For once, Harry Winston’s retail division was the company’s shining star. In its third fiscal quarter ended October 2008, the retail division posted an 8 percent increase in sales, though its normal seasonal operating loss widened modestly. On the other hand, revenues in the mining division fell by just over 25 percent, and operating profits were down by about 33 percent.

 

Management noted that the disparity in results between its two operating divisions was the result of two factors:

 

• The diamond industry is being affected by the current softening global economy, which has led to weak rough diamond prices. Harry Winston holds a 40 percent interest in the Diavik diamond mine in Canada, and weak rough diamond prices have affected revenues from Diavik.

• While consumer discretionary spending has softening in some economies, demand for luxury diamond jewelry held up in the Middle East and parts of Asia.

However, now that oil is down $100 a barrel to around $40 per barrel, there is some question about how sustainable demand will be in Middle East markets.

 

The table below summarizes results for Harry Winston’s retail division.

 

Highlights from the third fiscal quarter include the following:

 

• Harry Winston’s total retail sales rose by a relatively robust 8 percent in the third quarter ended October 2008. Management did not provide many details about its stores’ performance, but the following information was included in its legal filings.

·        Management said that diamond sales were strong in the Middle East and parts of Asia.

 

·        Sales grew in its eight U.S. stores, two European stores, and three Asian stores. However, sales in the five stores in Japan were weak.

 

·        The company opened a new store in Costa Mesa, California, in August. This year, there were 18 stores at the end of the quarter versus 16 in the same quarter a year ago.

 

·        Sales started strongly in the quarter, but weakened as the three-month period progressed.

 

·        The following table summarizes sales by geographic area for Harry Winston’s retail operations.

 

• Gross Margin – 46.4 percent vs 46.8 percent – A slight change in sales mix hurt this company’s margin by 40 basis points during the quarter. Management did not provide much information about its margin levels in the retail division.

Source: Company reports

 

• Operating Expense Ratio – 55.3 percent vs 55.5 percent - The company’s selling, general, and administrative expenses fell modestly as a percentage of sales in the third quarter. While the total dollar expenditures rose, mostly related to the expansion of the company’s retail store base, tight control of other operating expenses held costs in line with the prior year’s percentage of sales.

• In December 2008, about $30 million (at cost) of company-owned and consigned retail inventory was stolen during a robbery at the Harry Winston Paris salon. The loss is expected to be covered by insurance.