IDEX Online Research: Finlay Sales Driven by Bailey Banks & Biddle Acquisition
September 09, 08
Finlay Enterprises took the prize for the largest gain in total revenues in the second fiscal quarter of 2008: its sales rose by a whopping 29 percent. And, best of all, there were no “funny numbers” in those results. But an examination of the company’s second period financials shows that all of the gain came from the Bailey Banks & Biddle (BBB) acquisition which it completed in November 2007.
On an underlying basis – without the acquired BBB units – same-store sales in its other operations fell by 4.8 percent, which was worse than the company had originally planned.
While financial results are disappointing for Finlay, management continues to plow ahead with its strategy to move from a 100 percent leased department operator toward a blended operator of both leased departments and better-end specialty jewelers. Wall Street appears to have given up on Finlay, and some vendors apparently are worried, but Art Reiner, Finlay’s chairman, and his team are tightly focused on adding higher-end specialty jewelers to the company’s operating base.
This year, specialty jewelry operations – 67 BBB, 35 Carlyle units, and five Congress stores – represented about 38 percent of the company’s revenues in the first half of the year; last year, specialty jewelry operations contributed only about 18 percent of revenues in the same six-month period. We’ve never been fond of leased department operations: the operator has very little control over his destiny. In our opinion, the move toward specialty jewelry operations is the right way to go for Finlay.
So why are vendors worried, and why has Wall Street given up, especially on a company that was ironically named among 2008’s top 100 “Hottest Growth Companies” in the U.S. by the National Retail Federation? This list also includes Tiffany, Blue Nile, Birks & Mayors, and, of course, Wal-Mart.
We think there are two reasons: 1) the strategic shift in Finlay’s business from leased departments to a blended business has some vendors nervous; and, 2) Finlay carries an extremely heavy debt load. In the most recent quarter, its long term debt to total capital was 69 percent, and its total debt to capital was 85 percent. Both of these numbers are far above any comparable jeweler, and are extremely high for the retail industry. So far, Finlay’s lenders have backed its strategy, and the company has availability under its loan agreements. Perhaps in a stronger economy, investors and vendors would be less worried.
The table below summarizes Finlay’s second quarter financial performance.
The following are highlights of the company’s second quarter.
- Management noted that its same-store sales decline of 4.8 percent was worse than plan. Earlier this year, management had planned for a slight decline in same-store sales for its leased department operation. It has also planned for a modest increase in same-store sales for its specialty jewelry stores. Management noted that sales improved in its 67 Bailey Banks & Biddle stores in the first half of the year. It was silent on operational results in its other operating entities.
- Finlay said that its strongest categories were watches and designer jewelry. It noted that diamond jewelry continued to be weak, though demand improved somewhat during the second quarter. Among its leased department operations, Finlay said its Macy’s Central and Bloomingdale’s divisions generated growth.
- Texas is the strongest market for the company, followed by stores and leased departments in the Northeast. Florida, California and units in Midwest markets are challenging.
- The average ticket rose by 5 percent. The company did not break out how this statistic was spread across its operating divisions, but last year its leased departments generated an average ticket of $272, its Carlyle and BBB stores generated an average transaction of $1,200, and its Congress stores posted an $1,800 average transaction level.
- Finlay’s gross margin fell to 44.5 percent of sales from 46.2 percent last year due to two key factors: 1) a greater mix of specialty jewelry revenues, a category with an inherently lower gross margin; and 2) a much higher LIFO provision, which recognizes the rampant inflation which has characterized commodity materials used in jewelry.
- Its operating cost ratio also rose – 48.2 percent versus 47.5 percent last year – due to two factors: 1) lack of leverage of relatively fixed costs by a same-store sales decline; and, 2) store closing costs.
- Management also noted that the inherent seasonality of the Bailey Banks & Biddle units drove its seasonal loss higher this year. It has owned BBB since November of 2007, when it bought the stores from Zale Corporation.
- Management provided no outlook, given the uncertain economic environment.