Source: Company reports

• The company’s New York Fifth Avenue flagship store reported a sharp sales decline of 7 percent while branch stores reported generally flat same-store sales. This sales performance reflects the following factors:
• Foreign tourist customer traffic was down.
• Store traffic and total transactions declined slightly in the quarter.
• The conversion rate (browser to buyer) was unchanged.
• Sales were strongest at retail price points between $3,000 and $10,000.
• Demand for engagement jewelry and silver jewelry was particularly strong.
• Little Switzerland reported a sales decline of 3 percent. Fewer cruise ships docked in the Caribbean during the quarter.
• Iridesse, the company’s pearl jewelry stores, continued to post growth.

Mass Market Jewelers

Mass market jewelers posted modest sales gains in the quarter of 2006. Even Sterling Jewelers, which has consistently outpaced the industry, reported a much more muted same-sales gain in the period. Apparently, middle market customers are running of out gas for discretionary purchases as higher gasoline prices take a bite out of their wallet.

Sterling Jewelers

For its fiscal three-month period ended April 2006, total sales at Signet Group’s U.S. operations, including Kay, several regional brands, and Jared, rose 9.4 percent (constant dollars). Same-store sales rose by 3.9 percent. U.S. retail sales were about $575 million. Sterling Jewelers operates about 1,250 stores in the U.S.

• If sales are adjusted for the late Mothers Day selling period, total sales rose by an estimated 12 percent and same-store sales rose by an estimated 7 percent.
• Operating profits in the U.S. were up 5.6 percent. If profits were adjusted to reflect the timing difference of Mothers Day, they would have been up an estimated 10 percent.
• Valentines Day sales were strong, despite bad weather during the prior weekend.
• The long term sales shift toward diamonds, especially high-priced diamonds, continued in the quarter.
• The average transaction rose by 4 percent due almost entirely to price adjustments.

Zale Corporation

For its three-month fiscal quarter ended April 2006, total revenues at Zale Corporation rose by 2.2 percent; same-store sales were up 2.5 percent. Sales in the quarter were about $527 million.

• The big news in the April quarter was that the mass market Zales Jewelers division posted positive same-store sales. This division had been a drag on the company for the past few quarters. Several factors drove this division’s sales in the quarter ended April, including the following:
• Good in-stock position, with better product flow.
• Aggressive advertising, driven by a larger marketing budget.
• More customers (traffic drove same-store sales, the average ticket did not increase measurably).
• Right product – Zale featured lots of diamond circles and diamond solitaires in its stores and flyers.

• All of the company’s other divisions posted a sales gain except Piercing Pagoda.
• Zale Canada posted a double-digit same-store sales gain
• Bailey Banks & Biddle posted solid sales gains due to more customer party events. In addition, fashion watch demand was especially strong at Bailey Banks & Biddle, with a +20 percent run rate year-over-year. The average BBB ticket rose to $1,763, up 27 percent.
• Zales Outlet – Same-store sales were up mid-single digit, driven by an emphasis on bridal goods. Engagement ring demand was especially strong in this division.
• Piercing Pagoda – Reported same-store sales were down. However, if the impact of weak demand for Italian charms had been eliminated, same-store sales would have been up in this division. Italian charms are a fad item.

Finlay Enterprises

Finlay’s sales were reported several different ways for the quarter ended April 2006. We believe that the most accurate method of analysis is based on non-GAAP results, which report financials from the company’s going-forward business.

Total sales at Finlay were up 14 percent in the quarter ended April 2006; same-store sales rose 1.1 percent. Total corporate sales were about $192 million in the quarter; sales from going-forward units were about $159 million.

• Excluding Finlay’s revenues from the Carlyle chain, which was purchased last year in May, total sales in the first quarter were up about 1.5 percent from the company’s going-forward doors. On a pro-forma basis, total sales from Finlay’s Carlyle units were down just under 1 percent in the quarter. This is due to a reduction in total Carlyle units to 32 from last year’s 34 stores.
• Finlay management noted that the calendar shift related to Mothers Day cost the company an estimated 2 percent in same-store sales.
• Product categories that showed strong gains in the quarter included circles, bracelets, studs, long chains, gold coin jewelry, and silver with gemstones.

DGSE (Dallas Gold & Silver)

For its first quarter ended March, 2006, DGSE reported a total sales gain of 45 percent to $9.7 million

• Retail jewelry sales rose nearly 7 percent to just over $3 million.
• Bullion sales rose by 95 percent, and rare coin sales soared by 143 percent.

Other Luxury Goods Retailers – First Quarter Sales Results

• Bulgari reported that its jewelry sales were up 8.2 percent (constant currency). U.S. sales were up 8.4 percent, somewhat below other global markets. Its jewelry sales gain was more modest than other categories; watch sales helped provide the boost to jewelry demand.
• Richemont reported that its jewelry sales were up 13 percent (constant currency).
• LVMH said its jewelry sales were up 23 percent, with same-store jewelry comparisons up 19 percent.
• Saks said jewelry was a “weak performer” in the first quarter.
• Nordstrom said its “accessories, cosmetics, and men’s apparel” were above-average performers.
• Sotheby’s and Christies both reported strong diamond sales in the quarter.

GROSS MARGINS

Jewelers’ gross margins were under pressure in the first quarter due to sharply rising precious metals prices. However, high-end jewelers were able to offset this pressure while mass market jewelers’ margins fell. Further, a continuing long term shift toward higher priced diamonds, which carry an inherently lower margin, are also negatively affecting jewelers’ gross margins.

 

• Tiffany & Company – Tiffany’s gross margin rose to 55.8 percent in the quarter, up from 53.9 percent in the same quarter a year ago. A shift in the merchandise sales mix and higher retail prices helped boost the company’s margin. The margin gain was offset by higher precious metals prices.

• Harry Winston – A modest shift in Harry Winston’s merchandise mix boosted its gross margin in the quarter to 49.8 percent of sales this year from 48.3 percent last year.

• Movado – Movado’s corporate gross margin rose to 61 percent of sales in the first quarter, 80 basis points higher than last year. The higher gross margin reflected two positive trends: 1) new watch introductions carry a higher gross margin; and 2) sales leverage from the Movado Boutiques helped boost the company’s aggregate gross margin.

• Sterling Jewelers – Sterling Jewelers reported a lower gross margin due to higher commodity prices as well as a change in mix. Gold represents about 17 percent of Sterling’s cost of sales. Strong same-store sales helped leverage some of the fixed cost components in Sterling’s gross margin; this helped offset some of the pressure from higher commodity costs and shifts in the sales mix.

• Zale Corporation – Zale reported that its gross margin declined modestly to 51.7 percent versus 52.3 percent last year. Zale’s gross margin decline was due entirely to a higher LIFO charge. Zale’s consolidated operating gross margin was flat. Clearance markdowns related to getting rid of discontinued merchandise hurt the company’s gross margin, but Zale’s direct sourcing efforts offset this entirely. Zale has heavily hedged its gold position, so gold price increases were not a major factor in this quarter’s margin deterioration.

• Finlay Enterprises – Finlay’s gross margin from continuing operations fell modestly to 48.9 percent from 49.3 percent. The company’s margin from its leased doors rose by 30 basis points while Carlyle, with an inherently lower gross margin due to its watch sales, hurt the corporate gross margin by 70 basis points. The LIFO charge rose only moderately.

OPERATING COSTS

Most jewelers reported a higher operating cost ratio in the first quarter. For some jewelers, this was due to weaker-than-expected sales, which did not provide leverage for relatively fixed overhead costs. In addition, payroll, benefits, and marketing costs are rising rapidly.

 

 

• Tiffany & Company – Tiffany’s operating cost ratio was 42.1 percent, up from the prior year’s 40.9 percent. Sales growth was insufficient to leverage relatively fixed expenses as well as higher marketing costs.

• Harry Winston – A portion of the decline in Harry Winston’s operating cost ratio – 45 percent this year versus 46.3 percent last year – is related to a reversal of a loss provision against accounts receivable. Without this unusual credit, the company’s operating cost ratio would have been at least 400 basis points higher in the first quarter. Advertising and selling expenses rose sharply, followed by increases in salaries and benefits, rent, and other expenses. The increase in rent and salaries is related to the opening of two new stores since the first quarter of last year.

• Movado – As a percentage of sales, Movado’s corporate operating cost ratio fell to 57.5 percent from 57.8 percent last year due primarily to leverage from solid sales gains. However, management cited continuing cost pressure from marketing expenses, retail expansion, payroll, and benefit expenses.

• Sterling Jewelers – Sterling’s lower bad debt levels and strong same-store sales gains helped leverage the company’s expense ratio. However, for the quarter, the U.S. operating margin was 10.8 percent versus 11.3 percent last year. The decline in Sterling’s operating margin was due to two factors: 1) a lower gross margin; and 2) weaker-than-expected April sales due to the shift in Mothers Day.  

• Zale Corporation – Zale’s operating cost ratio rose to 45.8 percent of sales from last year’s 44.2 percent due to three factors: 1) severance and Bailey Banks & Biddle closings; 2) other operating cost increases; and 3) expenses related to stock-based compensation.

• Finlay Enterprises – Finlay’s operating cost ratio declined by 48 percent from 49.6 percent last year due to cost reductions in the leased department operations as well as an inherently lower operating cost ratio in its Carlyle units. In addition, gross advertising costs declined. These expense reductions were offset somewhat by one-time severance costs.

BALANCE SHEET STRENGTH

In general, the strength of retailers’ balance sheets remained relatively unchanged. Most retailers paid off (or paid down) their bank line during last year’s fourth quarter. While debt levels typically begin to rise in the first quarter, they usually remain low until the third quarter when holiday merchandise arrives.

 

A review of retailers’ balance sheets for the first quarter ended March or April 2006 revealed the following trends:

• Long term debt levels rose significantly.
• Inventory turns were about flat, at roughly 1.0x annually.
• Most companies’ current ratio improved.
• Inventory per store was about flat.

This tells us that jewelers continue to use the banks as their equity partners for growth. But banks tell us that they don’t want to be jewelers’ equity partners.

 

OUTLOOK

Most jewelers remain uncertain about sales for the balance of 2006. Tiffany has trimmed its sales forecast, while most other jewelers are mum about their projections. The IDEX Online Research proprietary sales forecast calls for jewelry sales to increase by about 4-5 percent in 2006 in the U.S. This means that holiday sales could be in the 5-6 percent range, based on sales trends so far this year. However, our sense is that we will likely modestly reduce our sales projection based on new economic data. New store openings continue about in line with historical levels. Retail real estate remains tight, though there are some deals being offered.

 

• Tiffany & Company – Tiffany & Company plans to open five U.S. stores this year as well as eight international stores. For the year, the company is forecasting that U.S. same-store sales will be up in the mid-single digit range. Tiffany management is still projecting profit growth of about 12 percent for the year, with most of the gain coming in the second half. In the Iridesse retail division, which operates seven pearl stores, six more units are slated to open this year. In a “few years,” Tiffany management said there would be at least 20 Iridesse stores in operation.

• Birks & Mayors – Birks & Mayors plans to open a new Mayors store in Bonita Springs, Florida, prior to the 2006 holiday selling season. The company also signed a lease for a new Mayors store in Weston, Florida, which it plans to open in the spring of 2007. Further, Birks & Mayors management said that its merger and integration was “essentially complete,” and that it is focusing on consolidation efficiencies.

• Harry Winston – A new flagship Harry Winston store is slated to open in London on Old Bond Street in July. Old Bond Street (and Bond Street) is the prime location for luxury merchants in London.

• Movado – Movado’s management continues to predict that total corporate revenues will rise between 9 percent and 11 percent during 2006, driven by new introductions and increased sales per customer. We expect the company to open three Movado Boutiques this year as well as two outlet units. The company appears to be selectively exiting doors in an effort to bring order and logic to its distribution.

• Sterling Jewelers – Sterling Jewelers is on track to increase its selling square footage by a net of +8-10 percent during 2006. However, management noted that it was more difficult than expected to locate potential metro (city) sites. The company also noted that a couple of the planned 18-23 new Jared superstore units had zoning or permit delays that could push those openings into 2007.

• Zale Corporation – Zale’s management has a very encouraging view of consumer demand for the second half of 2006, including the all-important holiday selling season. While gasoline prices are high, Zale says demand for its merchandise remains strong, except at Piercing Pagoda. The lower-end customer (often a teenager) who shops at Piercing Pagoda will most likely feel the impact of high gasoline prices before Zale’s other higher income customers who typically shop in its other divisions. The first free-standing out-lot Bailey Banks & Biddle store will open this year. This is Zale’s attempt to compete directly with Jared (Sterling Jewelers).

• Finlay Enterprises – Finlay continues to shrink. After losing nearly 200 doors due to the merger of department store giants Federated and May, Finlay recently announced that it will cease operating about 75 Belk leased doors. At the end of this year, Finlay could be operating only about 775 leased departments, down from over 1,000 just three years ago. A net of one Carlyle unit is slated to open this year, bringing the total stores in this guild chain to 33. We look for up to four new Carlyle stores over the next two years. Carlyle could easily generate 10 percent of Finlay’s sales, based on the number of going-forward units (leased departments plus guild stores).

Disclaimer:  The author owns 100 or less shares of every publicly held retailer in the portfolio as well as some others which are not listed.  This allows the author to have access to information which some companies restrict to “shareholders only.”