Financially beleaguered Odimo has sold off its diamond.com domain name and its associated business – sales of diamond and jewelry. While this move has generated significant cash for Odimo, it leaves the company with a business – the sale of watches and luxury goods – that is less than half the size of the entity that it sold to public shareholders in early 2005.

 

Without the sale of its crown jewel – the domain name diamond.com – Odimo could have been forced to declare bankruptcy due to lack of capital.

 

The domain name, diamond.com, had been carried on Odimo’s books with a zero cost basis; the company wrote off basically all of the value of its intangible assets such as its domain names, trademarks, and other intangibles last year. Thus, as company management attempted to sell this domain over the past few months, there was much speculation about how much it would fetch. In the end, Odimo sold the domain name diamond.com for $7.5 million to ice.com, a Montreal Canada-based diamond and jewelry online merchant. Management did not disclose if there were any other serious bidders.

 

At the very least, the sale of diamond.com business gives Odimo time to re-group and try to re-establish a niche in the online luxury goods market.

 

If Odimo’s management is successful with its turn-around strategy, it is possible that the company could post a quarterly profit by late 2007, though it could be 2008 before full year profitability is forthcoming.

 

Wall Street did not seem to care about this transaction; Odimo’s stock price has remained virtually unchanged over the past several days at about $1.35 per share. The company is still on a de-listing warning from NASDAQ due to its low market value.

 

New Business, New Management

The following are highlights of the deal to sell diamond.com and related events.

 

• Odimo sold its diamond.com domain name and its entire jewelry and diamond inventory to ice.com for $9.5 million cash. Ice.com is a Montreal (Quebec, Canada)-based business operated by Shmuel Gniwisch, CEO.
  • The domain name diamond.com was sold for $7.5 million, including all of the associated trade names, copyrights, product images, and other intangibles.
  • Odimo’s diamond and jewelry inventory was sold at cost for $1,962,929.66 (roughly $2 million) to ice.com. There was no gain on the sale of the inventory.
  • There is a $500,000 hold-back from ice.com for a six-month period. If the transaction is accomplished smoothly, this final payment will be released to Odimo just prior to the all-important holiday selling season. Therefore, it could be used to bring in additional holiday inventory 
• Odimo will sell only watches and luxury goods in the future. As part of the sale of its diamond.com domain and physical inventory, it will no longer sell diamonds or jewelry.

• Alan Lipton, who has been Odimo’s chairman, CEO, and president, relinquished the titles of CEO and president. He will remain as chairman of Odimo’s board, but will be classified as a non-employee. According to his separation agreement, Lipton’s salary stops as of the “separation date” (sometime in May), though he will be paid for certain benefits (such as health insurance) at the rate of about $1,500 per month for 12 months. Lipton had been drawing a salary of $385,000; he also had the possibility of a bonus. (His most recent bonus was $100,000 paid for 2003; he received no bonus in 2004 or 2005.) Lipton’s new compensation as a director and chairman were not disclosed. Previously, non-employee directors received a retainer of $10,000 annually plus $1,000 for each committee meeting which they attended. Reasonable expenses are reimbursed for directors.

• Jeff Kornblum, previously Odimo’s chief operating officer, has been named as president and CEO of the company. According to his amended employment contract, there was no change in his remuneration of approximately $200,000 annually. In 2004, Kornblum also earned a bonus of $70,000, a period when the company lost $12 million. In 2005, a year in which Odimo lost $23 million (on sales of $51 million), Kornblum was not paid a bonus. He did receive “other” compensation of about $23,000 relating to an automobile and medical insurance in 2005.

• A director, Robert Voss (president of Fox Packaging, a producer of specialized automotive aftermarket chemicals) has resigned. The company’s most recent SEC filings indicate that there are two new director nominees.

• Odimo will continue to be involved in the diamond.com business during a 60-day transition period. Ice.com will pay Odimo $25,000 per month plus certain expenses (for example, some employees will be leased to ice.com) while ice.com takes over the business.

What Will the “New Odimo” Look Like?
According to management, Odimo will be a streamlined company with a dramatically lower cost structure and a focused market niche. Here are the details.

• Based on revenues, Odimo will be a company with sales of roughly $25 million, as the table below illustrates.

 

Unfortunately, as the table illustrates, Odimo sold its only two growth categories – diamonds and jewelry. In 2005, the company’s luxury goods business declined by 30 percent and its watch business declined by almost 7 percent. Thus, management’s challenge is to turn around the remaining product categories.

 

Further, based on first quarter 2006 results, the company’s watch and luxury goods business continued to decline sharply. Based on those figures, Odimo is selling off categories that generated about 56 percent of first quarter 2006 revenues. In short, the company’s remaining business continues to show a sharp decline. 

• Odimo’s gross margin should rise significantly. In 2005, its gross margin from watches (a category it intends to continue selling) was 27 percent while its gross margin from diamonds (a category it sold) was a miserly 11 percent. The company did not disclose margins from “jewelry” (we estimate that the margin for this category was probably in line with watches) or “luxury goods” (we estimate that the margin from this category was probably the highest in the company). In 2005, Odimo’s gross margin was 24.2 percent, down substantially from the company’s 28 percent range it had posted for several years. Management attributed the gross margin decline in 2005 to two factors: 1) an increased mix of diamond sales which carry an inherently lower margin; and 2) discounts and price-based promotions designed to sell off the company’s inventory of luxury goods (one of the categories that the company is keeping). 

• Odimo’s cost structure should decline sharply due to several factors, including the following:
  • Advertising & marketing costs should be much lower.
    • Keyword marketing costs should drop substantially. Online keywords related to diamonds and jewelry are extremely expensive. Even Blue Nile noted this trend recently.
    • Odimo expects to receive co-op advertising help from its watch suppliers.
  • Odimo’s call center will be significantly smaller. It takes much longer to sell a diamond than a branded watch.
  • No gemologists are needed, since the company will no longer sell gemstones.
  • No jewelry inventory is needed.
  • Odimo plans to eliminate its staff of diamond and gemstone polishers.

• Odimo will focus on selling branded watches. By purchasing grey market goods, Odimo has the ability to purchase in-season goods at a cost well below the price that a typical independent specialty jeweler would normally pay. Management claims to have a particular expertise in watch procurement.

• Odimo will also focus on selling luxury goods. No details were given about this product category.

• With two very focused product lines, the company can use highly targeted marketing programs to reach potential customers.

• Odimo’s financials will be stronger. Earlier this year, Odimo had noted that it was seeking a capital infusion.
  • At the end of the March 2006 quarter, cash had dropped to just under $600,000 from $3.8 million at the end of 2005. Inventory had declined to $5.6 million at the end of March 2006 from year-end 2005 levels of $10.2 million. With the sale of roughly $2.0 million of inventory to ice.com, inventory levels are estimated to be in the range of $3.0-3.5 million currently, a level that will not reasonably support an annual sales plan of $25 million at retail (assuming a gross margin of 25-30 percent and a historical inventory turn of 3-4x annually).

Thus, the cash infusion of $9.2 million will help the company to rebuild its inventory and boost sales levels. (We note, however, that it is likely that Odimo’s inventory turn will decline, now that it will own most of the inventory that it will be trying to sell. Many of the diamonds it sold were held on a consignment-like arrangement.)

• As year-end 2005, the company had written off substantially all of its goodwill. Thus, we would expect most, if not all, of the $7.5 million received from the sale of domain diamond.com to be classified as a “gain on the sale of an asset.” The company has neither booked nor paid income taxes in its recent history due to continued operating losses. It is unclear if the sale of an intangible might trigger a special tax.

 

Missed Opportunities & Challenges

During the question and answer period of the company’s conference call, Odimo’s new president and CEO spoke of some of the opportunities that the company had missed as well as the outlook for Odimo. Here are highlights of his comments:

 

• Odimo wanted to offer all types of luxury goods. Its goal was to be everyone’s jewelry store. Kornblum says that the company was not focused enough.

• When challenged by a shareholder who asked if the “new Odimo” had a scalable concept (is it really a growth business?), Kornblum replied in the affirmative. He cited management’s background in procuring and selling watches as a strength.

• Kornblum said that Blue Nile trumped Odimo in 2000 and 2001 when dot-com businesses were blowing up. Blue Nile seized the opportunity to strike some favorable marketing deals while Odimo hunkered down to wait for the storm to blow over.

• Kornblum said that the next 12 to 18 months will be a “transition” period for Odimo, and profitability would likely follow after the transition period was over.