By  on December 1, 2008

Jewelers are likely to get a lump of coal for Christmas as consumers continue to pull back on luxury purchases.

In the face of rising unemployment, unstable financial and housing markets, high food prices and a credit market that has a vise grip on consumers, retailers hoping to sell pricey baubles this holiday will have their work cut out for them.

“This is probably one of the most challenging holiday seasons that we’ve seen for retailers catering to all income levels and all pricing levels,” said Telsey Advisory Group chief research officer Dana Telsey, who noted that while the economic downturn is affecting high-end jewelers, moderately priced and independent jewelers are being “hit hardest” by tightening consumer credit.

The “aspirational” consumer, who historically has depended on credit to buy jewelry in the $5,000-to-$15,000 category, “can’t take it out,” she said, adding that sluggish traffic in malls is causing independent jewelers to go out of business or file for bankruptcy.

Privately held jewelers hold nearly 65 percent market share of the business, Telsey noted, and when they liquidate, they flood the market with excess inventory, not only causing the jewelry market to contract, but also forcing midtier jewelers to compete with heavily discounted merchandise.

Through the third quarter of this year, “more than 3 percent of the capacity of the jewelry industry has been removed through store closures, consolidations and bankruptcies,” said Diane Irvine, president and chief executive officer of Internet jeweler Blue Nile Inc., adding that “there is much more shakeout to come.”

For the third quarter ended Sept. 28, the Seattle-based company saw its net income drop 21.4 percent to $2.3 million, or 15 cents a diluted share, from year-ago levels, while net sales shrank 2.9 percent to $65.4 million. U.S. sales declined 7 percent for the quarter, while international sales, which account for about 10 percent of business, grew 53 percent, which is “strong relative growth,” according to Irvine, but still down significantly from the company’s 179 percent jump in international sales last quarter.

Impacted by the “credit freeze,” Blue Nile’s engagement business is softening, as consumers are trading down from wedding rings to eternity bands or, in some cases, postponing their engagements altogether, JMP Securities retail analyst Kristine Koerber said.

Zale Corp. is a testament to this, she said, pointing to the company’s clearing of inventory after the sale of brand Bailey Banks & Biddle last year, as well as several recent cost-cutting initiatives.

In order to save more than $65 million a year, Zale revealed plans earlier this year to cut more than 200 jobs and close 105 stores. Even though Zale had a 0.7 dip in comparable-store sales in fiscal 2008, the results were offset by a 6 percent jump in comps during the second half of the year.


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