Birks & Mayors, the upscale jewelry chain with 69 stores in the U.S. and Florida, made several key announcements in conjunction with the release of its financial results for the quarter ended September 2007, including the following:

 

• Profit growth for the full fiscal year ending March 2008 will be less robust than previously predicted. Management is guiding expectations to a mid-single digit growth rate for profits, a gain that will probably still outpace the industry average.

• Declaring, “America is on sale for Europeans, Canadians and South Americans,” Birks & Mayors management said that incremental demand in its U.S. stores is being driven largely by foreign tourists.  

• The volatile U.S. financial markets reached the top echelon of Mayor’s customer base in August; demand for very high end jewelry in its Florida stores softened briefly in sympathy to the uncertain stock market.

• Birks acquired Brinkhaus, a two-store luxury jewelry chain with units in Vancouver and Calgary. The acquisition will add to Birks profits in the current fiscal year.

Since its acquisition by Birks in 1993, Mayors Jewelers has been “right-sizing” the company and rebuilding its South Florida and Georgia franchise with wealthy consumers, especially those who appreciate luxury timepieces. After the Getz family sold out in the 1980s, Mayors bounced between owners who had no idea how to leverage the company’s coveted market niche in Florida.

 

Birks, a luxury jeweler with stores in Canada, has brought in new management, new merchandise and new marketing which have rejuvenated the venerable Mayors operation. The resulting operation, with 38 stores in Canada operating under the Birks brand and 31 stores in Florida and Georgia operating under the Mayors brand, now posts consistently stronger profits and has a much more solid balance sheet than at any time in Mayors recent history.

 

Sales Trends Lead to a Reduced Profit Forecast

It comes as no surprise that Birks & Mayors’ management has toned down its profit forecast for the fiscal year ending March 2008. Prior guidance from management suggested that profit growth for the fiscal year would be up in the high single digit range. Management says that profit growth will now be in the mid-single digit range. This revised forecast is due mostly to sales volatility which the Mayors division experienced in the late summer period. However, there is an offset to the profit weakness in the U.S. stores: transfer profits from Canada will be larger, due to a stronger Canadian dollar.

 

Management explained that, when the U.S. financial markets experienced significant volatility in August in response to revelations that sub-prime credit would lead to dramatic write-offs by some banks, demand for jewelry in the South Florida units of Mayors softened, even among the highest-priced goods.

 

This trend is the first sign that even high-income consumers may consider reducing their expenditures for luxury goods such as jewelry and timepieces.

 

Weak Dollar Helps Boost Business

While American consumers may have tightened their purse strings, Mayors reports that its sales to Europeans and South Americans have increased. Demand from overseas visitors, especially those where the local currency has appreciated substantially against the U.S. dollar, has increased notably.

 

In addition, Birks reported that it is seeing some of its Canadian customers cross the border into upstate New York and Washington (state) to purchase jewelry which is bargain-priced, now that the Canadian Loonie is at parity with the U.S. dollar. We believe that this trend will accelerate as Canadians who migrate to Florida this winter, called “snowbirds,” launch spending sprees in Mayors’ South Florida stores.

 

During the September quarter, same-store sales in Canada rose by 4 percent while same-store sales in the U.S. rose by 5 percent. The impact of currency swings has been eliminated in these results.

 

Other jewelers have also reported significantly strengthened demand from overseas customers. In its quarter ended July, Tiffany & Co. reported that spending by foreign tourists helped drive its sales, particularly in its New York Fifth Avenue Flagship store.

 

Brinkhaus Acquisition Holds Promise

Simultaneous with the release of September quarter results, Birks announced that it has acquired Brinkhaus, a privately owned luxury jeweler with a 30-year history of selling high-end jewelry and fine Swiss timepieces. Brinkhaus, with two stores – one in Calgary and one in Vancouver – generated about $15 million in annual sales last year. Birks expects Brinkhaus to add to its profits during the current fiscal year ending March 2008.

 

The Brinkhaus store in Calgary is about 3,500 square feet in size, and the Vancouver store is about 1,500 square feet. This compares to the typical Birks & Mayor store size of 4,400 square feet (there is very little difference between the size of Birks’ Canadian stores and Mayors’ U.S. stores). The typical U.S. chain mass market jewelers operate stores in the range of 1,300 to 1,500 square feet, while independent specialty jewelers operate stores in the range of 2,000 square feet in size.

 

Birks paid about $12.75 million for Brinkhaus, including $6.8 million cash at closing (scheduled for late November). The remaining purchase price will be paid as follows: $0.85 million in April 2008, followed by $1.7 million for each of the following three years (April 30). The seller’s note apparently bears no interest, and the deal does not include any contingency or earn-out agreement.

 

The acquisition will be accounted for as an asset purchase. The down payment will be financed from the company’s credit line, while cash flow from operations is expected to fund subsequent payments. The purchase price represents about 80 percent of Brinkhaus’ $15 million in annual revenues; however, we believe that the deal was done based on some level of profits, either EBITDA, pretax, or net profits after adjustments. None of these profit figures was disclosed.

 

The former principals of Brinkhaus, Norbert and Kim Brinkhaus, will remain with the company. Further, Birks will retain the Brinkhaus name on the stores, though it is likely that Birks branded goods will begin showing up in Brinkhaus showcases soon.

 

Brinkhaus’ manufacturing division is excluded from the current transaction, though there apparently is a letter of intent to sell this division to Birks in three years for a nominal price.

 

Birks disclosed that the internal rate of return on its investment (IRR) is in excess of 30 percent for the Brinkhaus transaction.

 

Last year, Birks & Mayors posted sales of $294.3 million; this year, we are forecasting sales of about $310 million, prior to the contribution from Brinkhaus. Thus, on a full-year basis, Brinkhaus will represent about 5% of Birks & Mayors’ revenues.

 

Other Quarterly Financial Notes

Total sales for the September quarter at Birks & Mayors rose by 9% to $59.8 million, with corporate same-store sales up 5%. Same-store sales gains were driven mostly by a higher average ticket. In addition, one new store, year-over-year, also helped boost total sales. Further, the timing of a promotion contributed to about a 2% increase in total sales. 

 

 

Management said that sales of merchandise priced above $20,000 retail rose by 11 percent in the quarter, despite some softness in August. They also noted that sales softened as the quarter progressed. Sales gains were above average for luxury branded goods; this confirms trends from other guild jewelers who also have experienced strong demand for branded merchandise.  

 

The company’s gross margin rose slightly to 48.3 percent of sales from last year’s 48.2 percent, due mostly to a higher mix of Canadian sales with gross profits denominated in Canadian dollars. A favorable currency translation accounted for virtually all of the gross margin improvement.

 

Operating costs rose to 47.4 percent of sales from last year’s 46.7 percent due to increased marketing expense and new store costs. The company increased its marketing budget by 30 basis points in the quarter to help drive customers into its stores in the U.S.