The merger between Birks and Mayors is already a success, as measured by the financial strides that the company made in its most recent fiscal year ended March 2006. Even though the business combination was only completed in November 2005, Birks & Mayors has posted sharply stronger sales, a higher gross margin, and a lower expense ratio when one-time merger expenses are removed.

 

Management also presented a strategic plan which, if successful, should boost sales and push Birks & Mayors’ operating margin even higher in the fiscal year ending March 2007 and beyond.

 

Fiscal Year-End Results Strong

The table below summarizes financial results for the fiscal year ended March 2006 versus March 2005 on a consolidated basis. While the merger was consummated in late 2005, these results assume the companies were combined for both fiscal years.  

 

Sales – Consolidated total revenues for the fiscal year ended March 2006 were up 14.6 percent; on a constant-dollar basis, total sales were up just over 11 percent. Corporate same-store sales rose by a solid 11 percent, with U.S. same-store sales up 13 percent and Canadian same-store sales up 7 percent. The following factors helped boost sales:

• Higher average ticket – Most of the same-store sales increase came from a higher average ticket. This is a positive development, especially in light of hotly competitive conditions and widespread price-based promotions in the jewelry industry.
• Better merchandise assortment – Management deepened its jewelry assortment and increased new proprietary jewelry, which was internally designed, developed, and manufactured. The company’s proprietary branded diamond, Amorique, has helped boost sales. Birks & Mayors’ proprietary lines of jewelry helped create a competitive differential for the company, which helped boost customer loyalty.
• Increased marketing expenditures – The company increased its marketing budget. It continues to focus on newspapers, magazines, television, direct marketing, and store events to boost sales.
• Improved customer service – This has been a major focus for Birks & Mayors. The company is capturing customer information that allows it to target existing customers on a one-on-one basis.

Gross Margin – 47.2 percent versus 45.7 percent -- Two factors helped boost the company’s gross margin (defined as sales less cost of goods sold) for the twelve-month period ended March 2006:

• A higher mix of internally designed, developed, and produced jewelry helped the company’s margin.
• The merger of the two companies helped create merchandise sourcing efficiencies.  

Operating Costs (excluding merger costs of about $1.2 million or 0.5 percent of sales) – 41.4 percent versus 41.6 percent of revenues – Merger efficiencies were responsible for most of the decline in the company’s operating expense ratio.

 

Other financials – Even though total sales were up over 14 percent, the company’s inventory grew by only 7 percent. This illustrates some of the efficiencies of scale resulting from the merger of Birks and Mayors.

 

Outlook – New Stores, Consolidation Efficiencies, and Margin Improvement

Management outlined its strategy to boost revenues and profits for Birks & Mayors, as follows:

• New stores – Two Mayors stores are planned, each about 4,000 square feet in size. Currently, Mayors stores average about 4,400 square feet in size. One new store will open in a mall later this year, prior to the all-important holiday selling season in Bonita Springs, Florida. Another will open in Weston, Florida, in the spring of 2007. These new stores will help boost total corporate revenues. New stores are typically profitable in their first year of operation, and are near mature levels by the end of the third year. It is possible that some stores could be opened in Canada, but this is less likely. The company currently operates 39 Birks stores in Canada and 28 Mayors stores in Florida and Georgia.
• Longer term expansion – The company plans to grow primarily by opening new stores. Management also said it would consider acquisitions. Management would not confirm – or deny – that it may be planning to open new Mayors stores outside of its current markets. Prior to Birks’ involvement in Mayors, the company had plans to open stores across America.

• Margin improvement – Management expects that its gross margin in the current fiscal year will rise, though not as much as in the prior year, when it was up 150 basis points. Several programs will help the company boost its margins, including the following:
• A higher mix of proprietary products, which are internally designed, developed, and manufactured.
• A shift away from timepieces toward jewelry, especially at Mayors. Watches carry inherently lower margins.
• Continued improvement from merchandise sourcing programs. The combined volume buying power of Birks & Mayors should help reduce merchandise costs.
• Reduced markdowns and higher margins from special sales are expected to raise overall margins. During the most recent fiscal year, management was successful in reducing markdowns related to aged product, and it generated margins that were either on or above plan for its special sales events. These trends should continue into FYE March 2007.

• Mayors will slowly discontinue its own branded Mayors products; instead, it will introduce the Birks brand in its stores later this year. An advertising program will be implemented in Florida to launch the Birks brand.
• Same-store sales are projected to rise, though not at the same rapid pace as during the fiscal year ended March 2006. Management would not give guidance about same-store sales by division.
• Interest costs could drop dramatically – The company has roughly $12 million of debt at an interest rate at about 12.75 percent. Based on its strengthened financials and new credit line, it could borrow new money at 7 percent and pay off this older high-cost debt, saving about 500 basis points of interest (roughly $600,000) annually. While we were not able to review the complete term sheet related to the 12.75 percent debt, the company’s legal filings note that Birks & Mayors “has the right in certain circumstances to prepay the whole or part of principal of the note on the terms and conditions specified in the credit agreement.” There may be prepayment fees; either way, the company could save significant interest costs if it prepaid this high-cost loan.
• Merger efficiencies – Management expects continuing merger efficiencies to occur during 2006-2007, but at a more modest pace than last year.
• Increased transparency – Management says that it will report financials quarterly and hold investor conference calls to answer questions, as if it were a U.S. company. As a Canadian company, its reporting cycle is not the same as U.S.-based companies.

The improvements and financial gains at Birks & Mayors has been recognized by Wall Street. BMJ shares are up 23 percent since the beginning of the year, as the graph below illustrates.