Holiday Forecast: Cautious Outlook, 3%-5% Growth Expected

The year’s gloom may have a happy, or at least a semi-happy end. It’s far from being obvious, so it's worth examining. A group of diamond jewelry retailers have recently reported their outlook for the coming months, including the holiday season, along with their third quarter results. The three, Signet, Chow Tai Fook and Tiffany & Co., have some similarities, but it is interesting to examine them and their projections because of their differences.

Signet, the world’s largest specialty jeweler, mainly serves middle-class Americans and, to a lesser degree, UK clients. Chow Tai Fook serves Mainland China, Hong Kong and Macau. Their clientele is somewhat broader, offering a range that spans from Disney to the higher-end De Beers brand Forevermark. In addition, a large part of their business is Mainland Chinese tourists buying at their Hong Kong and Macau stores.

Tiffany, on the other hand, has a global presence and is not limited to a specific region (or economy). It is strictly high-end, however Tiffany’s clients often prefer the brand to the expense – their average per item sale is just a few hundred dollars. Their silver pens and key chains are very popular and as such responsible for the low average ticket price. Much of Tiffany’s business takes place in their iconic New York City Fifth Avenue flagship store, with many of the buyers being folk from out of town. Many of them are tourists.

All three are well-established retailers. The first two have more than 1,000 doors each, while Tiffany has a few hundred stores. All three have a very positive financial track record. They are public companies, which source rough diamonds and polish them on their own. Chow Tai Fook and Tiffany are DTC Sightholders, and Signet has been vying for a Sight for several years. In the eyes of many, they are a sign of the future of rough diamond marketing – larger retailers, which source their goods from the major miners, leveraging their vertically integrated structure to drive value for consumers and shareholders alike.

In its just published fourth quarter guidance, Signet said it expects same-store sales to increase in the low-to-mid single-digit range. This is not wildfire growth, in line with US economy growth, but with a hint of outpacing it. OECD guidance for US Real GDP growth is 2-3 percent. Last year, same-store sales were up 3.5 percent.

Signet further states that in the fourth quarter, gross margin is expected to be relatively consistent with the prior year, which stood at $637.1 million, up 13.1 percent.

Chow Tai Fook provided a much broader outlook, discussing the economy in its region. With an expected Real GDP growth of 7.5 percent, demand for jewelry in Mainland China continues to be strong as demonstrated by the 29.6 percent growth in retail sales of gold, silver and jewelry in the first nine months of 2013.

The company also underscores the Chinese government’s measures to shift the economy to an internal consumption-driven model. It sees particular potential in Tier III and lower tier cities.

It is what it calls the “mass luxury jewelry segment” that has become its key growth driver. Together with a growing focus on its online operations and converting online clients into store buyers, Chow Tai Fook anticipates a “steady business growth” for the rest of the year and “maintains a positive view in the medium to long run.” In the past, these statements translated into solid growth. The caution is probably driven by the record results of yesteryear, a tough benchmark when it comes to year-over-year comparisons.

Tiffany is forecasting global net sales increasing by a mid-single-digit percentage in U.S. dollars and a high-single-digit percentage increase on a constant-exchange-rate basis. Again, not wildfire, especially in light of its guidance of net earnings in a range of $3.65-$3.75 per diluted share, compared with $3.50-$3.60 per diluted share in its previous outlook and $3.25 per diluted share in 2012. This is a forecasted increase of 12.3-15.3 percent in net earnings.

The projection shows that the company now has a more positive outlook for the current quarter and holiday season than it had just a few months ago.

The leading firms see growth for diamond jewelry around the world and share a positive outlook for the coming months. Their position is, however, cautious, expecting a modest increase in sales and earnings. After a year characterized by great difficulties, so bad that we have dubbed it The Year of Omnishambles, even a guardedly positive holiday season is a keeper. Have a very happy Thanksgiving Holiday and a successful selling season!

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