IDEX Online Research: Major Jewelers Set for Modest Holiday Sales Gains

Jewelry inventories are especially difficult to control because of the lead-time required for ordering goods. Initial holiday orders – or at least, intentions to order – are placed at the U.S.-based JCK show in early June, roughly six months in advance of the beginning of the holiday selling season. Despite improved forecasting techniques, sales predictions six months ahead of a sales event have little credibility. However, because most jewelry comes from overseas, the lead-time is measured in weeks and months, rather than hours and days.

While most jewelers negotiate terms for returning unsold merchandise to their vendors, there are typically limitations on the amount of goods which can be sent back. The balance of the unsold merchandise held by a retailer is either deeply discounted or melted down; both of these options are profit killers. Zale fell into this trap: about two years ago, it had about $85 million of excess inventory, which it has finally worked down to $19 million at the end of October 2007. In the meantime, working down this deeply discounted merchandise has taken a heavy toll on the company’s gross margin levels.

Finally, if merchants underestimate the amount of inventory needed to support their forecasted holiday season demand, low sales levels will become a self-fulfilling prophecy. There simply won’t enough jewelry in the store to meet shoppers’ demand. We believe this happened at Tiffany & Co earlier this year; demand appeared to outstrip inventory growth by a significant measure late in the first half of 2007.

Merchandise Offerings to be Tried-and-True

We haven’t found any jeweler who is taking any significant chances with new, innovative merchandise. Virtually all of the merchants we have talked with are promoting bread-and-butter core goods. Thus, there won’t be any excitement to drive customers into their neighborhood jewelry shop. On the other hand, jewelers won’t be left with unproven merchandise that might never sell.

Here are some of the holiday sales promotional plans of the publicly held jewelers, along with comments about merchandise which sold well in the third quarter and which is likely to sell well in the fourth quarter.

Birks & Mayors – This company, which has been generating solid gains all year, has just scaled back its profit forecast to a mid-single digit gain for the year, rather than a high single digit gain. Management has expanded its holiday collections, especially Birks branded goods. A weak dollar has created two interesting opportunities for Birks: 1) some of its Canadian shoppers are coming to the U.S. where prices are more favorable; and 2) according to Birks management, “America is on sale for Europeans”, which means that the company is seeing increased sales to overseas tourists. In the third quarter, Birks’ marketing budget was up 30 basis points as a percentage of sales; this successfully drove sales at a same-store pace of +5 percent, well above other mass market jewelers and just below Tiffany’s +8 percent same-store sales gain. Sales so far in 2007 have been driven largely by a higher average ticket in Birks & Mayors stores.

Tiffany & Co – For the fourth quarter, Tiffany management is forecasting a same-store sales gain in the mid-single digit range. This would be the smallest gain of any quarter this year, and comparisons against last year’s fourth quarter (+9 percent) are not particularly difficult. In the third quarter, sales of goods in the retail price range of $4,000 to $50,000 were the strongest category; earlier this year, goods over $50,000 were the fastest growing price category. This indicates to us that shoppers are opting for slightly less expensive goods. Goods that Tiffany will likely focus on during the holiday selling season include statement jewelry, engagement jewelry, fashion jewelry – especially gold and silver jewelry – as well as designer jewelry and watches.

Finlay Enterprises – Finlay management has reduced its sales forecast for the fourth quarter ending January 2008. It is now predicting that fourth quarter same-store sales will be up about 1.5 percent to 2.5 percent, down 100 basis points from its prior range. In part, this was based on November sales levels at its core business – Carlyle, Congress, and its leased departments which we believe was up 1-2 percent – as well as disappointing sales trends in its just-acquired Bailey Banks & Biddle stores. However, we note that holiday sales for Finlay usually come later than for most other merchants, just because of the nature of its leased department business. Key product categories for the fourth quarter include the following: diamonds, especially colored diamonds, Journey diamonds, diamond hoop earrings, better silver jewelry with diamonds or semi-precious stones, watches, and designer jewelry.

Sterling Jewelers – For the month of November, Sterling’s same-store sales were down 7 percent, and customer credit approvals were down. Thus, Sterling is sailing into some tough headwinds, just as it enters this all-important selling period. The company’s product focus in diamonds will be the Right Hand Ring, Journey, solitaire stones, and the Leo Diamond. New designs by Le Vian have been introduced, and the Peerless Diamond is increasingly popular in Jared stores. There will be an increase in national advertising levels for Kay; Jared will have national television advertising support on both network and cable channels for the first time. Advertising levels for regional brands in America will be similar to last year. Sterling management has warned that its gross margin will likely fall further in the fourth quarter.

Zale Corporation – On a late November conference call with Wall Street analysts, the company gave no hint about its holiday sales trends. However, Zale management has reduced its holiday same-store sales forecast to “flat to slightly down” from its former prediction of up 1-2 percent. Further, our calls around the industry indicate that Zale’s sales in November may have been weak, similar to many other mass market jewelers. Zale plans to introduce “some newness” into its holiday merchandise assortment. It will focus on Journey diamonds, Right Hand Rings, Past Present & Forever diamonds, and big gold hoop earrings. Its television spending will be flat with last year. Further, there will be less discounting; Brilliant Buys will represent about 25 percent of sales this year versus 36 percent last year. There will be no special online promotions; all Zale promotions will be multi-channel this year.

Blue Nile – Blue Nile has raised its fourth quarter sales expectation to a range of $109-115 million. At the midpoint, this is 25 percent above the same quarter a year ago, and would represent the smallest gain in quarterly sales in 2007. Thus, we believe that this is a conservative estimate. For the full year, management is guiding Wall Street analysts to $316-322 million in revenues, well ahead of earlier predictions of just over $300 million. Last year, the company posted just over $251 million in annual revenues. Since the typical independent specialty jeweler generates sales of about $1 million annually, Blue Nile’s 2007 sales represent the equivalent of about 320 traditional jewelry stores.