If anyone is wondering if the uber-rich are continuing to spend in the current uncertain environment, they need to look no further than Harry Winston Diamonds’ retail operations. Its 18 stores (the company calls them “salons”) around the world generated a total sales gain of 19 percent in the quarter ended July 2008. While the company does not disclose same-store sales, we believe that they were up in the low-to-mid single digit range.

 

Did Harry Winston capture those sales by offering discounts or taking markdowns? Not likely. Based on profits which soared by 733 percent (that’s seven times last year’s profits), it is clear that the company did not blow out inventory at liquidation prices. Further, Harry Winston’s gross margin rose and its operating expense ratio fell.

 

In short, Harry Winston’s retail division is doing just fine. The table below summarizes the performance for the retail division of the company. The top line shows this year’s results, while the bottom line illustrates the comparison to last year.

 

 

 

 

Highlights of the July Quarter

The following are highlights from the July 2008 quarter, based on management’s comments and legal filings.

 

• Sales were strong in the U.S. and international markets, with the exception of Japan where sales were slow. While the table (above) summarizes revenues by region of the world, Harry Winston measures sales at the customer level based on the home address in their passport. Here are the results by key market – based on the customers’ passports – for the second quarter:
  
• U.S. customers represented 26 percent of sales versus 30 percent last year. In part, this was due to strong growth in other world markets.
• Asian customers, outside of Japan, represented 17 percent of sales versus 14 percent last year.
• Russian customers were 15 percent of sales versus 10 percent last year.
• Japanese customers were about flat at 30 percent of sales both years.  

• Harry Winston reported that several segments of its business were particularly strong, including the following:

• Rings
• Jewelry priced above $500,000 retail
• Sales to Russian customers
• Harry Winston branded watches (opening retail price point is $18,000)

• In the first half of the year, Harry Winston introduced 32 new jewelry products. These include some repeatable designs and some one-of-a-kind pieces. The company has begun running a new ad campaign designed to accentuate the new designs. This is want customers want: something new and differentiated.

• Even with revenues up 19 percent, the Harry Winston retail division was self-financing. Most retailers would need significant capital to support that level of growth.

• Company management plans to “explore” the online sales opportunity. They plan to begin a test of online sales in the U.S. market sometime in the next six months. When queried, management defended this test by saying that it will benefit customers who are not near its stores, but who want access to Harry Winston jewelry.

• The company’s gross margin for its retail division rose to 49.3 percent of sales from the prior year’s 47.8 percent due to a change in sales mix as well as price adjustments to reflect increased precious metals and gemstone costs. During the first quarter of 2008, there were some unusual factors which hurt the company’s gross margin; these factors were more or less eliminated in the second quarter, and margins rose. Excluding the impact of sales of Harry Winston pre-acquisition inventory (when will that stuff be gone?), the company’s gross margin for the quarter would have been 51.3 percent versus 51.1 percent.

• Harry Winston’s operating cost ratio related to its retail division was 42.0 percent in the quarter, down from last year’s 43.0 percent. Despite several categories of higher costs, especially related to the three new stores which opened in the past year, sales leverage brought about a decline in the company’s expense ratio.

• At the end of the quarter, Harry Winston operated 18 salons: 7 in the U.S., 5 in Japan, 3 in Europe, and 3 in Asia. In August, it opened a new salon in California.

• Management’s outlook calls for luxury jewelry demand to remain robust. Its retail division is geographically diversified, and should be able to weather any localized geopolitical slowdowns. Management said that continued strong demand for luxury diamond jewelry and watches from markets in Asia, Russia, and the Middle East is expected to offset the difficult retail environment in the U.S. and Japanese markets. The company’s goal is to increase its retail sales by 15 percent this year; it is well-positioned to achieve this goal.

• Harry Winston retail is about 44 percent of the total revenues of Harry Winston Diamonds. The balance of the company’s revenues comes from its diamond mining operations.