Birks & Mayors reported a seemingly dismal fiscal year ended March 2009, punctuated by a $61 million loss on revenues of just under $271 million. However, those numbers included a wagonload of unusual charges. In the prior year, the company reported sales of about $315 million and a profit of just over $10 million, almost all of which was related to a huge one-time tax credit. Thus, while it appears that the company reported a $70 million swing from a profit to a dramatic loss, it really wasn’t nearly as bad as it looked.

 

After excluding unusual financial items in both years, the company actually lost $14.6 million from operations for the fiscal year ended March 2009, versus a miniscule profit of just over $600,000 in the prior year ended March 2008. However, in a “normal” year – based on its corporate history – we would have expected Birks & Mayors to post a profit in the $10 million range, rather than an operating loss.

 

What’s Selling At Birks & Mayors?

Here’s the good news: after posting a sales decline of 28 percent in the quarter ended December 2008, sales dropped by a more moderate 23 percent in the first calendar quarter ended March. Since then, management said that the rate of decline has continued to diminish, but did not elaborate. Further, based on a peer group of private and public companies, our information suggests that Birks & Mayors’ sales have not dropped as much as other comparable higher-end jewelers.

 

Management outlined what is – and is not – selling in the Birks & Mayors stores:

 

• Bridal was mentioned as one of the best-selling categories, though we believe that total sales for this category are probably down modestly.
• Classic jewelry – with “enduring value” – continues to sell well.
• Diamond demand is just OK.
• Watch sales have been hard-hit.
• Fashion and trendy merchandise is not selling well.

We believe that Birks & Mayors’ customer who is coming through the store door today is generally “old money,” they want classic jewelry. “New money” – consumers who became wealthy via the stock market and real estate investments – were the buyers of high-end branded watches and fashion/trendy jewelry. Those folks are shopping down (or not at all) in the current economic environment.

 

Company Background

Birks & Mayors is a leading North American luxury jewelry brand which designs, develops, manufactures and retails fine jewelry, time pieces, sterling silver and gifts. Last year, about 58 percent of its sales came from jewelry, while 42 percent of its sales were watches. Rolex sales comprised just over half of those watch sales, or 24 percent of total corporate sales (up from 22 percent in the prior year). By comparison, a typical jeweler generates about 12 percent sales from watches.

 

As of May 31, 2009, Birks & Mayors operated 69 luxury jewelry stores, 37 stores under the Birks brand, located in major cities across Canada, two retail locations in Calgary and Vancouver under the Brinkhaus brand, and 30 stores under the Mayors brand, located in Florida and Georgia in the U.S. The average square footage for the company’s three flagship Birks stores in Canada is 18,500. The average square footage for all other Birks-branded stores is about 3,200; the two Brinkhaus brand stores are about 1,800 square feet each. The U.S.-based Mayors stores average about 4,400 square feet each.

 

As a luxury jeweler, most of the company’s jewelry products are constructed of 18-karat gold, platinum or sterling silver, with or without precious gemstones, with an emphasis on quality craftsmanship and distinctive design. The company’s average ticket (U.S. $) for the past four years was as follows: $1,172 (FYE 3/09); $1,200 (FYE 3/08); $1,049 (FYE 3/07) and, $898 (FYE 3/06).

 

Fiscal Year Highlights

Here are the highlights Birks & Mayors’ fiscal year ended March 2009 versus its prior year:

 

• Total sales dipped by 14 percent to $270.9 million from $314.7 million. Management cited reduced store traffic and a modestly lower average ticket as the primary reasons for slower sales.

• The mix of Birks & Mayors’ credit sales was relatively unchanged: it represented about 10 percent of sales in Canada, up from 9 percent in the prior year; in the U.S., it was about 14 percent of sales, down from the prior year’s 16 percent. Birks & Mayors is upfront about using private label credit as a way to boost sales.

• Same-store sales declined by 14 percent. Birks’ same-store sales in Canada were down 7 percent, while Mayors’ same-store sales in the U.S. were down 19 percent.

• Its gross margin fell to by 380 basis points to 42.7 percent from the prior year’s 46.5 percent due primarily to lack of sales leverage and an increased level of price-based sales promotions – primarily its Winter Sale which was extended in both the U.S. and Canada. In addition, Birks & Mayors adjusted prices in its Canadian stores to decrease the disparity between its retail prices in Canadian dollars versus American dollars; this took a toll on its gross margin.

• Birks & Mayors’ operating cost ratio rose by 130 basis points, a modest increase in the face of sharply lower sales levels.

• As noted earlier, its after-tax operating loss, excluding unusual items, was $14.6 million versus a modest $638,000 profit in the prior year.

• Inventories fell by nearly 15 percent, more or less in line with the decline in sales. However, about half of this decline was related to currency translation – as the Canadian dollar retreated, Birks’ inventories in that country were devalued. Thus, on a unit basis, the company probably has about 7 percent fewer units of jewelry.

• Most worrisome is the company’s capital structure:
• Its stockholders’ equity dropped from $93 million last year to $35 million this year; book value per share retreated to $3.08 from $8.25 last year.

• Its debt levels rose: debt is 79 percent of total capital. Total debt is about $133 million while shareholders’ equity is about $35 million. Anytime a jeweler’s debt exceeds about 33 percent of total capital ($1 in debt to $2 of equity), it causes bankers, investors, and vendors to take notice. While bank debt is down – the banks have a senior secured position – the company has replaced it with new subordinated borrowings from other sources, including the following:

• A $13 million loan from Gordon Brothers, referred to as “GB Merchants” in the company’s legal filings.

• Approximately $5 million in cash advances at a 17.6 percent effective interest rate from its controlling shareholder. Via a convoluted web of companies and trusts, including The Goldfish Trust, Montrovest B.V., the former parent company of Iniziativa S.A. and Montrolux S.A., and Rohan Private Trust Company Limited (the “Trustee”), Dr. Lorenzo Rossi di Montelera, who is the Company’s Chairman of the Board, has advanced operating funds to Birks & Mayors. Dr. Rossi is also a director of the Trustee (Rohan), and a beneficiary of the Goldfish Trust; he essentially controls all of the companies listed above. Dr. Rossi has the ability to control most actions requiring shareholder approval, including electing the members of Birks & Mayors’ board of directors and the issuance of new equity. Rossi’s control consists of roughly 68 percent of the company’s shares; because of their convertibility, he essentially controls 95.3 percent of the votes. (Class A shares carry one vote per share; those are owned by the public and are not convertible. Class B shares carry 10 votes per share, and all of Rossi’s stock is either Class B or Class A shares which are convertible into Class B shares.) A fee will be paid to Rossi (7 percent of the loan), if his cash advance is converted into company shares.

• A $10 million loan from a government agency of Quebec, on top of a $3 million government commitment related to Birks’ sponsorship as the official supplier of jewelry for the 2010 Olympic and Paralympic Winter Games in Canada.

The following table summarizes key financial results for the company’s fiscal year ended March 2009.

 

Cost Cutting Runs Deep

In an effort to stem the flow of red ink, the company has implemented a viable plan to control costs while waiting out the storm of the current recessionary environment. Elements of this cost reduction program include the following:

 

• About 15 percent of its total workforce has been eliminated.

• Salaries were reduced by up to 10 percent for all employees.

• No bonuses are being paid.

• Its Rhode Island production facility – which manufactured gold jewelry, diamond and gold jewelry, and silver jewelry – has been shuttered.

• All operating costs have been scrutinized and reduced.

• The company has plans to reduce its occupancy costs.

• The company will cease to report complete financials (income statement, balance sheet, cash flow and related schedules) on a quarterly basis. As a foreign company (technically a “foreign private issuer”), it is not required to report quarterly financials. Even though Birks & Mayors reports in U.S. dollars using U.S. GAAP (Generally Accepted Accounting Principles), it is a Canadian corporation with U.S. corporate subsidiaries. However, the company will report sales on a quarterly basis.
  
  Management said the move to semi-annual reporting had less to do with reducing the cost of the investor conference calls and related expenses, and more to do with the accounting preparation necessary to comply with SEC regulations, if the company elected to continue to report on a quarterly basis. Thus, we see this as a cost-saving move, though it reduces investor and vendor transparency.

We would not bet on Birks & Mayors re-opening its Rhode Island manufacturing facility. All of the goods it produced, with the exception of silver jewelry, can be manufactured in the company’s Montreal production facility, which is larger than the Rhode Island operation. Currently, the Montreal facility produces diamond jewelry, including rings, earrings, and solitaires. The Montreal facility could double its capacity easily; thus, it could produce all the goods that Birks & Mayors needs. The silver jewelry, which requires expensive presses and other capital equipment, will be sourced from third parties.

 

March Quarter Results Disappointing

The following table summarizes Birks & Mayors’ key financial results for its fourth fiscal quarter ended March 2009.

 

Here are highlights of the quarter:

 

• Sales were down 23 percent to $49.2 million from last year’s $64.2 million. Just over $5 million of the sales decline is related to unfavorable currency translation.

• Corporate same-store sales declined by 16 percent. U.S. same-store sales dropped by 26 percent, while same-store sales in Canada were flat.

• Birks & Mayors’ gross margin declined by 520 basis points to 36.1 percent of sales versus last year’s 41.3 percent. Sales initiatives – discounting – was the key factor responsible for this gross margin decline, although currency translation also hurt this financial measure.

Operating costs were 54.2 percent of sales, up from the prior year’s 50.5 percent. Lack of sales leverage hurt mostly; this was offset by lower marketing costs, lower selling costs, and reduced operating costs.