They say that no person is an island. In the jewelry business, you can’t survive unless you know what is going on in the market, what is happening with your customers, and perhaps most importantly, what’s going on with your competition.

 

Jewelers usually have good financial data on their businesses (we are convinced, however, that they do not make good use of this data). But, how does their performance compare with their peer group? Are profits above or below average? Where is their competition going to open new stores? Suppliers need to know which retail jewelers – their customers – offer growth opportunities, and which are closing stores?

 

In prior articles about second quarter results, we’ve covered sales trends (a divided market where guild jewelers are doing well and mass market jewelers are barely treading water), and we’ve summarized gross margin trends (down).

 

In this summary, we’ll cover other relevant information about publicly held jewelry retailers and suppliers which we’ve gleaned from SEC filings, legal filings, conference calls, and perhaps from press releases. If you find just one thing you didn’t know, and you can use it in your business, then we’ll consider this compilation a successful journalistic endeavor.

 

Inventory Levels Up

One of the more closely watched financial measures that all businesses calculate is the inventory-to-sales ratio. In a perfect world, inventory gains and sales gains will match. The trick in the real world is, of course, to keep inventories from building significantly faster than sales. If inventories are allowed to build too rapidly, working capital needs soar.

 

Further, there is a great risk of inventory becoming obsolete, as fashion changes. Finally, when disposing of obsolete or un-needed inventory, it takes time to melt down the goods or find a liquidator who will take the merchandise.

 

The arguments that merchants make for allowing inventories to grow faster than sales is that new stores need initial inventory and new collections need to be put in stores. In addition, because of long lead times for supplier orders, retailers often must order far ahead of the selling season – Christmas, for example; thus, their inventories will build in anticipation of a spike in sales.

 

In the second quarter, only one publicly held retailer reported that inventories grew more slowly than sales – Tiffany. We think Tiffany was surprised at the strong pace of sales in the quarter, and we think they are currently under-inventoried.

 

What about the other merchants? Most of these retailers are on a fiscal second quarter ended July. That’s too far in advance of the holiday selling season to justify bringing in Christmas goods. In their cases, we think that their sales gains were probably more modest than plan, so they are likely to adjust their open-to-buy (vendors: are you listening?).

 

The graph below summarizes inventory gains (blue bar) versus sales gains (red bar) in the second quarter of 2007 for the publicly held companies in the U.S. market.

 

Jewelers' Sales to Inventory Trends Generally Unfavorable Percent Change Year-to-Year Source:  Company Reports

Growth Prospects – A Mixed Bag

Some jewelers have embarked on an ambitious expansion program, while others have opted to pull back, either in response to market uncertainty or to allow management to focus on other challenges (think Zale).

 

Guild Jewelers

Harry Winston – Since its acquisition by Aber Diamond, Harry Winston has been on an ambitious expansion program. In the second quarter, it opened a new salon in Beijing, and refurbished its salon in Taiwan. Since the end of the second quarter, a new store has opened in Hong Kong, and stores are scheduled to open in Chicago (US) and Nagoya (Japan) prior to the all-important holiday selling season. This will bring the total Harry Winston salons to 18 units, up from 13 units during the 2006 holiday selling season. In addition, construction of a new watch factory in Geneva has basically been completed, and watch manufacturing operations should begin in the next month or two.

 

Birks & Mayors – Birks management says it is aggressively seeking acquisitions, but it has not found a good fit since the acquisition of Mayors a few years ago. It plans to open two new stores this year which will add about 2.5 percent to its selling square feet (ending with 306,000 square feet). One of those stores has already opened in Weston, Florida, and a store will open in Jacksonville, Florida, later. The company will end the year with 69 locations, including 38 stores in Canada and 31 units in the U.S. Management continues to focus on developing the Birks brand, especially in the Mayors stores.

 

Tiffany & Co. – In addition to opening seven new U.S. stores this year, a 10 percent increase over the prior year, and completing the renovation of its flagship Fifth Avenue (New York) unit, Tiffany plans to relaunch its Tiffany.com website this fall, prior to the holiday selling season. While direct marketing – online and catalog – sales are only about 6 percent of corporate sales, they are growing rapidly. In the second quarter, direct marketing sales were up 12 percent. The average ticket was up, and online sales increased substantially. Catalog circulation is down 10 percent this year, in line with plan. Management has a carefully crafted strategy to use catalogs and online marketing to drive “direct” sales. About 11 new stores will be opened this year in international markets, an increase of about 10 percent, bringing the total company-owned international units to 114 at year-end. Management noted that sales in its Iridesse pearl stores rose solidly in the quarter, but it was otherwise quiet about future plans for this specialty division. Little Switzerland’s results are no longer included, since it is being divested. Tiffany plans to initiate wholesale watch distribution of its Tiffany-branded watches sometime in 2008.

 

Online Jewelers

Blue Nile – Blue Nile processed just over 44,000 orders in the second quarter, up 27 percent over the prior year, with an average value of about $1,600. Engagement ring sales were a greater portion of the company’s sales mix, according to management, because there was no major calendar event driving sales of other goods in the quarter, according to management.

 

What about Blue Nile’s Mother’s Day sales, which occurred in the second quarter? Blue Nile apparently is not top-of-mind for Mother’s Day gifts; it also confirms DTC research that says only about 2 percent of all diamond sales (by value) occur during the Mother’s Day selling period.

 

Blue Nile has raised its sales forecast for 2007 to a range of $312-$318 million for the full year ending December 2007; last year, the company posted sales of about $252 million. Blue Nile is expanding its distribution center and infrastructure to handle up to $1 billion in annual sales; clearly, management is bullish about the company’s future. Management reiterated that it had no plans to take the Blue Nile luxury brand beyond jewelry.

 

Mass Market Jewelers

Finlay Enterprises – The company expects to have about 730 doors at year-end, down from just over 1,000 at its peak a few years ago. Last year, the company ended the year with 758 units. Management continues to cite its leased jewelry departments in Dillards as a challenge. Finlay is clearly moving toward the upper end of the market: leased departments in Bloomingdales and its guild specialty stores operations are its best-performing units. Management said it would like to find more acquisitions similar to Congress and Carlyle.

 

 

This is related to real estate issues, and is not a reflection of Sterling’s ability to support new store openings. For the full year, Sterling will add about 10 percent new store space in 2007; this is far ahead of any other major mass market jeweler. At the end of 2007, the company is expected to operate 1,406 units, up from last year’s 1,308 stores in the U.S. market. The table below summarizes Sterling’s store opening plans, both this year and for the longer term.

Zale Corporation – Zale is cutting back on store openings for its Zale’s Jewelers and Gordon’s divisions. Instead, it will accelerate new store openings for its Zale Outlet division as well as its Canadian stores, Peoples and Mappins. Online sales are expected to add 1-2 percent to sales in the current year. In the current fiscal year ending July 2008, we look for about 37 new stores and about 10 new kiosks; this implies a growth rate of 2 percent or less.

 

Management further said that it had identified a group of stores that might be closed after the holiday selling season, but it was too soon to be more specific. We continue to believe that Bailey Banks & Biddle is a candidate for divestiture. Management also said that Gordon’s did not have the potential to become a second national brand, primarily because the financial returns were not compelling enough. 

 

Expenses Rise

Costs of operating continue to rise for jewelers, and it seems as if they all read from the same list of rising expense factors:

 

• Payroll and benefits
• Rent
• Legal costs
• Non-cash stock compensation

As expected, reduced gross margins and higher expense ratios had a depressing impact on second quarter profits (or the normal seasonal loss). The only good news is that most jewelers post only modest profits (or a small seasonal loss) in the second quarter. That’s an excuse, not a reason; a really good merchant would address this challenge more aggressively, we believe.

 

Bad Debt Levels Rising, But Not Alarmingly

Sterling Jewelers – Sterling reported that its bad debt levels were 2.8 percent of total sales, up from the prior year’s 2.4 percent. In-house credit sales are roughly 50 percent of Sterling’s total sales, so bad debt levels related solely to credit sales were 5.6 percent this year versus 4.8 percent last year. This year’s level, while up, is still broadly in line with the company’s historic range over the past ten years. Management noted that approval rates have declined modestly.

 

On the other hand, it cited solid credit portfolio statistics: the average account is under 12 months and has a balance of less than $1,000. However, management said it had recently recruited 40 new collectors to help bring down its bad debt ratio. Management said it has made no significant change in credit standards for its customers.

 

Holiday Outlook – Cautious

Finlay Enterprises – Finlay is planning for a very moderate sales increase of 2.5 percent-to-3.5 percent during the second half of 2007 (fiscal six months from August 2007 through January 2008).

 

Birks & Mayors – The company is planning for a mid-single digit sales gain this year; in addition, it is expecting gross margins to rise. The company has added almost $3 million to its advertising budget this year, though management did not provide a breakout by market (Canada vs. U.S.). Either way, this is a significant addition to corporate ad spend.

 

Sterling Jewelers – Other than acknowledge that the market is uncertain and challenging, management offered no perspective on the upcoming holiday selling season. It did note that advertising expenditures would increased for Kay in the Christmas selling period, though they will remain broadly in line for the full year with historic levels. Management also noted that Jared will begin to use national television advertising for Christmas 2007, rather than purchase airtime in each local market.

 

Tiffany & Co. – Like many guild jewelers, Tiffany has raised its sales forecast for the year. It now expects corporate revenues to be up about 14 percent for the year, or about $3 billion in total revenues, including both U.S. and international operations. U.S. sales are expected to rise by a low-double digit level. The company’s profit forecast also rose, after results of the second quarter were announced.

 

Zale Corporation – Zale management provided a fairly detailed snapshot of its plans for the upcoming 2007 holiday selling season. Last year, management acknowledged that it was overly aggressive with its pricing, especially on Brilliant Buys. It plans to cut back on this level of aggressive pricing in an effort to boost gross margins. This year, promotional schedules for Gordon’s and Zale’s will be coordinated, now that a new management structure is in place. Zale’s and Gordon’s will have 40 percent of their merchandise in common, up from 20 percent last year. Management said its overall promotional strategy will remain unchanged, and advertising will be similar to last year.

 

Pricing, however, will be much more unified between brands. Zale is expecting strong demand for Journey diamonds; otherwise, there is no new compelling product to drive jewelry and diamond sales this year. We believe Zale management is planning for a very modest sales increase of 2 percent or less in the holiday selling period.