IDEX Online Research: Q1 U.S. Jewelry Demand Shows Slowing Rate of DeclineJuly 01, 09
The sharp decline in jewelry demand in the U.S. market appears to have slowed. Specialty jewelers’ first quarter 2009 sales were only down by 14 percent or so, after diving precipitously by nearly 20 percent in the all-important holiday 2008 selling season, according to data just released by the U.S. Department of Commerce.
In April, specialty jewelers’ sales declined by only 5 percent, based on preliminary data. It would appear that the worst of the decline in demand for jewelry is behind us.
Specialty Jewelers’ Sales Comparisons Are Less Onerous in First Quarter
In the first calendar quarter of 2009, jewelry demand at specialty jewelers declined by about 14 percent; in the fiscal first quarter (February, March, and April), jewelry demand was down less than 12 percent, based on preliminary numbers for April. These results are in sharp contrast to the very weak fourth calendar and fiscal quarter of 2008, when jewelry demand at specialty jewelers dropped by almost 22 percent during December.
The graph below summarizes jewelry sales by month for 2008 and year-to-date 2009 for specialty jewelers in the U.S. Specialty jewelers sold about 43 percent of all jewelry in 2008. As the graph illustrates, jewelry demand appears to have bottomed in December 2008.
Source: US Dept. of Commerce
U.S. Jewelry Sales Show Slowing Rate of Decline
The graph below summarizes jewelry sales by month for the entire U.S. market, including the 43 percent sold by specialty jewelers (Kay, Zale, and merchants whose primary business is jewelry) as well as the other 57 percent of merchants such as Wal-Mart, Sears, and others who are multi-line retailers and for whom jewelry is only a minority portion of their total sales volume.
Source: US Dept. of Commerce
First Quarter 2009: High-End Weaker Than Lower-End
Once again, the high-end “guild level” jewelers suffered worse from the lack of sales versus the mass middle market and lower-end jewelers. Typically, high-end jewelers don’t participate in a recession at the same level as mass market jewelers, who usually are hurt the most. However, high-end consumers, most of who have their wealth tied up in the stock market and real estate, have seen their personal net worth slip notably as values of these two assets have declined sharply for many months.
The graph below summarizes first quarter sales results for six of the key publicly held U.S. jewelers. Clearly, high end jewelers such as Tiffany & Co. and Harry Winston posted more disappointing results than the mass market jewelers.
Source: Company reports
Outlook: Improving Demand
Despite the weakness of consumer demand for jewelry in the first quarter, the signs point to an improving environment. For example, Sterling Jewelers, which operates Kay, Jared, and some regional brands, reported that first fiscal quarter (February, March, April) same-store sales were down only 2.6 percent. Sales were weakest in its upscale Jared stores. At the opposite end of the pipeline, some diamond mining operations have reopened, and the Diamond Trading Company’s most recent diamond sight – estimated at over $400 million – was about four times the size of sights earlier this year. However, it was still below the size of diamond sights during the first half of 2008. Further, many of India’s diamond polishers in Surat have begun recalling workers which were laid off in 2008.
On a global basis, the signs also suggest that the recession has not only bottomed, but may have begun its recovery phase. OECD data shows that some of the Asian and European economies appear to have stabilized. National data for the U.S. suggests that the bottom of the recession may have occurred late in 2008.
While most economists are predicting a slow recovery from the current recession, the news is good: a recovery appears to be in progress. Banks are back in the lending business: mortgage re-financings have spiked, though it is taking longer for consumers to close on the loans due to an increased level of credit checks.
No one likes a recession, but they provide some opportunities:
- Inefficient merchants are flushed out of the business.
- Great real estate deals abound.
- A pool of talented jewelry personnel is available.
- Recessions serve as a “wake-up” call to merchants, and cause them to re-think how they run their business, and, more particularly, how they market and how they manage their inventory.
The survivors of the current recession will see a landscape where there are fewer competitors vying for pieces of a larger market. By 2010 or 2011, jewelers’ sales per store will rise, if for no other reason than there are fewer stores selling into a market that could hit a record $66 billion in sales (by 2011), based on our preliminary forecast.
U.S. Economy Showing Vitality
The U.S. economy is showing some vitality, after significant weakness over the past year. Three factors are having a positive impact on the U.S. economic recovery:
- The U.S. government has thrown all of its defenses at the recession early in the economic decline, long before other nations.
- The U.S. economy is far more resilient than most people understand (especially the mass media).
- The Federal Reserve is engineering the stimulus to put the U.S. economy back on track. If there is one thing we’ve learned over the years, it is this: don’t bet against the Fed. The Fed may not be perfect, but overall its success record is enviable.
The American Consumer: Born to Shop
Consumers have begun to poke around the malls, mostly in search of bargains. Americans are unusual consumers: they love to shop, even when the environment is in a recessionary mode. Americans invented the concept of recreational shopping, and they will stay out of the stores only so long, before they return to the malls.
It is important to understand that Americans have not stopped shopping, though the mass media would have us believe that retail sales have dropped to near zero. In fact, total retail sales are down only 8-10 percent so far in 2009 - in other words, they are running at near 90 percent of last year’s levels for the first quarter. Further, consumer spending, which includes services and other non-retail categories, is only down about 2 percent in the first quarter of 2009.
The reason that economists focus on consumer spending is because it accounts for about two-thirds of America’s Gross Domestic Product, which is the sum of all the goods and services produced in the nation.
Economists are still somewhat on the fence about the timing of the impending economic recovery, and have retreated to making forecasts using their time-honored hedge, “On one hand... and on the other hand...”
In keeping with the economists’ “one hand . . . other hand” hedge, we’ll present the arguments that economists cite when arguing whether the economic recovery will be slow or rapid:
On one hand...
· Consumer confidence has risen.
· Inventories have dropped and need to be re-stocked.
· Government stimulus money is beginning to have an impact.
· The stock market, usually a leading indicator, has risen solidly.
On the other hand...
· Bankruptcies, especially in the consumer sector, are rising.
· Credit is still difficult to obtain.
· Household net worth is still very low.
· Unemployment is expected to continue to rise into 2010.
The following table summarizes sales results of the publicly held jewelers during the first quarter of 2009.
Source: US Dept. of Commerce & Company reports
Harry Winston Diamonds
- Harry’s Winston’s U.S. retail store sales decline diminished dramatically in the first fiscal quarter ended April 2009. After plummeting by 60 percent in the fourth quarter of 2008, sales in the first quarter of 2009 fell by only 25 percent in the eight U.S. salons.
- Total Harry Winston global retail sales – including the U.S., Europe and Asia – were down by 30 percent in the first quarter of 2009, a worse trend than the 21 percent decline reported in the fourth quarter of 2008. Sales in the two remaining Europe stores collapsed in the first quarter – from a 77 percent increase in the fourth quarter to a 39 percent decrease, in part due to the closing of the Geneva store in the third quarter of 2008 – while sales in Asia (eight salons) fell by 24 percent in the first quarter, somewhat worse than the 16 percent drop in the fourth quarter of 2008.
- Retail store traffic in the Harry Winston salons is “improving.” Most of the improvement apparently has come in the non-U.S. division.
- Harry Winston management noted that the retail sales decline of 30 percent in the first quarter was due in part to tough comparisons against last year’s +27 percent sales increase due to particularly strong demand in Asia and Russia in early 2008. In the first quarter of 2008, sales in Harry Winston’s Europe salons were up 42 percent (most Russian sales are in this sales comparison) while sales in the Asian salons were up by a dramatic 52 percent. Clearly, these tough comparisons had a negative impact on sales results this year, given the recessionary economic climate.
- Harry Winston Diamond chairman Bob Gannicott assured company shareholders that the future is brighter: “The world of diamonds is fundamentally under-supplied,” he told investors during Harry Winston’s annual meeting.
Tiffany & Company
- Tiffany’s weakest global region was the U.S. In New York, the company’s flagship store, which typically generates about 10 percent of corporate revenues, posted a highly disappointing 42 percent drop in sales. Management attributed this sharp decline to turmoil in the financial markets; Wall Street employees represent a notable segment of Tiffany’s New York customer base. In addition, the number of foreign tourists shopping in the New York Flagship store has declined, especially as the U.S. dollar rose in value earlier this year.
- Weak sales in the U.S. market were due to two factors: 1) fewer transactions (just over half of the decline); and, 2) a drop in the average ticket (just under half of the sales decline).
- Tiffany’s price stratification analysis showed that demand across virtually all price points declined, though management noted that sales of goods priced above $50,000 were the weakest category.
- Sales in Tiffany’s U.S. stores were down 34 percent in February, dropped by 39 percent in March and declined by 30 percent in April. Management’s comments would imply that sales in May were down by a smaller percentage than April’s decline of 30 percent; our estimate is that they declined in the high 20 percent range (perhaps down by 28-29 percent).
- Tiffany noted that the competitive landscape has been particularly brutal, with some jewelers discounting extremely heavily, and others engaging in liquidation / going-out-of-business sales. Management commented, “It is difficult to say when these competitive headwinds will dissipate, but they surely will.” Like most industry players, Tiffany management implied that the number of store closings will likely be large this year.
- By merchandise category, the best performing categories were fashion silver and gold jewelry both smaller ticket items. Bridal jewelry remains a very strong category, though sales declined year-over-year. Watch sales were also lower in the first quarter.
- Tiffany’s e-commerce and catalog business suffered a sales decline of 17 percent due to significantly fewer orders and a slightly lower average ticket.
- Same-store sales for the 1,400-store Sterling Jewelers chain, the U.S. division of Signet Jewelers, were down 2.6 percent in the quarter; total sales were down a miniscule 1.0 percent. While management did not give specific numbers for the various brands, it did indicate that Kay’s same-store sales were up, while Jared and the regional brands posted a decline in same-store sales.
Same-store sales during the Valentine’s Day selling period were marginally ahead for Sterling Jewelers, but declined for the balance of the fiscal quarter.
- The average transaction value in the mall brands (Kay and regionals) was down 9 percent in the quarter. The average transaction value in the Jared stores was down 7 percent, after adjusting for a new product launch this year. The number of total transactions was up significantly in the Kay stores, and was a little down in the Jared units.
- Exclusive merchandise – the Leo Diamond, Le Vian, Open Hearts, Russell Simmons and other designer merchandise – accounted for 15-20 percent of first quarter sales. These proprietary – and unique – goods have accounted for much of the sales strength, and they generate an above-average margin for Sterling.
- Credit sales – typically just over half of all sales – were down modestly in the first quarter. The approval rate for credit sales also declined modestly.
- Zale’s total sales were down by 20.5 percent; same-store sales fell by 20.0 percent. While this appears to be extremely worrisome, it is important to remember that last year’s third fiscal quarter same-store sales increase of 5.8 percent (April 2008) was ahead by about 10 points due to an unusually high – 30 percent – mix of discontinued merchandise.
If the impact of the obsolete merchandise sales is removed, last year’s same-store sales would have been down by an estimated 4-5 percent, and this year’s sales comparisons would not be nearly as onerous.
While it is difficult to estimate this year’s total and same-store sales on the same basis, it is not unreasonable to assume that Zale’s sales for the April 2009 quarter were probably down by 10-11 percent or so on a “real” basis, rather than the reported decline of 20 percent.
- In the April quarter, Zale’s average ticket was up slightly. Unfortunately, virtually all of the sales decline came from the lack of traffic, resulting in fewer transactions in its stores.
- Management continues to cite the bridal jewelry category as its strongest. Roughly 40 percent of Zale’s sales are bridal-related.
- Zale has increased its mix of proprietary goods. Based on the success of proprietary brands and lines at other jewelers, this appears to be a solid strategy. Last year, Zale introduced its Diamond Celebrations diamond line, and it has helped differentiate the company’s merchandise offering and build sales.
- In an attempt to create other proprietary jewelry lines, the company has revised its research and development process for new merchandise. No specific details are available for competitive reasons. However, collections appear to hold much potential for Zale – especially collections that carry an emotional story that tugs at consumers’ heartstrings.
- The attachment rate for its highly profitable warranty products was 49 percent this year, down modestly from 54 percent last year. The warranty attachment rate for discontinued goods is higher than for in-line goods. Since a higher percentage of goods in 2008 were discontinued merchandise, it is understandable that the warranty attachment rate was higher last year than this year.
- Zale lost money in its fine jewelry division – it had an operating margin loss of 8.9 percent, but it showed a very modest profit in its kiosk division of 0.9 percent, despite a decline in sales in both divisions.
Movado – Retail
- Consumers continued their quest for value in the first quarter. As a result, total sales in Movado’s outlet stores were up moderately – +5.6 percent. Further, the company staged compelling in-store sales promotions in its outlet units during the first quarter.
- Unfortunately, total sales were down 11.7 percent in the Movado Boutique stores. However, this is a recovery from the prior quarter when sales were down almost 15 percent.
- Movado’s retail sales were 23 percent of total corporate revenues, up substantially from last year’s 16 percent of total revenues. Like most suppliers, Movado is feeling the impact of the recessionary environment more severely at its manufacturing level than at the retail level.
- Blue Nile’s total sales (all markets, including the U.S., Canada, the U.K. and others) declined by 11 percent in the first calendar quarter ended April 2009. Its U.S. sales were down by 12 percent.
- The bridal category, which includes diamond engagement rings and wedding bands, performed better than the company average. Contrary to erroneous media reports, the number of weddings does not diminish during recessionary times, and Blue Nile felt the tail winds from bridal demand.
- However, high-end engagement rings and jewelry priced above $25,000 at retail were the most negatively affected by the current recessionary environment. Sales of this high-dollar merchandise declined by a greater-than-average amount.
- Management also noted that significant competition came from jewelers who were liquidating their inventories. However, most of this competition was from non-bridal jewelry, since bridal jewelry – mostly diamonds – can be sold at or near full retail, even in a liquidation situation.
- Sales for Blue Nile improved as the quarter progressed. Management previously reported that sales were running down about 15 percent in the period up through Valentine’s Day. Since then, the pace of sales has picked up. Management noted that the seasonally adjusted run-rate for its business picked up in the first quarter versus the fourth quarter of 2008 when sales were down a dismal 23 percent.
- Blue Nile’s domestic (U.S. market) revenues showed a much smaller decline in the first quarter versus an extremely fourth quarter of 2008. Total U.S. sales were down by only 12 percent, as noted earlier, and the company took market share from traditional store-based jewelers.
- While management did not give out an exact average ticket value for its engagement rings, it indicated that it was running slightly below the full-year 2008 average ticket of $6,000. The industry average ticket for a diamond engagement ring is just over $3,500.
- Blue Nile’s overall average ticket was $1,662 in the first quarter, up about 1.5 percent from last year. The average ticket for most mass market jewelers is about $350, while higher-end AGS type jewelers post an average ticket of about $1,200.
- Blue Nile reported that its total number of orders were down by about 12 percent in the first quarter to approximately 37.5 million versus last year’s first quarter order level of 43.0 million.
Neither Finlay Enterprises nor Birks & Mayors had reported first quarter sales at the time this report was prepared. Finlay Enterprises has missed the filing deadline set by the Securities & Exchange Commission (SEC). Under certain circumstances, Finlay can convert itself to a “non-reporting” company, but we don’t believe it qualifies for this status, given its large shareholder base. Birks & Mayors’ fiscal year ends in March, and, because it is domiciled in Canada, it has SEC filing deadlines which are typically longer than U.S.-based companies. In 2008, Birks & Mayors reported its March year-end results on June 24.