Birks & Mayors previously reported extremely weak sales for the 2008 holiday period, so it was no surprise that its key profit and loss ratios were disappointing for the quarter ended December 2008. And, management predicted more of the same for 2009.

 

Rather than lamenting the sad state of its business, Birks & Mayors’ management outlined a program to survive the current industry downdraft. Some of the key points of this program include the following:

 

• 85 positions cut
• Salary reductions of up to 10 percent (we expect this to rise)
• Other expense reductions which should yield $20 million in savings over two years
• Closing of one store, with the possibility that others will close (the company currently has 69 stores in operation in the U.S. and Canada)
• Strengthening its capital base by restructuring its debt, along with capital infusions from the government of Quebec (Canada) as well as its controlling shareholder
• Reducing inventory levels (same-store inventory is down about 4 percent year-to-year)
• Used the quarter as an opportunity to take heavy asset impairment write-downs

 

In short, management is doing the things that companies ought to do, when they hunker down to weather a recessionary environment.

 

Highlights of the December Quarter

The following table summarizes Birks & Mayors’ financial results for the quarter ended December 2008.

 

 

Highlights of the quarter include the following:

 

• Total sales were down 28 percent, with same-store sales down 23 percent. In Canada, same-store sales were down 18 percent, while same-store sales in the U.S, were down 28 percent. Total sales were hurt by the 23 percent decline in same-store sales and a significantly unfavorable swing in currency translation, but were offset by revenues from one new Mayors store and two acquired Brinkhaus units.

• Management noted that its sales were negatively affected by heavy discounting of jewelry by Neiman Marcus and Saks. The company’s president and CEO made an interesting observation; he said, “Too many retailers confuse discounting with offering value.” He’s correct; they aren’t the same thing. Discounting equals “cheap.” Value is a combination of price and quality.

• The company’s gross margin fell to 42.6 percent from last year’s 48.5 percent. Virtually all of the decline was due to a reduction of its retail prices in its Canadian stores which occurred earlier in the year when the Canadian Loonie was so strong against the American Greenback.

• The company’s operating expense ratio rose to 33.6 percent of sales from last year’s 30.4 percent due to negative currency swings which were somewhat offset by lower marketing and operating expenses.

• Birks & Mayors tapped its controlling shareholder, Dr. Lorenzo Rossi di Montelera, for a $2 million advance. This loan is junior to all other debt, and carries an interest rate of 16 percent. We expect this loan to be converted to equity sometime in the next couple of years.

• Management talked about its inventory valuation, especially in light of liquidation sales being run by competitors who are going out of business. Essentially, those lenders who provide financing against inventory are taking a hard look at the value of that inventory. Either they are reducing the total loan availability or they are reducing the percentage value of the inventory against which they will lend.

• Birks & Mayors’ management said that it plans for declining sales and margins for the balance of the year.