Zales will have a “cleaner, newer,” inventory heading into Christmas.
Appeared In
Special Issue
WWD Jewelry & Watches issue 12/01/2008

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

This story first appeared in the December 1, 2008 issue of WWD.  Subscribe Today.

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.




The comp increase resulted from Zales’ aggressive clearance program during the third quarter, vice president and treasurer David Sternblitz said. Now the company will have a “cleaner, newer,” inventory heading into Christmas, he said.

Still, its first-quarter net loss expanded to $45.3 million, or $1.43 a diluted share, 50 percent higher than the 95 cent loss forecast by analysts. Sales fell 3.5 percent, to $364.1 million, and dropped 3.7 percent on a same-store basis. Its 2008 profits sunk 81.8 percent to $10.8 million, or 25 cents a diluted share. Earnings included $7.1 million from discontinued operations in the just-concluded year, and $11.1 million in 2007. Sales receded 0.7 percent to $2.14 billion.

In February, Finlay Enterprises Inc., which leases space in department stores, said 94 of its 316 Macy’s Inc. locations would be closed, and all 47 of its Lord & Taylor shops would be shuttered. According to Finlay, the Macy’s locations generated about $120 million in revenue, while the L&T stores brought in roughly $44 million.

But store closures are only one element of Finlay’s troubles, noted Moody’s Investors Service senior credit analyst Maggie Taylor.

“Finlay has so much debt that they don’t have any flexibility,” she said, pointing to obligations derived from the company’s acquisitions of Congress, Carlyle, and Bailey Banks & Biddle. As of Aug. 2, Finlay’s total liabilities were $634.4 million, $200 million of it in long-term debt.

On Nov. 17, Finlay was put on credit watch by Standard & Poor’s and was downgraded to “CC” from “CCC,” meaning that some kind of default seems “probable,” according to S&P. The downgrade came after the jeweler held discussions related to a recapitalization of the company.

“We view this transaction as detrimental to the note holders, who will be receiving less value for their holdings, and as coercive, since a viable alternative for Finlay is a filing for bankruptcy protection,” said S&P credit analyst David Kuntz.

U.S.-based jewelers are not the only ones losing their luster, although Montreal-based Birks & Mayors Inc. trimmed its second-quarter net loss to $2.1 million, or 18 cents a share, from a loss of $3.5 million, or 31 cents a share, for the year-ago period. Net sales for the three months ended Sept. 27 edged up 2.2 percent to $61.2 million. Tom Andruskevich, president and CEO, said while he believes the retailer is “faring better than some,” it is not immune to the financial crisis.

Even though its global operations helped boost Tiffany & Co.’s second-quarter profits 99.6 percent to $80.8 million, the upscale jeweler saw signs of a spending slowdown in August. With flagging sales in the U.S. — same-store sales were down 4 percent — and currency translation that has deteriorated drastically since the summer, “it’s hard to believe Tiffany won’t be impacted internationally,” said JMP’s Koerber, who noted that Tiffany is planning on doubling its store base in Europe to about 40 units.

With all of its store expansion plans, “there’s not a lot of cost cutting they can do,” she said. “But Tiffany always comes out of a downturn with more market share. People go there to shop for that little blue box.”

Saddled with currency translation and credit woes, Signet Jewelers Ltd. is also “taking a hit,” said Telsey Advisory Group luxury retail analyst Chia Kuo, who explained that bad debt from its in-house credit facility is piling up as consumers default on their payments or take longer to pay. Signet said 52.6 percent of its U.S. sales this year came from credit, up from 51.7 percent last year. Bad debt charge, at 6.5 percent of credit sales, was at the “high end of the tight range of the last 10 years, reflecting deterioration of the U.S. economy,” the company said.

In the third quarter ended Nov. 1, Signet registered a net loss of $15.1 million, or 18 cents a diluted share, versus year-ago net income $2.5 million, or 3 cents. Revenues dipped 7.3 percent, to $629.4 million, and fell 4.3 percent excluding currency fluctuation.

“The U.S. and the U.K. are in similar sorts of states,” said Piper Jaffray retail analyst Mike Dennis, who cited parallels in rising unemployment and tightening housing and credit markets. “It’s going to be tough, but Signet will be one of the survivors.”

As for the jewelry market, investors should take into consideration the assets of jewelers, which include valuable inventory and property, he said.

“The jewelry business looks to be fundamentally quite a good value if you think the U.S. and the U.K. customer is going to wake up and start spending in two years,” Dennis added.