Harry Winston retail sales remained very weak in the second quarter, similar to other high-end luxury jewelers. Unfortunately, in the current recessionary environment, shoppers who would drop several hundred thousand dollars on a piece of jewelry have retreated to the sanctuary of their homes, awaiting a recovery in their net worth.

 

Here’s a summary of Harry Winston’s retail results in the second fiscal quarter ended July 2009:

 

• One new store opened, in Singapore. The company now operates 19 stores.
• The number of retail sales transactions rose in the quarter.
• Total retail sales were down 40 percent.
• U.S. sales were down 48 percent.
• European sales were down 44 percent.
• Asian sales were down 21 percent.
• Sales in Japan were down only 5 percent.

Despite these very weak comparisons, Harry Winston management believes that fourth quarter retail sales will show a positive comparison to last year, when its store sales plunged by 60 percent. We concur with their forecast; last year was so bad that it is extremely unlikely that this year’s sales could be worse. Since it appears that the global economy may have bottomed – and the U.S. economy may be easing out of the recession – there is reason to believe that shoppers will loosen their purse strings in this year’s all-important holiday selling season.

 

The table below summarizes Harry Winston’s second quarter financial highlights.

 

 

Second Quarter Highlights

The following are highlights from the three-month period ended July 2009 for Harry Winston’s retail operations:

 

• Harry Winston reported that the number of retail sales transactions rose in the quarter, indicating that customers are returning to its stores. While those customers are not spending as much as last year, at least store traffic is improving. In part, this customer traffic is being driven by the introduction of new merchandise as well as a focus on “more accessible” price points (read: lower, which means under $25,000 for Harry Winston). Far too many merchants have stopped bringing in new products into their stores. This is a mistake, because it doesn’t give the customer a reason to visit the store. Clearly, Harry Winston understands what it takes to build customer traffic.

• Harry Winston management also noted that it is seeing fewer large ticket purchases.

• Management said that it is focusing new product introductions at price points below $25,000. Tom O’Neill, president of Harry Winston, noted that one of the more successful new products in that price range is a designer wedding band with a small princess cut diamond embedded in it, aimed at customers in Japan.
  
  Other new products cited in the range of “below $25,000” include a very small pendant in the recently introduced New York collect for about $2,000 (USD), a set of cufflinks for $18,000 in the Guggenheim Collection, and a couple of pendants for $5,000 to $7,000. Jewelry in the New York collection is clustered in a range of $5,000 to $28,000.

• Harry Winston management mentioned that the bridal business is very important for the retail stores, and that apparently this business segment has been hurt less than some other segments of its business.

• Harry Winston opened a new salon (that’s what they call their stores) in Singapore in July. The company operates 8 stores in the U.S., five in Japan, two in Europe, and four in Asia outside of Japan, for a total of 19 retail units, up 6 percent from the 18 units operated at the end of last year’s second quarter.

• It is notable that sales in the company’s five stores in Japan were down by only 5 percent. However, this market has been weak for a long time. Management noted that it has seen a “marked improvement” in demand trends in Japan.

• Harry Winston’s wholesale watch business has been battered by retail jewelers who have sold their existing stock, but not replenished inventory. This trend is most evident in the U.S., especially among independent specialty jewelers. However, management said that it is “beginning to see increases in restocking efforts” by some retailers. If the holiday selling season shows a reasonable recovery, there could be a surge in wholesale watch sales as merchants rush to add to their inventories.

• In addition to the new products noted above – the New York collection and the Guggenheim Museum collection – Harry Winston expects to introduce a new line of jewelry inspired by the Hope Diamond. Further, it has begun delivery of the new Opus 9 mechanical watch that was introduced at Basel this year.

• Harry Winston’s gross margin in the quarter fell to 46.3 percent from 49.3 percent last year. Even when sales of pre-acquisition inventory are eliminated (they should have been melted long ago), the quarterly gross margin was down 47.1 percent versus 51.3 percent. The gross margin declined primarily due to lack of sales leverage of relatively fixed costs that are included in the company’s “cost of sales.”

• The company’s operating expenses fell to $28.2 million from $34 million last year due to a decrease in incentive compensation, staff reductions and lower spending for discretionary items. However, as a percentage of sales, the operating expense ratio rose sharply to 57.7 percent of revenues versus 42 percent last year.

• Management’s outlook is reasonably optimistic, especially for the fourth quarter of this year. The company believes that sales levels will be up (we concur). Further, management believes that its new collections and other new merchandise will entice customers into its stores. If so, it is likely that the company will post an operating profit in this year’s fourth quarter versus a $2 million operating loss last year in the three-month period ended January 2009 (last year’s fourth fiscal quarter).