Virtually every jeweler we talked to mentioned the “uncertainty” in the market: what will the economy do? What will precious metals prices do? Will the consumer continue to spend? What will the slower housing market mean? When will consumers step up their savings rate? Will stock market volatility have a negative impact on jewelry demand? And the questions go on and on.

 

In our opinion, “uncertainty” is a euphemism for “pessimism.”

 

Jewelers say they are planning for only “modest” to “moderate” gains for the balance of 2007, including the all-important holiday selling season.

 

The apparent decline in the traffic count at the Las Vegas JCK jewelry show in early June reflected some of the uncertainty in the industry. While some vendors reported strong sales, those sales were primarily to overseas customers from the Middle East and Asia.

 

IDEX Online Research continues to predict that jewelry sales in the U.S. will rise by 3-4 percent in 2007, down from last year’s very strong 7.1 percent gain. It won’t be a banner year, but it won’t be a bust, either. The following graph illustrates our forecast for U.S. jewelry sales in 2007.

 

 

Source: U.S. Dept of Commerce, NIPA

 

GUILD JEWELERS

Most guild jewelers look for continued solid sales gains in 2007. Demand for high-end jewelry generally remains unaffected by economic cycles and most other factors that affect discretionary spending. Further, guild jewelers’ store expansion plans remain robust.

 

Tiffany & Co. – Tiffany management believes that the outlook for jewelry demand from its customer base is solid for the balance of the year.

 

• Sales in the U.S. and most overseas markets, except Japan, are expected to grow solidly this year, according to management.
• The company is forecasting that total sales will grow by 12 percent in 2007 due to “a continued favorable retail environment” and planned growth.
• Management is also forecasting an improvement in its operating margin in 2007.
• Tiffany opened one store in the U.S. – Austin, TX – in the first quarter, and plans to open six more U.S. units prior to the all-important 2007 holiday selling season. The new U.S. stores will be opened in New York (Wall Street area), Las Vegas, Natick MA, Red Bank NJ, Providence RI, and Santa Barbara CA. The company will also open several new units in overseas markets.
• Tiffany will begin wholesaling its Tiffany-brand watches to other fine jewelry and watch retailers within the next year. Here’s management’s statement: “Tiffany has developed a very strong, competitive watch assortment in the past several years, always with a long-term objective to increase watch sales as a percentage of our overall business. We are now well-positioned to take the next step in this evolution, and believe that expanding our distribution through other fine jewelry and watch retailers will enable us to build customer awareness and generate meaningful incremental sales growth. The initial offering will include our MARK, ATLAS, GRAND and T-57 collections, as well as a selection of jeweled timepieces.”

Harry Winston – Harry Winston is planning for strong growth in 2007.

 

• Four new stores are slated to open – Chicago, Hong Kong, Japan and China (Beijing). This will bring the total number of Harry Winston stores to 18 by the end of the fiscal year (January 2008).
• Management plans to continue to open Harry Winston stores at a solid pace in future years.
• Harry Winston is relocating its Geneva-based watch manufacturing facility to a new, dedicated, larger location later this year.
• During the quarter, a new salon was opened in Tokyo; this unit is dedicated primarily to the sale of watches and men’s jewelry products.
• The company’s Osaka, Japan, salon was successfully related to a new flagship salon elsewhere in town.

Birks & Mayors – Management spelled out its plans for the next two years in detail. The following factors will have an impact on Birks & Mayors’ growth.

 

• Management plans to increase the level of Birks branded merchandise in its stores, especially those in Florida. Currently, about 40 percent of sales are derived from Birks merchandise, up from the prior year’s 35 percent. We believe that internally produced goods could represent as much as 50 percent of merchandise sales over the next few years.
• Mayors will introduce more jewelry. Historically, a large portion of Mayors sales have come from watches, a low margin category.
• Expansion will come from new stores (about two per year) as well as possible acquisitions. The company is proactively seeking high-end jewelers who are market leaders and have a high internal rate of return.
• Management is creating a strategy for wholesale distribution of Birks branded goods, first in the U.S., with possible expansion into overseas markets.
• The company is seeking more third party partnerships similar to the one just established with H. Stern.
• The company dropped David Yurman in March; it was replaced by H. Stern, and perhaps other branded goods (look for more announcements).
• We look for the company to raise its public profile via sponsorship of more community events such as the 2010 Olympic and Paralympic Winter Games in Vancouver.
• Sales in the June quarter are expected to be slightly below last year’s June quarter because there were 14 weeks in the prior year (the extra week was worth $4.3 million in sales and about $800,000 in operating profits) versus 13 weeks this year.
• In an effort to boost sales in the Florida market, the company will step up its advertising and marketing budget by $2-3 million this year.
• It appears that Birks & Mayors has captured the attention of Wall Street analysts. There were at least five analysts asking questions on a recent conference call; in prior periods, it was rare for more than one analyst to be on the call. However, BMJ shares still trade very thinly.

Movado Boutiques – On the company’s conference call, several analysts questioned the lack of profitability at the Movado Boutiques. In prior periods, management had indicated that the Boutiques would be profitable when there were 25 or so units. With 29 units (down from 31 at the end of the year), this division is still not profitable on a fully-allocated basis.

 

• For the fiscal year ended January 2007, the Movado retail division generated sales of $89.7 million and operating profits of $5.8 million. However, management indicated that overhead costs and marketing expense were greater than the operating profit.
• Management indicated, as confirmed by the numbers, that the Movado Boutiques are profitable on a four-wall basis.
• Management plans to add more Movado branded jewelry to its stores’ sales mix. No wholesale sales of Movado jewelry are planned at this time.
• The company plans to open 1-2 Movado Boutiques annually near term, until the division can achieve profitability.

MASS MARKET FASHION JEWELERS

Most mass market fashion jewelers tried to put on a happy face, but the simple fact is that this is the segment of the business that is under the most pressure from slowing consumer discretionary spending.

 

Finlay Enterprises – Finlay continues its transition from operating leased departments exclusively to operating a mix of leased departments and free-standing guild jewelry stores.

 

• Management expects second quarter (ending July 2007) same-store sales to be down 1-2 percent. The Mother’s Day sales shift moved 3-4 percent of sales from the second quarter to the first quarter.
• Finlay will exit from the Parisian (Saks) leased departments in July.
• At year-end (January 2008), we expect Finlay to be operating about 730 units, including 34 or 35 Carlyle stores, 5 Congress stores, and just under 700 leased departments. At the end of the first quarter, Finlay operated 749 units, including Congress and Carlyle.
• Because of the ongoing transition, Finlay is expected to post an operating loss for its current fiscal year ending January 2008. Total sales are expected to be in the range of $770-790 million for the year. At its peak, Finlay’s revenues were nearly $1 billion.

Sterling Jewelers – Sterling is one of the fastest growing mass market jewelers in the U.S. The following factors are helping to fuel its growth.

 

• The company is adding new stores at a rate approaching 10 percent a year.
• Sterling’s bridal business remains stable. We believe that it accounts for as much as 40 percent of the company’s revenues.
• Mother’s Day was weak for Sterling, but since them, same-store sales have bounced back to approximately the same level as the first quarter. Management noted that there was no material change in promotional activities during the Mother’s Day selling period. Management believes gasoline prices, coupled with some other factors, could put a damper on demand later this year.

Zale Corporation – Zale continues to try to get its business back on track. The following strategies and tactics are designed to boost sales and profits for the company.

 

• Gordon’s and Zales will have at least 50-60 percent common merchandise. In other words, one-in-two items will be in both stores. Historically, only one in five items were in-common; at the end of the April quarter, about 1 in 3 items were in-common.
• Mother’s Day same-store sales were flattish for Zale; this represents an improvement from weakness earlier this year. Pagoda posted a decline in same-store sales. Zale Outlet same-store sales were up low single digit, and Bailey Banks & Biddle generated improved same-store sales comparisons.
• Zale management continues to worry about high gasoline prices affecting demand for jewelry, especially from its lower end customers. Stores that are located in “destination” locations are posting weaker sales, indicating that customers won’t drive out of their way to shop for jewelry at a Zale store.
• In an effort to step up sales of the remaining $40 million of clearance goods, Zale plans to move some of the clearance merchandise to Zale Canada (Peoples and Mappins) and its dot.com stores.
• For the quarter ending July 2007, management is forecasting that same-store sales will decline by 2-3 percent.
• Zale management has a “conservative” sales plan for the 2007 holiday selling season.
• Zale says its store base is “clean” with few under-performing stores. Therefore, we do not anticipate any major store closing program.
• Zale management says it has no plans to sell any of its brands.
• Zale says its goal is to direct source about 20 percent of its diamonds and 30 percent of its other goods.

ONLINE JEWELERS

While the online jewelers are expected to post very strong sales gains, the percentage sales increase will probably moderate for them this year. In part, it is a function of the math; in part, it is a function of the economy; and, in part, it is a function of the overall slowing of online retail sales growth.

 

Blue Nile – The outlook for Blue Nile remains positive, though there could be some short term cyclicality. Some of the factors which will affect its growth include the following.

 

• Sales for the second quarter of 2007 are expected to be in the range of $65.5 to $67.5 million, up about 17 percent, a growth rate far below the first quarter (+34 percent). This slowing growth rate has to do with some seasonality issues as well as timing of the implementation of the new diamond pricing strategy in 2006.
• For the full year, Blue Nile’s total sales growth is expected to be in the 19 percent range. The graph below summarizes the company’s sales growth rate for the past several years as well as our projected growth rate for 2007.

Blue Nile Sales - % Change Year-to-Year Source: Company reports

• The company has used up its net-operating-loss; thus, it will begin paying cash taxes this year.
• Net profits are expected to be up for the current year ending in December. However, the expense related to stock-based compensation will keep profits from growing as quickly as sales.
• Management said that diamond demand from Middle Eastern consumers is driving up prices of larger stones; lower-end diamond prices are soft.
• Blue Nile also noted that a weak U.S. dollar is also driving up diamond prices.
• The company said rising precious metal prices were affecting its retail pricing, but there has been little softening of demand due to the higher prices.
• Blue Nile has added colored diamonds to its product offering. While this is a tiny category – 7 percent of the global diamond market and about 5-6 percent of the U.S. diamond market – it opens new sales opportunities for Blue Nile, both in the U.S. and in overseas markets.
• The company has begun ramping up its efforts to reach consumers in the U.K. and western European markets. It will distribute diamonds from a facility in Ireland, and it will accept orders denominated in some local currencies.

Abazias – It may be a small player, but Abazias has big ideas.

 

• Abazias says its website showcases over 80,000 diamonds and about 100 styles of fine jewelry, including rings, wedding bands, earrings, necklaces, and bracelets. For a while, it appeared that a battle of egos had erupted between Abazias and Blue Nile over how many items each had for sale. For several quarters, it seemed to us, there was a game of one-upsmanship being played: Blue Nile would put out a number about the size of its online inventory, and Abazias would trump it. Blue Nile no longer discloses its SKU count in its legal filings; rather, it simply says that it showcases thousands of diamonds.
  The Abazias.com website recently indicated that it had 121,506 diamonds for immediate sale, and that it was the “largest online” database for diamonds. Interestingly, Blue Nile’s website claimed that it also had the largest online inventory of diamonds.
• In January 2007, the company initiated a formal process to explore a variety of strategic alternatives to enhance shareholder value, including the potential sale of the company. There has been no news relating to this process since January.

Bidz.com – Growth is expected to be strong at Bidz.com this year.

 

• Management anticipates revenues in the $170-180 million range this year, up about 33 percent from the prior year. This would likely make the company the second largest online retailer of jewelry, potentially edging out Tiffany by a slight margin.
• This year’s gross margin should be 24-25 percent, up from last year’s 23.7 percent.
• Pretax earnings are anticipated to be about $13.0-14.0 million, up 145 percent or so from the prior year’s $5.5 million.