IDEX Online Research: Berkshire Hathaway Report Reveals Jewelry Stats

But, as an analyst who is looking for numbers, the Berkshire Hathaway annual report has always been light on specific numerical performance measures. For example, the company does not reveal revenues of its individual businesses, other than by broad category. 

While the 2005 Berkshire Hathaway annual report is much like prior years’ reports, it does contain some nuggets that will be of interest to jewelers. Some of the information that we have highlighted was previously unknown. Other information is good common sense, which could be of benefit to all of us. 

Jewelry Gems

• Ben Bridge Same-Store Sales up 6.6 percent in 2005 – “I told you last year that Ben Bridge (jewelry) . . . had same-store sales gains far above the average for [its] industry. You might think that blow-out figures in one year would make comparisons difficult in the following year. But Ed and Jon Bridge at their operation  . . . were more than up to this challenge. Ben Bridge had a 6.6 percent same-store sales gain in 2005.” By comparison, Tiffany posted a 7 percent same-store sales gain in 2005; Sterling Jewelers (Kay, Jared, and regionals) posted a 7.1 percent same-store sales gain; and, Zale posted same-store sales which were nearly flat – +0.3 percent. 
• Borsheim’s Gross Margin 20 Points Below Major Rivals – “Borsheim’s operates on a gross margin that . . . is fully twenty percentage points below that of its major rivals. Last year, our shareholder-period business [Editor’s note: Borsheim’s holds a shareholder-only sale during the company’s annual meeting] increased 9 percent from 2004, which came on top of a 73 percent gain the year before.” 
• Jewelry Division Revenues – “Jewelry revenues were $801 million in 2005 as compared to $758 in 2004.” While the company does not disclose revenues by business, IDEX Online Research believes that Helzberg Diamond revenues were in the range of $545-550 million, Ben Bridge revenues were in the range of $225-235 million, and Borsheim’s revenues were in the range of $20-30 million. 
• Retail Division Performance – Berkshire Hathaway’s retail division consists of several home furnishings retailers (Nebraska Furniture Mart, R.C. Willey Home Furnishings, Star Furniture Company, and Jordan’s Furniture) as well as several jewelers (Helzberg Diamond Shops, Borsheim’s, and Ben Bridge Jeweler). This division generated sales of $2,759 million and operating profits (pretax and pre-minority interests) of $201 million. This was an operating margin (essentially a pretax margin) of 7.3 percent. By comparison, Tiffany and Signet posted pretax margins of 12.6 percent in 2004 and Zale posted a pretax margin of 7.1 percent in 2005. In other words, Berkshire Hathaway has no magic profit formula for its retail businesses. 
• Why Buffett Buys Companies – The CEO of one company that Buffett purchased sent him a letter that said, “We run a tight ship and keep unnecessary spending under wraps. No secretaries or management layers here. Yet we’ll invest big dollars to gain a technological advantage and move the business forward.” If you have thoughts of selling your business to Warren Buffett or anyone else, you could learn from those comments. 

Other Gems

Warren Buffett has many things to say on many topics. Here are some particularly pithy comments.

• On over-compensated CEOs – “Getting fired can produce a particularly bountiful payday for a CEO. Indeed, he can “earn” more in that single day, while cleaning out his desk, than an American worker earns in a lifetime of cleaning toilets. Forget the old maxim about nothing succeeding like success: Today, in the executive suite, the all-too-prevalent rule is that nothing succeeds like failure.” 
• On high-turnover investment accounts – “Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, ‘I can calculate the movement of the stars, but not the madness of men.’ If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.”
• On the Dow in the year 2100 – “The Dow Jones Industrial Average increased from 65.73 to 11,497.12 in the 20th century, and that amounts to a gain of 5.3 percent compounded annually. To achieve an equal rate of gain in the 21st century, the Dow will have to rise by December 31, 2099 to – brace yourself – precisely 2,011,011.23 [Editor’s note: that’s over two million]. But I’m willing to settle for 2,000,000; six years into this century, the Dow has gained not at all.” 
• On management succession – “As owners, you are naturally concerned about whether I will insist on continuing as CEO after I begin to fade and, if so, how the board will handle that problem. You also want to know what happens if I should die tonight.

That second question is easy to answer. Most of our many businesses have strong market positions, significant momentum, and terrific managers. The special Berkshire culture is deeply ingrained throughout our subsidiaries, and these operations won’t miss a beat when I die.

Moreover, we have three managers at Berkshire who are reasonably young and fully capable of being CEO. Berkshire’s board has fully discussed each of the three CEO candidates and has unanimously agreed on the person who should succeed me if a replacement were needed today. The directors stay updated on this subject and could alter their view as circumstances change. The important point is that the directors know now – and will always know in the future – exactly what they will need to do when the need arises. 

The other question that must be addressed is whether the board will be prepared to make a change if that need should arise not from my death, but rather from my decay, particularly if this decay is accompanied by my delusional thinking that I am reaching new peaks of managerial brilliance. When that time comes for me, our board will have to step up to the job. From a financial standpoint, its members are unusually motivated to do so. I know of no other board in the country in which the financial interests are so completely aligned with those of shareholders. On a personal level, however, it is extraordinarily difficult for most people to tell someone, particularly a friend, that he or she is no longer capable.” 

• On not acting on problems – “Fault me for dithering. (Charlie [Buffett’s partner] calls it thumb-sucking.) When a problem exists, whether in personnel or in business operations, the time to act is now.”

Berkshire Hathaway’s 2005 Annual Report, like prior years’ reports, is filled with wisdom that jewelers could use. If you can’t get a paper copy, you should go to the Securities and Exchange Commission website (sec.gov), type in Berkshire Hathaway, and download your copy. It will be a weekend of reading well spent.