Despite price reductions in its Canadian jewelry stores, Birks & Mayors reported that total revenues for the quarter ended March 2008 were up 16 percent. More importantly, same-store sales rose by 2 percent. Because this luxury jeweler targets the high end consumer, it has felt less impact from a weakening economy, volatile financial markets and the consumer credit crunch than many other chain jewelers.

The following table summarizes the company’s results for the quarter. While Birks’ pretax loss was larger than last year, it posted net income for the March quarter due to a huge tax credit in the three-month period. This was an accounting anomaly; the company’s pretax loss most accurately reflects its financial performance for the quarter.

 

 

Sales for Birks & Mayors’ twelve-month fiscal year period ended March 2008 were up 8.5 percent on a 52-week basis; same-store sales were flat. Most jewelers would be delighted to post numbers of that magnitude in these challenging times, in our opinion. On a reported basis, total sales for the fiscal year were up 7 percent, but this does not represent an apples-to-apples comparison since the prior year (FYE 3/07) included 53 weeks. The extra week added 1.5 percent of sales in FYE 3/07, and made reported sales for FYE 3/08 look less robust than reality.

 

The table below summarizes fiscal year-end results for Birks & Mayors. The large tax credit in the fourth quarter (ended March 2008) distorted its net profit for the year. The company’s pretax results more accurately reflect its financial performance.

 

Highlights from the company’s fourth quarter and full year financial results include the following:

 

• In the quarter ended December 2007, the company began systematically reducing prices in its Canadian stores (37 units) as the Canadian dollar rose against the U.S. dollar. Management implemented this strategy in an effort to keep its Canadian customers shopping it the Canadian stores, rather than crossing the border into the U.S. to buy the same goods at lower prices, based on a favorable currency exchange rate.
  
  While the reduction in prices in its Canadian stores had a negative impact on gross margins, it helped keep Canadian sales from falling dramatically. In the March 2008 quarter, same-store sales in Birks’ Canadian stores were down 2 percent; for the full year, they were flat.

• For the March 2008 quarter, same-store sales in the Mayors U.S. stores were up 5 percent. For the fiscal year, same-store sales in the U.S. market were flat.

• Customer traffic was down in both the March quarter and for the full year. In recent months, the average ticket in its Canadian division has been up notably, while its average ticket in the U.S. stores has risen only slightly. Clearly, Birks & Mayors’ sales people are doing a good job of boosting the average ticket, despite overall weak demand for jewelry.

• Sales of lower-end goods were weakest. Sales of very high-end timepieces were very strong. Demand for gold jewelry and bridal goods was also strong. Management specifically mentioned that Roberto Coin gold jewelry was doing well in its stores. The company made a strategic decision to de-emphasize diamond engagement ring sales, so this was a soft category. We think that the commodization of diamonds, along with tough online competition, has caused Birks & Mayors’ management to focus on other jewelry categories which offer greater profit potential.

• During the year, Birks & Mayors opened two Mayors stores in the Florida market, and it acquired two Brinkhaus stores (November 2007) in Canada.

• The company opened Birks Galleries in its Mayors (U.S.) stores in an effort to build awareness of the Birks brand in this market. In Canada, the Birks name is synonymous with luxury jewelry.

• Management plans to roll out more Van Cleef & Arpels galleries in its Canadian stores in 2008 and beyond. These galleries, which feature Van Cleef & Arpels merchandise, have been successful in attracting the luxury consumer into the Birks stores.

• For both the March quarter and full fiscal year, Birks & Mayors reported a decline in its gross margins. For the fiscal year ended March 2008, its gross margin was 46.5 percent, down from the prior year’s 48.3 percent. For the March quarter, the company’s gross margin was 41.3 percent, down from the prior year’s 45.9 percent. Three factors affected this financial trend:

• Price reductions in its Canadian stores to remain competitive against jewelry stores along the U.S. border.
• A sales mix shift toward timepieces in the U.S. market
• A higher mix of timepiece sales in its acquired Brinkhaus stores.

• The company’s operating expense ratio rose in both the March quarter and for the full fiscal year ended March 2008 for several reasons:

• Currency translation between its Canadian division and its U.S. division added significant costs. The company’s costs are reported in U.S. dollars.
• The new Mayors stores are operating at immature store levels; thus, their operating cost ratio is above average.
• There are unusual costs relating to the assimilation of the acquired Brinkhaus stores.
• Marketing costs rose as the company poured money into advertising designed to attract customers to its stores.
• There were some higher variable costs related to the increase in sales.
• For the fiscal year ended March 2008, Birks & Mayors’ operating expense ratio was 40.8 percent of sales versus 39.2 percent in the prior year. For the March quarter, the operating expense ratio was 50.5 percent of sales, up from last year’s 47.6 percent.

• While reported inventories were up nearly 15 percent, they were flat on a same-store basis. The reported increase in inventory came from three factors: 1) currency translation; 2) inventory associated with the acquired Brinkhaus units; and 3) inventory associated with the new stores in Florida. Management feels that the company’s inventory is relatively “clean,” and there are no plans for any unusual liquidation activities.

• No new stores are planned for the current year. However, management continues to seek new acquisition possibilities, especially those which might be similar to the Brinkhaus acquisition completed late in 2007.

• While the company boosted its advertising budget last year in an effort to boost customer traffic, management acknowledged that the campaign was not as successful as it had hoped. In 2008, advertising expenditures will be down at more historical levels. Like many other jewelers, Birks & Mayors is finding that no amount of advertising will bring in customers when they are under financial stress from a volatile real estate market, roiling financial markets, and credit crunches.

• For the full year, Birks & Mayors is planning for a low single-digit sales increase and a very modest increase in its gross margin.