Sterling Jewelers plans to continue its aggressive store expansion program in 2007. Management has a stated goal to add net new selling square footage in the range of 8 to 10 percent annually, a benchmark that was exceeded in 2006 when the company generated an 11 percent increase in selling square footage. In 2007, management indicated that it would add new selling square footage toward the top end of its goal; we believe that a 10 percent increase is likely for the year.

 

Here’s what is particularly notable about Sterling’s store opening plan for 2007: it flies in the face of conventional wisdom which suggests that merchants should slow store expansion when faced with the prospects of a slowing economy, a likely probability in this year. However, history has shown that smart merchants should use a slowing economy to grab real estate deals that are available, especially when real estate prices moderate due to weak demand, which often occurs when the economy softens.

 

Sterling’s management appears to have the patience to wait for the right real estate deals. Despite results that management termed as “satisfactory” relating to the success of its metro store test, no new stores are planned for 2007 due to high real estate prices. Signet’s CEO Terry Burman emphasized that the industry should not read anything into the company’s metro store delay, other than the lack of availability of economically viable real estate.

 

Recently, Sterling’s management commented on its 2006 store openings as well as the status of some of its operating units, as follows:

 

• New stores in 2006 – At the end of the fiscal year (January 2007), Sterling expects to operate 1,307 stores in the U.S., a net new store space increase of 11 percent from the end of the prior fiscal year (January 2006), when the company operated 1,221 units. While the number of units increased by about 7 percent during the past year, many of the new stores were the large Jared superstores, which are roughly four times the size of a typical mall store (5,900 square feet for Jared versus 1,460 square feet for a mall store). Thus, the Jared stores are pushing up Sterling’s total net selling square footage dramatically.
  
  The following is a summary of new store openings at Sterling during 2007:
  • Jared – Twenty-five Jared stores were opened; the company now operates about 135 Jared stores.

• Mall stores – Fifty-four mall stores were opened in 2006; there are now about 800 units in operation, virtually all under the Kay Jewelers brand.

• Off-mall stores – Twenty-one off-mall stores were opened; there are now about 52 units.

• Outlet centers – Four more outlet stores were open, bringing the total to five units.

• Metropolitan stores – Three of these stores were opened in 2005; none have been opened since then.

• Regional brands – At the beginning of the year, there were 330 of these units open; it appears that there were 312 at year-end. Sterling is slowly consolidating this portfolio of regional brands under the J.B. Robinson name, where appropriate.

The table below summarizes Sterling’s store opening program in 2006 as well as for the long term.

 

Source: Company reports

 

• The following is a summary of the status of each of Sterling’s operating divisions:

• Jared – The Jared superstore division, with 135 units, is generating sales at a rate of about $650 million annually, making it the fourth largest specialty jewelry brand in the U.S. Jared is performing well. We believe that the company will add at least 25 more Jared stores in 2007. The long term potential for Jared is about 250 stores, roughly double the current level.

• Off-mall stores – This program is four years old. During the first three years, the company opened about ten stores each year. In 2006, 21 units were opened, bringing the total to 52 units at year-end. In 2007, the number of off-mall stores opened will increase significantly, but management was not specific about the exact number of new stores in 2007. We believe that at least 30 off-mall stores will open in 2007. Ultimately, there could be as many as 500 off-mall units, about ten-fold the number of stores currently open.

• Metro stores – In 2005, Sterling opened three metro stores as a test. This past year was the first full year of operation for these stores, and management characterized the results as “satisfactory.” There are no plans to open additional metro stores in 2007, but management was careful to warn that this did not mean the test was doomed. Due to escalating real estate prices in high-profile metropolitan markets, rent factors are too high to make metro stores economically viable at the current time. Management believes that there could ultimately be at least 50 metropolitan stores, but this is more of a guesstimate than a firm projection.

• Outlet stores – During 2006, four more outlet mall stores were opened, in addition to the one already in operation. Five more units are slated to open in 2007. Management said it was “pleased with the results.”

• Other speculation about Sterling’s expansion – In recent weeks, there have been several news stories about the possibility that Sterling would make an acquisition. It held very preliminary talks with Zale earlier this year, but those talks were terminated. At least one Wall Street investment banker is predicting that Sterling might acquire a division of Zale – perhaps Bailey Banks & Biddle. Others have speculated that Sterling might acquire Whitehall.
  
  Terry Burman has been quite straightforward about his attitude toward an acquisition: it must make sense economically. Too many merchants make ego-driven acquisitions that end disastrously. We don’t believe that Sterling would make this mistake.
  
  The most recent major acquisition that Sterling made was in July 2000, when it purchased the 137-store Marks & Morgan chain. Since then, Sterling has not completed any notable acquisitions other than selected real estate sites that belonged to other jewelers.
  
  The high-end jewelry business is very different from Sterling’s mass market business, and the acquisition of a guild jeweler such as Zale Corporation’s Bailey Banks & Biddle could present a major challenge for Sterling management. However, at one time, Kay Jewelers, the major Sterling brand, also operated the Black Starr & Frost chain, a guild jeweler founded in 1810. That brand re-surfaced just over a decade ago, and operates one store in Costa Mesa, California.

• Sterling is a consistent leader in store openings – The following table, provided by Signet Group, the parent company of Sterling Jewelers, illustrates growth trends among the top U.S. jewelry chains.

Source: Company reports