory purchase obligations associated with these agreements have been estimated at approximately $45.0 million for 2018 and are included in this table. Purchases beyond 2018 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.

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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.
f)
Under the 2017 Tax Act, the Company recorded estimated income tax expense of $56.0 million in respect of the Transition Tax and a related income tax liability, which is payable over eight years, and of which $5.9 million is current and $50.6 million is non-current, as of January 31, 2018. See "Item 8. Financial Statements and Supplementary Data - Note O. Income Taxes" for additional information.

The summary above does not include the following items: