Finlay Posts $74.8 million Q2 Loss

U.S. fine jewelry retailer Finlay Enterprises reported a second quarter loss of $74.8 million. The loss includes a pre-tax non-cash charge of $77.3 million for the impairment of goodwill, the company said. Income from operations before depreciation and amortization expenses, excluding the goodwill charge, totaled $6.9 million compared to $8.9 million during the second quarter of last year.

Last year's second quarter net loss totaled $5.7 million, which includes pre-tax charges of $9.1 million associated with early debt extinguishment costs related to the refinancing of the company's debt.

Sales increased 5.9 percent to $199.7 million for the second quarter compared to $188.6 million in the same period a year ago. Total sales for the second quarter of fiscal 2005 included $13.9 million of sales related to the Carlyle specialty jewelry stores acquired by the company in May. Comparable department sales (departments open for the same months during the comparable period) for the first quarter increased 0.1 percent.

The write-down of goodwill, a non-cash charge, was the result of updating the company's impairment analysis required by SFAS No. 142 - "Goodwill and Other Intangible Assets". The analysis took into consideration the company's results for the first half of the year and estimates for the balance of the year and beyond, as well as Federated Department Stores, Inc.'s recently announced intention to divest 42 stores for which Finlay currently operates the jewelry departments. As a result of this analysis, an impairment of goodwill of $77.3 million was recorded, which eliminates all the goodwill that was on the Company's balance sheet.

Chairman and CEO Arthur E. Reiner said “We generated bottom line results for the quarter in line with our previously provided expectations. Our comparable store sales were impacted by softer sales in May company stores, however, we generated solid comparable department sales in our Federated host store groups.  In addition, we are pleased to have successfully completed the acquisition of Carlyle, whose stores performed well in the quarter. The acquisition of Carlyle diversifies our business and provides additional opportunities for future growth."

For the first half of the year the company reported a net loss of $77.6 million. Excluding the non-cash goodwill charge, the six month net loss was $4.7 million. Last year's net loss for the comparable period totaled $7.3 million.

Excluding the refinancing charges and the income tax credit, the prior year's net loss for the first six months was $2.3 million.

Finlay currently operates the jewelry departments in 42 of the locations included in the list of 68 locations Federated Department Stores recently announced it intends to divest in 2006 following its merger with the May Department Stores Company. Annual sales from these 42 locations in fiscal 2004 were approximately $49 million.

At this time, Federated has not announced a specific timeline for when these stores will close. However, Finlay is assuming that these stores will start closing in the beginning of 2006. It’s currently estimates recording closing costs associated with accelerated depreciation of fixed assets, losses on disposal of fixed assets and severance totaling approximately $1.2 million.