IDEX Online Research: U.S. Retail Jewelers’ Profits Improve in Third Quarter
December 21, 11
(IDEX Online) – Jewelry retailers in the As a result of improved profits in the third quarter – in some cases, well above expectations – two publicly held jewelers have raised their profit forecast for the current year. No company guided analysts to lower profit expectations. Profit Drivers: Strong Sales Leverage & Stable Costs Here are highlights of jewelers’ profitability in the third fiscal quarter of August, September and October (with the exception of · Strong sales helped leverage fixed expenses which are included in both the gross margin calculation and the operating expense ratio. · Stable commodities costs coupled with less store-level discounting and higher retail prices helped boost jewelers’ gross margins. · More aggressive marketing – and the related costs – kept operating expenses from being leveraged further by strong sales. · Only two publicly held retail jewelers reported a loss in the period. Traditionally, the third quarter – with no major sales event such as Valentine’s, Mothers Day and Christmas – has been unprofitable for most jewelers. · Most jewelers expect to hold the line on retail prices during the all-important fourth fiscal quarter (November, December and January). However, virtually all of the retailers entered the holiday selling season with higher inventories. If the goods don’t sell, there will be heavy discounting which will hurt fourth quarter profit margin. Most Publicly Held Jewelers Posted Higher Gross Margins Of the seven U.S.-based publicly held jewelers, five of them posted flat or improved gross margins in the third quarter. Only two – The table below summarizes gross margins for publicly held jewelers. All of the margins are for the company’s entire operations, except for Harry Winston whose retail gross margin is shown.
 Source: Company reports |
It is important to note that the reported gross margin shown on the table above is not a “raw merchandise margin.” There are many other costs – besides merchandise costs – included in public companies’ calculated gross margin. For example, certain occupancy, buying, freight and other costs are included.
Further, each company calculates its gross margin differently. Signet Group, which has a low gross margin – 32.4% in the third quarter versus 50% or so for most of the other store-based jewelers – also has a much lower operating expense ratio since it classifies many of its expenses in “costs of goods sold.”
Except for Signet, most publicly held jewelers’ raw merchandise margins are ten to fifteen percentage points higher than their “reported gross margins.”
Pretax Margins Mixed for Retail Jewelers
While retailers’ gross margins were generally up, pretax margins were mixed. Despite sales leverage and a higher gross margin, many companies elected to ramp up marketing and personnel costs in anticipation of the upcoming holiday selling season.
The table below summarizes pretax margins for publicly held companies in the
 Source: Company reports |
Fourth Quarter Outlook Favorable
Assuming that sales continue to track favorably in the fourth quarter – with high single-digit or low double-digit increases, most jewelers should benefit from leverage of relatively fixed expenses.
Further, we sense there is less discounting at the store level. In addition, we have seen no cutthroat price-based promotions of any magnitude. This should help jewelers maintain their gross margins.
Therefore, we believe that it is highly likely that fourth quarter profits could set records for American jewelers.