Harry Winston Diamonds’ retail store division is setting the stage for significant growth in the post-recession environment. After holding steady at 18-19 stores for the past three years, it could double in size by 2016 to 35 or so units, according to management.

 

In addition, Harry Winston’s wholesale doors could grow to 300 or more by 2016, up from the current 188 wholesale accounts.

 

Further, new management in the Harry Winston retail division is proposing to open “partner salons,” a hybrid distribution model where business partners operate Harry Winston stores. We look for perhaps 12 of these units to be open by 2013, with up to 20 partner salons in operation by 2016.

 

Finally, management plans to raise the brand profile of Harry Winston via a series of exhibitions and events which will highlight the brand, especially with younger, wealthier consumers.

 

Annual Meeting Highlights Retail Growth Opportunity

At its recent annual shareholders’ meeting, both Harry Winston Corporation chairman Bob Gannicott and Harry Winston retail and wholesale CEO Frederic de Narp painted a picture of accelerating growth for the consumer division of Harry Winston Diamonds – specifically its company-owned stores as well as partner stores and wholesale accounts.

 

Management outlined six key strategies for growth of the Harry Winston brand, including the following:

 

·        Build the Harry Winston brand – Management plans to rejuvenate the appeal of the Harry Winston brand with younger, wealthy consumers. It will leverage the brand name and history to boost communication exposure.

 

·        Strengthen the high end – Harry Winston’s merchandise is the best of the best. Management plans to reinforce this core uber-luxury product segment and revive its legacy business which should produce an umbrella effect for the brand as it attempts to tap new markets.

 

·        Become a bridal destination – Everyone is focusing on this rapidly growing market segment, and Harry Winston plans to leverage its diamond heritage to capture market share.

 

·        Introduce new modern, creative, innovative collections – Management plans to rejuvenate its collections to appeal to a younger clientele.

 

·        Rationalize and broaden its timepiece offer – Harry Winston will introduce more “compact” collections with increased commercial impact in an effort to rationalize its consumer offer. It will increase its flow of new product.

 

·        Optimize its margins for timepieces – Watch margins have historically been below the average of most other jewelry categories, largely because they are branded goods which can be compared easily by consumers. Harry Winston plans to boost its timepiece margins primarily by increasing its production levels in an effort to help absorb relatively fixed overhead costs more efficiently. Management noted that the company has a manufacturer which today “produces a few thousand watches, while having a capacity of 14,000 to 15,000 watches [annually].”

 

Management also provided a glimpse of its potential store growth between now and 2016. The company targets markets with a large number of people who have a net worth of $1 billion or greater – clearly the very top end of the market – as well as markets with consumer households with $1 million in investable assets excluding the value of their homes, collectibles, and other durables (boats, etc.)

 

The following table lists the population by global geopolitical region with an investable net worth of $1 million or more, along with the current number of Harry Winston stores and store projections for 2016.

 

 

Clearly, the company expects to build its presence in Asia and Europe. Further, opportunities beyond 2016 exist in the Middle East, with lesser opportunities elsewhere in the world. We believe that the company is not rushing to open stores in the Middle East because those consumers like to make their major jewelry purchases outside of their geopolitical region – perhaps on a shopping junket to Paris or London.

 

Harry Winston also gave a hint about which cities it might be targeting in the future. The table below lists major cities around the world, their population of billionaires, and the presence (or absence) of a Harry Winston store.

 

 

 

Wholesale Doors to Grow

There is very little legal and financial disclosure about Harry Winston’s wholesale operation, which consists of sales of Harry Winston branded watches to third party merchants for resale to consumers. Wholesale revenues are included in “retail” revenues; we estimate that wholesale revenues are roughly one-third of the total retail revenues.

 

At its annual shareholders’ meeting, retail management noted that Harry Winston’s wholesale customer base consisted of 188 doors in 2010. The number of wholesale doors could nearly double over the next six years, as the table below illustrates.

 

 

Partner Salons: A New Distribution Channel

Management disclosed that it plans to open a network of “partner salons.” These partner salons represent a hybrid distribution model where the stores operate as Harry Winston salons, but are financed and operated by independent business partners. Management will maintain and control the brand image with a “Book of Guidance” driven by the brand. Harry Winston retail management said that this hybrid distribution model will limit the company’s exposure in riskier markets. We think “partner salons” is a fancy name for “franchise.”

 

The table below illustrates management’s plans for rolling out its partner salon distribution concept.

 

 

Exhibitions & E-Commerce

Management of Harry Winston retail said that it will focus on the most important global exhibitions of luxury goods. It plans to participate in four to seven of the exhibitions annually. In addition to its own events and exhibitions, Harry Winston would consider participating in exhibitions such as the Biennale des Antiquaires in Paris (Fall 2010), TEFAF in Maastricht (spring), and the Doha Fair in Qatar (winter).

 

Management did not expand on its e-commerce plans.

 

Retail Financial Forecast

Based on data from Harry Winston retail management, the following table summarizes actual revenues and key margins for 2009 as well as a forecast of estimated financial results through 2016, as calculated by IDEX Online Research. Revenues in 2016 could be two-and-a-half times are large as they are currently.

 

 

Harry Winston Retail Is Company’s Future

Harry Winston Diamonds began its life as Aber Resources Ltd., staking mineral claims in the Lac de Gras region of the Mackenzie Mining District, Northwest Territories, Canada, in late 1991. Drilling and sampling programs were carried out between 1994 and 1998, after which time the company, along with its joint venture partner Rio Tinto, began plans to operate a diamond mine on East Island, on the Eastern side of Lac de Gras on about 600,000 acres, located near the Arctic Circle. The joint venture was called Diavik Diamonds Project.

 

The first commercial diamonds were produced from the Diavik mine in early 2003.

 

Meanwhile, Aber chairman Bob Gannicott, who has long said that the money in the diamond industry is made at either end – mining and retail – but not in the middle (he’s correct), announced a plan to “book-end” the industry.

 

Loaded with cash from its mining operations, Aber began to search for a retail entity to acquire.

 

The Harry Winston Diamond name appeared on the company’s list of potential retail acquisitions. While the Harry Winston name has long been synonymous with the “best of the best,” the company suffered from a lack of management attention as family member fought family member during a very bitter and public court action over a number of years.

 

The timing was perfect for the acquisition of Harry Winston. While the Harry Winston court case had been settled, the family remained unsettled, and much of the family’s fortune had been spent on lawyers.

 

In April 2004, Aber acquired a 51 percent interest in Harry Winston Diamonds, a retail chain of six salons. It later acquired the remaining 49 percent of Harry Winston Diamonds.

 

Today, the company’s mining interest consists of a 40 percent ownership of the Diavik diamond mine and a 100 percent ownership of Harry Winston Diamonds retail. The company dropped the Aber name, and took on the highly recognizable moniker of Harry Winston Diamonds.

 

Unfortunately, Harry Winston retail has never made much money for the corporation, but that is expected to change soon.

 

Why is it important for the retail division to become highly profitable? At some point – perhaps sooner rather than later – the Diavik mine will cease producing diamonds in economically viable quantities. Estimates for the remaining life of the mine run from ten to twenty more years, though it is not possible to predict the exact life of the mine.

 

Aber / Harry Winston has no new potential mines lined up to replace the Diavik operation when it is depleted. Since it takes ten to fourteen years to bring a new diamond mine into production, we believe that the Diavik mine will run out of diamonds before any new mines could begin production.

 

With no new mining operations in the company’s future (other than possible acquisitions), Harry Winston’s operations could be totally reliant on its retail division in a decade or two.

 

Financial History – Revenues Up and Down

The following table presents a detailed financial history of the retail division of Harry Winston Diamonds for the past five years. Aber Diamond Corporation, the former name of Harry Winston Diamonds, purchased an ownership position in the Harry Winston retail operation in April 2004; it operated six stores at the time. Eventually, Aber increased its ownership to 100 percent, and it changed its corporate moniker to Harry Winston Diamonds, which includes both the retail and mining operations.

 

 

 

The following table summarizes retail sales performance by geopolitical region.

 

 

Sales Per Store Roughly $8 Million Each

Based on the raw data (see table above) about Harry Winston’s retail division, it appears that sales per store vary widely. However, “retail” sales data includes wholesale sales of Harry Winston branded watches to third party retailers who re-sell those watches to the public.

 

While Harry Winston discloses segment sales between mining and retail / wholesale, it does not provide financial details about its wholesale business. However, IDEX Online Research believes that roughly one-third of “retail” revenues consist of wholesale sales of watches to third parties. Thus, an estimated $75 million of the retail division’s $225 million in sales for 2009 (fiscal year ended January 2010) were wholesale sales of watches.

 

Further, we believe that most of the wholesale watch sales took place in Europe because those watches are produced in Switzerland.

 

Based solely on estimates by IDEX Online Research, we believe the company’s retail sales (to consumers only) per store by geopolitical region are roughly as shown on the following table. It is important to note that the sales per salon numbers do not include wholesale sales.

 

 

Sales of about $8 million per Harry Winston retail unit are impressive, especially when compared to the typical mass market U.S. specialty jeweler’s sales of $1-1.5 million per store and the average for a guild jeweler of $2.4 million per store. However, when compared to Tiffany & Company, sales per unit at Harry Winston stores are more than 25 percent below the average per-store sales for Tiffany’s U.S. branches of about $11 million each in 2009.

 

In our opinion, this is an opportunity for Harry Winston’s retail division: improve sales per store among its existing branches. This division could then ultimately prove to the world that Gannicott’s vision of book-ending the industry is a viable concept.