Financial Analysis

INTRODUCTION

A financial statement analysis is basically doing homework on a company's financial statements, analyzing everything down to the footnotes. Analysts look at these statements to determine whether or not to invest in a company. They look at previous performance to determine future performance. Financial statement analysis allows you to compare more than two companies at a time. They compare different ratios as well as looking at the annual report. Included in the annual report are information about the company, letter to shareholders, the auditor's report and results, financial statements and any other information on the company.

Within this analysis, I will look at Tiffany and Co. along with Zales Corp to analyze their annual report which will cover ratios, the financial statements and the notes to these statements for both 2002 and 2003.

BACKGROUND

Tiffany and Co. was founded in 1837 and is a renowned jeweler and specialty retailer who specialize in jewelry, stationery, fragrance and accessories. They have 4 channels of distribution which are their means of collecting revenues. They are US Retail, International Retail, Direct Marketing and Specialty Retail. Tiffany has over 141 stores in the US and stores all over the world. The company has four key growth strategies. They plan to expand its channels of distribution, to increase sales in existing stores, to enhance customer awareness and appreciation and to provide outstanding customer service. The company has invested in Temple St. Clair a privately held company that designs and sells jewelry, Della.com an online provider for wedding gift registry, Aber diamond by purchasing their common stock and the company has recently invested in Iridesse a company that sells pearls. The number of employees at tiffany has increased over the years

Zales Corp was founded in 1927 and is the largest jeweler in the US with over 2,234 stores mainly in shopping malls. The company has seven brands to satisfy certain customers. The company continues to increase its brand differentiation, strengthen its infrastructure and take advantages of long term growth opportunities. Zales main form of business is charms, jewelry and watches. The company has over 17000 employees. There busiest time is around the holidays.

ANALYSIS OF EARNINGS PER SHARE

TIFFANY & CO.

Basic earnings per share (EPS) for 2003 was $1.48 which increased by $.17 from 2002 $1.31. The increase was due to the fact that net income rose by 13.49% while weighted average outstanding common stock rose by .0027% both from 2002-2003; there were no outstanding preferred shares. Because there was a greater increase in net income than weighted average outstanding common stock, EPS increased. Dilutive securities were stock options which increased the weighted average outstanding common stock. The weighted average outstanding common stock after the stock options were 148,472 in 2003 and 148,591 in 2002 a .0008% decrease which made diluted EPS increase from $1.28 in 2002 to $1.45 in 2003. In 2003 they had a lower interest expense and financing costs as well as other income in stead of other expense. In 2002 and 2003 there were $4,991,000 and $1,791,000 antidilutive stock options which were excluded from computing EPS due to their antidilutive effect.

ZALES CORP.

Basic earnings per share (EPS) for 2003 was $2.02 which increased by $2.65 from 2002 ($.63). This increase took place because Zales had a net income in 2003 instead of a net loss from 2002. They had a decrease of 18.40 % for weighted average outstanding common stock from 64528 in 2002 to 52650 in 2003. This caused EPS to increase. They had higher sales, a decrease in the cost of insurance and there was no impairment of goodwill for 2003. They also had dilutive securities which were stock options only in 2003. This increased weighted average outstanding common stock to $53,519 in 2003 which caused the diluted EPS to decrease. Diluted EPS increased by $2.62 from a loss of ($.63) in 2002 to $1.99 in 2003. In 2002 and 2003 there were $1,180,299 and $26,530 antidilutive stock options which were excluded from computing EPS due to their antidilutive effect.

When looking at several years of EPS for both companies, Tiffany and Co. has increased their earnings each year as well as EPS. Zales EPS has fluctuated several times. Even though Zales have more sales than Tiffany, Zales incur more expenses and therefore earnings may go up and down as the years go by.

ANALYSIS OF STATEMENT OF CASHFLOWS

TIFFANY & CO.

Tiffany & Co. uses the indirect method to report the statement of cash flow. In 2003 accounts receivables increased as well as inventories. They were both subtracted from net income. The increase in inventory and accounts receivable can be justified by the increase in sales revenue. If they sold more they probably bought more inventories and more customers used credit, therefore these items would increase. In the future management expects that inventory will increase to support new stores, product introductions, sales growth, etc. They continue to manage inventory investment by developing effective systems and processes. Accounts payable, accrued liabilities and income taxes payable also increased because they were added to net income. In 2002 accounts receivables increased as well as inventories. Accounts payables and income taxes payable decreased while accrued liabilities increased. They probably paid off some debt during this period.

They had a positive cash flow for operating activities for both 2002 and 2003 due to the increased earnings and non-cash items. This shows that the company's operations are successful. Looking at several years of cash and cash equivalents it seems that it has been increasing and decreasing throughout the years. The capital expenditure has increased from $219,717 in 2002 to $272,900 in 2003. The depreciation expense has increased from $78,008 in 2002 to $90,420 in 2003. Tiffany is replacing its equipments and has been expanding each year. They open at least 2-3 stores per year; they have renovations, expansion of current stores, distribution facilities and constant investments in new systems. The