Almost every publicly held specialty jeweler, except for Birks & Mayors, reported that their gross margin fell in the first quarter. Even those few jewelers who reported relatively strong sales gains experienced a decline in their gross margin. Clearly, sales leverage was insufficient to absorb some of the relatively fixed costs which are included in the cost-of-sales calculation (which yields “gross margin”).

 

The graph below summarizes gross margin trends for the major publicly held jewelers. Some jewelers’ numbers are not on the graph since they are not calculated in a comparable manner.

 

Jewelers' First Quarter 2007 Gross Margins Mostly Down Source:  Company Reports

 

We estimate that specialty jewelers’ gross margins fell by about one percentage point (100 basis points) in the first quarter of 2007 versus the same period last year.

 

Almost every jeweler noted that they were unable to pass along the full amount of higher commodity prices – particularly gold, silver, platinum – in their retail prices. Most jewelers also said that they made “price adjustments” (read: price increases) in the first quarter, but those price adjustments were generally made after the Valentine’s selling period, so they affected only a portion of the quarter.

 

GUILD JEWELERS

While guild jewelers reported strong sales, most of them reported a decline in their gross margin. Only Birks & Mayors was able to raise their gross margin due to increased benefits from vertical integration as well as strong sales of the proprietary Birks branded jewelry in the Mayors stores. Otherwise, guild jewelers reported the same margin pressure that is affecting virtually everyone in the industry.

 

Tiffany & Co. – Tiffany’s gross margin fell to 54.5 percent from 55.8 percent last year. The following factors had an impact on the company’s gross margin.

 

• Tiffany’s sales mix hurt. Bigger ticket purchases typically carry a lower gross margin; sales were strongest in jewelry categories $50,000 and higher.
• The company was unable to pass along the full amount of higher materials costs.
• The LIFO provision was $6.9 million this year versus $1.4 million last year. This reflects dramatic price inflation especially among precious metals components used in the jewelry manufacturing process.
• Factors related to inflation and mix cost the company a 0.9 percent decline in its gross margin in the three-month period.
• A 62 percent increase ($5.2 million) in the sale of wholesale diamonds hurt margins. The company sells of diamonds which are unsuitable for its jewelry at very near its cost. This represented 0.4 percent of the 1.3 percent gross margin erosion in the quarter.
• In the U.S. market, Tiffany’s gross margin fell by 1 percentage point due primarily to higher product costs and an unfavorable sale mix.

Harry Winston – Harry Winston’s gross margin in the quarter was 47.8 percent, down from last year’s 49.8 percent. The following factors had an impact on the company’s gross margin.

 

• Sales included goods that were on hand when Aber Diamond purchased Harry Winston. These goods were sold at a lower margin during the quarter in an effort to liquidate the outdated goods. Management believes this had a negative impact of about 4 percentage points on the reported gross margin. Thus, the underlying gross margin in the quarter was about 51.8 percent, up 2 percentage points from last year.
• Management has set a target to maintain a gross margin of at least 50 percent in the future.

Birks & Mayors – The company’s gross margin rose 150 basis points to 45.9 percent versus 44.4 percent last year. The following factors had an impact on the company’s margins.

 

• Vertical integration helped boost the gross margin. This year, almost 40 percent of is merchandise was produced internally, up from just under 35 percent last year. Internally produced goods not only boost margins, but the company is able to control inventory levels more closely.
• Solid same-store sales gains helped leverage relatively fixed expenses.
• The company was able to negotiate better deals for its merchandise; raw margins rose.

Movado Boutiques – Management reported that gross margins rose in its Movado Boutiques in the quarter, but it did not quantify the improvement. We believe that a combination of price adjustments, merchandise mix, and new products with higher margins were responsible for this improvement.

 

MASS MARKET FASHION JEWELERS

Mass market jewelers reported that they were unable to pass along the full amount of price increases related to higher commodity prices which have plagued jewelers for the past couple of years. In addition, the factors which drove higher average tickets – strong sales of larger diamonds and watches – had a negative impact on jewelers’ gross margins, since these categories carry inherently lower margins.

 

Finlay Enterprises – Finlay’s gross margin was 46.9 percent, down from last year’s 48.6 percent. The following factors had an impact on the company’s gross margin in the first quarter.

 

• A sales mix shift toward designer goods and watches, both of which carry inherently lower margins, hurt Finlay’s gross margin.
• The calendar shift for Mother’s Day meant that more price-based promotions were included in first quarter results this year versus last year.
• Vendor allowances and concessions were lower due to Finlay’s sales reduction over the past couple of years.
• Finlay returned a significant level of goods; return allowances hurt the company’s gross margin by 40 or 50 basis points.
• This year’s LIFO allowance was $1 million versus $400,000 last year.

Sterling Jewelers – Signet does not report gross margin by operating division. However, management said that the gross margin in its U.S. market was down due to two factors: 1) mix; and 2) higher commodity prices (which appear to have stabilized recently).

 

Zale Corporation – Zale reported a modest decline in its gross margin to 51.0 percent from 51.7 percent. The following factors had an impact on the company’s gross margin.

• Because of a change in accounting for the Jewelry Protection Program revenues, about $8.7 million of revenue was deferred. If these sales had been counted in total revenues, the company’s gross margin for the quarter would have been 51.7 percent, or 10 basis points higher than last year.
• Management reduced promotional activities; this had a positive impact on gross margins.
• Zale reduced emphasis on sales of clearance merchandise. The company continues to carry about $40 million of clearance inventory, for which it is fully reserved. However, as it sells these goods, there is a negative impact on the gross margin.
• Zale believes that its gross margin was boosted by increased efforts to direct-source product and finished goods. However, commodity price increases were significant, and offset some of the fundamental gross margin gain related to direct sourcing. For the year-to-date, Zale has direct-sourced about 35 percent of its goods versus 26 percent last year. Nearly 9 percent of its diamonds were direct-sourced.
• Weak sales de-leveraged some of the relatively fixed costs included in “cost of sales”; this, too, hurt margins.

ONLINE JEWELERS

Online jewelers were not immune from margin pressure. However, the factors affecting their margins were somewhat different from the factors that affected store-based jewelers’ margins.

 

Blue Nile – Blue Nile’s gross margin slipped very modestly in the quarter to 19.5 percent of sales from last year’s 20.4 percent. The following factors had an impact on the company’s gross margin in the first quarter.

 

• Management reduced prices on diamonds in an effort to boost sales and gross profit dollars. This strategy was successful. In last year’s first quarter, sales rose by a more modest 14.9 percent, this year sales were up 34.0 percent. Gross profit dollars rose by over 28 percent this year versus a 7 percent increase in the prior year.
• The gross margin was also lower due to a higher sales mix of large diamonds, many of which are sold at single-digit margins.
• The gross margin on non-diamond merchandise is higher than on diamond goods. The company is currently building its sales of non-diamond merchandise.

Abazias ­– Abazias.com reported a sharp decline in its gross margin in the first quarter.

 

• For the three-month ended March 2007, Abazias’ gross margin fell sharply to 5.8 percent of sales versus last year’s 13.2 percent of sales. Management said that the increase in product cost was consistent with the increase in sales. We beg to differ: sales were up 49 percent and merchandise costs were up 67 percent. Clearly, either Abazias either is cutting prices or is unable to pass along higher commodities prices (or both).

Bidz.com – For the first quarter, bidz.com’s gross margin was 24.9 percent versus 26.5 percent in the prior year period.

• In an effort to boost declining margins, the company ended most free-shipping promotions in February 2007.