IDEX Online Research: Bailey Banks & Biddle Could Ultimately Operate Only 50 Stores, Half of Current Number

Recently, Zale Corporation chairman Mary Forte made headlines when she announced that Bailey Banks & Biddle, the company’s guild store brand with 104 units, would close 30-35 stores over the next year or so. Simple math tells you that this would leave about 70 stores in operation, plus the possibility of a few new stores.

What you didn’t hear was Forte’s comments about the ultimate size of Bailey Banks & Biddle (BBB).  If it were “right-sized”, she said, BBB might be a chain of 50 stores or so.

If that’s so, then there are another 20-25 stores which will be closed.  The remaining possible closures will occur over the next few years, as leases expire and aren’t renewed, Forte indicated.

What’s going on?

• Conceptually, Zale management is trying to reinforce the notion that BBB is a luxury brand.
• By reducing the number of stores, BBB will automatically become a more “exclusive” brand like Tiffany, Harry Winston, and other luxury jewelers which aren’t trying to flood with market with stores.  In fact, Forte compared BBB to Tiffany, suggesting that Tiffany’s current 56-store level might represent the “right” number of stores for a luxury brand.
• Even before the recent store-closing announcement, BBB had already begun to close stores.  It had 108 stores at the beginning of the most recent fiscal year (beginning August 2004); it ended the fiscal year (July 2005) with 104 units.  But, at its peak, it had nearly 125 stores in 2002.
• In terms of new stores, only one new BBB unit is slated to open during the current fiscal year ending July 2006.  This unit has been planned for some time.  Beyond this one new store, the company has not announced any further new BBB stores, and we don’t look for any near term.
• New stores will look much more like the Houston Galleria upscale prototype that the company opened in 2004.  This unit is much larger than most other BBB stores, and apparently it is performing very well. 
• BBB is closing many of its stores for two reasons:
  • It is trying to increase differentiation between its various brands, including Zale, Zale Outlet, Gordon’s, and BBB.  Apparently, some low-end BBB units looked too much like a Zale store.
  • Stores in the BBB chain are “uneven.”  Consumers who shopped at the Houston Galleria store couldn’t believe that this was the same jeweler who operates a BBB store in Tyson’s Corner Mall near Washington DC.  In these times when consumers move from one part of the country to another, Zale wants each of its brands to convey the same message (in the case of BBB, the message is that “this is a guild store on the order of Tiffany”), no matter where the store is located.
• Zale plans to reduce the number of BBB stores in markets where it has multiple units.  This will further add to the exclusivity of the brand.
• BBB is attempting to raise its average ticket, a process that is moving ahead quite well. This, too, will add to the perception that BBB is a luxury jeweler.
  • For the quarter ended July 2005, BBB’s average ticket was $1,502, up 13% from the prior year’s $1,325.
  • Prior to July 2004, the company reported the average cost per item sold rather than the “average ticket”.  Adjusting for this differential, BBB’s average ticket was in the range of $875 around 1999 and 2000. Clearly, the company is making excellent progress toward raising the average ticket.
  • By comparison, while Tiffany no longer reports its “average ticket”, it was in the $350 range a couple of years ago (we note that this includes the tourist trinkets as well as the multi-million dollar pieces).  Thus, BBB compares favorably with Tiffany’s average ticket, in our opinion, especially given that BBB does not have the broad range of merchandise -- $25 silver key rings to multi-million dollar diamonds – that Tiffany sells.
• Two key programs have helped boost BBB’s average ticket:
  • BBB has a higher mix of more expensive jewelry.
  • BBB sales people have been trained to generate more sales with add-on merchandise.
• As the average ticket rises, fixed costs can be leveraged substantially; this will boost profits for BBB.
• BBB is adding recognizable luxury brands.  For example, it is adding Chopard and Bulgari branded merchandise to some of its stores.  It has Vera Wang wedding jewelry in a few of its stores.  These exclusive brands will reinforce BBB’s image as a luxury jeweler.
• There is a wide variation in revenues between the more successful BBB stores versus the less successful units.  Many of the units slated for closing generated $2 million or less in annual sales last year; however, the more successful stores generated $4 million or more last year, and several units generated over $10 million in annual sales.  On average, the typical BBB store generated $3 million in the twelve months ended July 2005 (the BBB chain posted $321 million in sales from an average of 106 BBB units for the year).
• Finally, don’t feel too bad about the $20 million pretax / $13 million after-tax) one-time write-off that Zale is taking for BBB’s store closures.  One solidly profitable year at BBB will recoup those costs plus significantly more, in our opinion.

Our conclusion is that Bailey Banks & Biddle is well on its way to a successful repositioning.  Further, the high-end market is growing much more rapidly than either the popular-priced market segment or the mass-market segment, a trend which is expected to continue.  While total revenues for BBB may be flat for the next few years as increased sales per store are offset by store closings, profits should rise exponentially as sales per store grow and the average ticket increases.