As a result of generally weaker-than-expected sales levels in the first quarter, jewelers’ inventory turns slowed modestly. Jewelers had expected higher sales, and they had brought in enough inventory to fill their projected demand trends. When sales failed to materialize, merchants were left with higher levels of unsold inventory.

 

The graph below compares the year-over-year increase in inventories versus the sales increase year-over-year. In a perfect world, inventory levels would rise by modestly less than the sales increase.

 

Jewelers' Sales to Inventory Trends Generally Unfavorable Percent Change Year-to-Year Source:  Company Reports

 

The jewelry industry has one of the lowest inventory turns of any retail category. In the first quarter, we estimate that jewelry industry inventory turns fell from about 1.0x turns annually to about 0.9x turns annually. The range for inventory turns for most retail categories is 3x-5x annually.

 

GUILD JEWELERS

Guild jewelers are among the most vertically integrated merchants in the industry. As a result, their inventory levels often do not track with sales, because they may buy commodities well in advance of a major selling period. Further, they may take advantage of “deals” on raw materials; this, too, distorts inventory levels.

 

Tiffany & Co. – Inventory levels at Tiffany remain manageable.

• During the quarter, Tiffany’s inventory levels rose by 13.5 percent over the same period last year; sales were up by 15 percent.
• Inventory growth remained moderate, despite a significant increase in work-in-process inventory and finished goods inventory. For the full fiscal year ended January 2007, 58 percent of Tiffany’s sales were generated by merchandise manufactured in-house.
• The company’s inventory turn rose very modestly to 0.87x from last year’s 0.83x. Tiffany’s inventory turn is below the industry average since it manufactures such a high proportion of its products.

Harry Winston – Harry Winston (retailing) does not report specific inventory levels.

 

Birks & Mayors – Inventories rose by 8 percent, year-over-year.

• Same-store inventories were up 4 percent, relatively consistent with same-store sales gains.
• Some of the inventory increase was related to new stores.
• A portion of the inventory gain was to support a higher level of internally produced goods.

Movado Boutiques – On a corporate basis, total inventory dropped by almost 1 percent. We believe management has taken steps to control inventory in view of the weak environment. Inventory turns at the corporate level, including both retail and wholesale/manufacturing, increased to 0.75 times annually from 0.71 times last year.

 

MASS MARKET FASHION JEWELERS

Inventory levels among fashion-driven mass market jewelers soared in the first quarter, largely due to a sales shortfall which left jewelers with too much inventory in their stores.

 

Finlay Enterprises – Finlay’s inventory grew by 28 percent over the same period a year ago. The following factors affected Finlay’s owned inventory levels.

• The company terminated its gold leasing arrangement in the fourth quarter of last year. Thus, it now owns gold that it previously leased.
• Consignment inventory has declined to $198 million from $312 million a year ago. Much of this decline is related to sharply fewer stores in operation. Last year, there were 957 stores in operation in the first quarter; this year there were 749 units.
• The acquired Congress stores added to inventory levels.

Sterling Jewelers – Corporate inventories were up 13 percent, year-over-year; sales were up just over 10 percent. The company does not break out inventory levels by operating division. However, since U.S. market sales are nearly 78 percent of total corporate revenues, we believe that most of the inventory increase came in the U.S. market and is related to sluggish demand.

 

Zale Corporation – Zale’s inventory levels rose by over 17 percent in the quarter ended April. In contrast, its sales were down about 3 percent. The following factors had an impact on Zale’s inventory buildup.

• Remaining clearance inventory levels are still relatively high. While the company has taken an accounting reserve for this inventory, it still languishes in the warehouse and stores.
• As a result of direct sourcing and the internal assembly organization, inventory levels are up.
• Inventory investments have been made to reposition Zale’s product assortments in its stores.
• Inventory turns declined from 1.10 times to 0.92 times annualized.

ONLINE JEWELERS

Online jewelers reported mixed results for inventory levels at the end of the first quarter.

 

Blue Nile – Blue Nile’s inventory remains well controlled.

• Blue Nile’s inventory rose by just over 13 percent in the quarter, versus the same period a year ago. This was far below its sales gain of 34 percent.
• The company’s inventory turn reached 14.11 times annualized in the first quarter, well ahead of last year’s 11.80 turns.
• While Blue Nile operates with negative working capital, its cash flow was negative in the first quarter. Most of its payables related to goods sold during the 2006 holiday season came due in the first quarter of 2007. This reflects normal seasonal patterns for cash use.

Abazias – Abazias continues to control its owned inventory closely.

• For the first quarter ended March, Abazias’ inventory was about $250,000, up only 3 percent from the prior year. Sales were up about 49 percent.

Bidz.com – Inventories were up sharply to $31.4 million, a gain of 79 percent. The company offered no explanation. Sales were up 29 percent, so inventory levels rose much more sharply than revenues.

• Bidz.com inventory turn was a robust 4.28 times, but it was down from 5.82 times turn (annualized) last year.