Two key sales trends emerged from publicly held jewelers’ third quarter financial reports:

 

• Names in, commodities out – Brands, designer, and fashion jewelry were in; commodity jewelry was out. Management of almost every public company mentioned this trend one way or another.

Sales were generally affected by the same three factors which have put pressure on revenues throughout the year:

 

• Store traffic has declined, especially for mall-based jewelers.
• The number of sales transactions declined for guild and mass market jewelers.
• The average ticket rose, though only modestly.

The bottom line: despite pressures on consumer spending, total U.S. jewelry industry sales in the third calendar quarter 4.4 percent, right in line with the nine-month year-to-date gain of 4.3 percent. Further, specialty jewelers’ sales rose by 3.5 percent, exactly in line with year-to-date gains.

 

Third Quarter: The Calm Before the Storm

Some people have described the third calendar quarter of the year as the calm before the storm – meaning the quiet period before the all-important holiday selling season. Whether a company is on a calendar quarter – July, August, September – or a fiscal quarter – August, September, October – there are no major holidays or other events driving demand for jewelry in this three-month period. In contrast, Valentine’s occurs in the first quarter, Mother’s Day occurs in the second quarter, and Christmas / Hanukkah / Kwanza dominate the fourth quarter.

 

As a result of the lack of a specific event which drives jewelry sales, retail jewelers typically post the smallest quarterly sales level of the year during the three-month period, as the graph below illustrates.

 

 

Source: Department of Commerce

 

Specialty Jewelers Lost Market Share

It comes as no surprise that specialty jewelers lost a modest amount of market share in the third quarter. This trend has been an ongoing trend. For the year-to-date, specialty jewelers’ sales also grew by a lesser amount – +3.5 percent – than the increase in total jewelry industry sales – +4.3 percent.

 

The graph below illustrates quarterly and year-to-date sales trends for 2007 for both total jewelry sales and specialty jewelers’ sales.

 

Source: Department of Commerce

 

Bifurcation of the Market

In general, guild jewelers generated solid sales gains in the third quarter while mass market jewelers lagged. But retailing is always full of exceptions to any rule, and such was the case in the third quarter. Sterling Jewelers posted a solid gain, despite operating mass market stores in shopping malls. Among guild jewelers, Harry Winston’s third quarter was disappointing for its six U.S. stores.

 

It is interesting to analyze what is going on at the rarefied luxury level where Harry Winston operates. A large portion of its sales are made at five, six, and seven digit levels. Jewelers are now reporting that sales of very expensive merchandise have slowed. For example, until the third quarter, Tiffany had been reporting that its largest sales growth was coming from that rarefied level - $50,000 and above retail. But in the third quarter, Tiffany noted that this price range was no longer the fastest growing. The good news for Tiffany is that the company also sells more moderately priced goods that helped support an extremely strong sales gain for the three-month period.

 
The graph below illustrates sales trends – up or down – by major publicly held jeweler in the third quarter.

 

Source: Company Reports & Department of Commerce

 

 

Third Quarter Sales Levels by Company

The following is a summary of management’s comments about third quarter sales trends for the major publicly held U.S. jewelers. The graph summarizes third quarter sales revenues (in millions of U.S. dollars) for each of the companies. Clearly, the largest jeweler is Sterling with $488 million in revenues, which pulled more than $100 million ahead of Zale in the quarter. The smallest jeweler is Abazias, an online merchant, with just $1.8 million in revenues.

 

 

Source: Company Report

 

Third Quarter Sales Trends by Publicly Held Company

Mass Market Jewelers

Sterling Jewelers – Sales for Sterling Jewelers, the U.S. division of Signet Group plc, were up 10.1 percent for the three months ended October 2007. For the same period, same-store sales roe by 2.5 percent, about in line with nine-month year-to-date same-store sales of +2.7 percent.

 

• Sterling management described the third quarter as a “challenging period at retail.” August and September sales were stronger than October. Since the end of the quarter, management reported that same-store sales for the period November 1 through the end of the Thanksgiving weekend were down a disappointing 7 percent.
• The average ticket is up by about 4.5 percent for the year-to-date.
• Bad debt has ticked up modestly, and credit approvals are down slightly. Just over 50 percent of Sterling’s sales are made on its private label in-house credit program.
• Key merchandise initiatives, which will carry over into the fourth quarter, include the Right Hand Ring, Journey diamonds, solitaires, LeVian, the Leo diamond, and designer names.

Zale Corporation – Total sales were down 1.3 percent for Zale (all brands), and same-store sales declined by 0.4 percent for the three-month period ended October 2007. Bailey Banks & Biddle results were excluded from the company’s reports, since it was acquired by Finlay in early November.

 

• By division, sales trends for Zale during the October quarter were as follows:
  • Zale’s Jewelers, Gordons, and Piercing Pagoda posted a sales decline in the low-to-mid-single digit range
  • Zale’s Outlet sales were up mid-single digit.
  • Sales in the Canadian division – Peoples and Mappins – were up double digit.
  • Fine jewelry sales were down 0.2 percent; sales in its kiosk division were down more than 7 percent, primarily due to the close of kiosks in the Canadian division.

• Zale management estimates that mall traffic was down 4-6 percent in the October period. Florida was a particularly soft market.
• Credit approvals were up, according to Zale management. This is the only jeweler we know of which reported a higher approval rate for credit customers. Due to mortgage woes, higher energy costs, and other stresses on consumer spending, most consumers qualified for less, rather than more, credit in the third quarter. Zale said its third party credit provider, CitiGroup, did not change lending standards. Credit sales are running at near 40 percent of total sales, more or less in line with historical trends.
• Zale’s attachment rate for its new merchandise warranty continues to run at about 50 percent. This is a lifetime warranty, rather than its prior limited warranty.

• The company’s inventory of clearance merchandise has dropped to $19 million from $68 million a year ago and about $85 million two years ago. Thus, the company can begin to focus on building its core merchandise line, rather than selling “cheap, cheaper, and cheapest.”
• Based on third quarter sales trends, Zale’s merchandise focus for the fourth quarter is on Journey diamonds, Right Hand Ring diamonds, big gold hoop earrings, and Past, Present & Forever. Brilliant Buys (“cheapest”) will be a less important portion of the company’s sales mix. All holiday promotions will be the same across all channels – online and stores.
• With the departure of Zale’s CEO Betsy Burton, who was not a merchant, we expect to see major merchandising changes under new management beginning in late 2008.

Finlay Enterprises – Total sales for the three months ended October were up 4.1 percent, based on comparisons of continuing operations year-over-year. Same-store sales were up a respectable 1.6 percent; nine months year-to-date same-store sales were up 2.1 percent.

 

• Sales categories which were strong in the third quarter and which are expected to fuel fourth quarter sales included the following:
  • Diamonds and diamond jewelry, such as Journey and colored diamonds (keep in mind that these are fashion diamonds, not large stones)
  • Journey diamond jewelry
  • Diamond hoop earrings
  • Better silver jewelry with diamonds or other semi-precious stones
  • Watches
  • Designer jewelry 

• The Midwest is now Finlay’s weakest sales region. Florida sales have perked up. 
• Higher-end jewelry is showing stronger sales gains than popular-priced jewelry.
• The average ticket is as follows:

• Department stores - $250
• Department stores with Lord & Taylor and Bloomingdales - $300
• Carlyle and Congress - $1,300 to $1,500
• Bailey Banks & Biddle - $1,600

Movado Group –Total retail sales at all 62 of Movado’s stores were up 10.2 percent in the three months ended October 2007. Movado’s total corporate sales, including retail and manufacturing, were up 8.3 percent. Movado’s product line stretches across the horizon from popular-priced fine watches to true luxury timepieces.

 

• Movado’s retail sales in its two store divisions were up 10.2 percent.
  • Movado Boutiques, the mall-based jewelry stores, posted a total sales increase of 14.7 percent, with a very strong 8.8 percent same-store sales gain. Are these stores targeting the mass market or higher-end consumers? That is the question Movado management is asking. To help answer it, retail and merchandising consultants have been brought in. When we shop Movado stores, we are not clear on their market niche, but we analyze them as a mass market jeweler. Their average ticket, estimated to be about $850, would indicate that they are a guild jeweler, but that’s not our sense, when we shop their stores.
  • Movado Outlets generated a more modest, but still robust versus competitors, 7.4 percent total sales gain. However, same-store sales in the Movado Outlets dropped by 0.8 percent. We believe the average ticket in Movado’s outlet stores is less than $600.
  • There are 31 Movado Boutique stores and 31 Movado Outlet stores.Its Swiss brands experienced product capacity constraints which delayed delivery of the more expensive watches with mechanical movements.

•  Movado’s sales of watches were drive by dramatic gains in licensed brands in international markets. For example, its total licensed brand category – Coach, Tommy Hilfiger, Hugo Boss, Juicy Couture, and LaCoste – were up over 33 percent in the quarter.
• Concord and Ebel were down 5 percent. Concord’s repositioning continues to be a drag on these brands.
• U.S. wholesale sales were down 2.3 percent, primarily reflecting timing of deliveries to retailers for the holiday selling season, according to management. We believe that retail merchants are also keeping inventory levels down in anticipation of a weak selling period.

Whitehall Jewelers – Whitehall, which now has stock in public hands (symbol: WHJH), reported a disappointing third quarter ended October 2007. Total sales were down 8.9 percent; same-store sales declined by 7.0 percent.

 

• Sales were negatively affected by a lower average selling price which resulted from a shift in product mix toward gold jewelry as well as precious and semi-precious stone jewelry which carries a lower average price point. 
• The decrease in the average selling price was partially offset by a 2.1 percent increase in the total number of merchandise units sold.  
• Management noted that there was a slowdown in sales of higher priced merchandise in the quarter. 
• The company’s third quarter gross margin was 20.4 percent, down substantially from the prior year’s 24.4 percent due to lack of sales leverage, higher inventory shrink, higher repair costs, and increased costs associated with its jewelry service plan. 
• The company’s operating cost ratio was nearly 51 percent of sales in the three-month period ended October 2007. 
• Despite a fresh start and new management talent, Whitehall can’t continue to operate with a gross margin of 20 percent and an expense ratio of 51 percent. Further, management essentially said it would run out of cash in the fourth quarter of this year; it is seeking a new cash infusion. 
• Whitehall currently operates about 314 stores. At its peak, the company operated 388 stores in mid-2005. We expect to see a significant number of stores closed in 2008.

Guild Jewelers

Tiffany & Co. – As expected, this guild jeweler posted strong sales gains. Total sales in the U.S. market were up 12 percent, with a same-store sales gain of 8 percent. Corporate sales, including stores in international markets, were up 18 percent, with worldwide same-store sales up a very strong 9 percent.

 

• Tiffany’s U.S. sales were driven by a higher average ticket and more transactions. Most of the increase in transactions in the U.S. stores came from overseas tourists spending strong currencies. 
• On a year-to-date basis, Tiffany’s U.S. sales were up 16 percent and same-store sales advanced by 13 percent. This compares to more modest gains in the third quarter of +12 percent for total sales and +8 percent for same-store sales. Clearly, sales momentum at Tiffany slowed in the third quarter.  
• By price range, Tiffany’s products in the $4,000 to $50,000 range showed the largest gain. This is a change from the past, when jewelry $50,000 and higher was consistently generating the largest sales gain. We believe that this is an indicator that the higher end market may be softening, as spending by high-income consumers begins to slow. 
• Sales in the U.S. in August were up 11 percent; September sales rose by 2 percent; and, October sales rose by 12 percent. 
•  Tiffany’s New York Fifth Avenue Flagship store posted a whopping sales gain of 25 percent due largely to greater spending by foreign tourists, mostly from Europe. Sales in its New York area branch stores rose by a more moderate 5 percent. Tiffany’s U.S. branches generated a sales gain of 4 percent. 
• There was no particular regional sales pattern in the third quarter for Tiffany’s sales. California was stronger, and Florida showed an improvement. 
• Direct marketing sales – largely online sales – were up 4 percent; that was somewhat below plan. Virtually all of the increase in direct marketing sales was driven by a higher average order size. 
• By product, the following categories were strongest in the quarter:

• Fashion jewelry
• Silver and gold jewelry
• Designer jewelry
• Watches and tableware
• There were no particularly soft categories
• Statement jewelry
• Engagement jewelry

• Tiffany announced a new store concept: Tiffany Collections. These stores will be about 2,000 square feet in size, well below its current average store size of 4,500-7,000 square feet (gross); selling square footage is about 60 percent of gross square footage. The company’s New York Fifth Avenue store has about 40,000 square feet of retail selling space. The company can now project up to 170 Tiffany-branded stores in the U.S., up from its prior 100-store projection. The company now has just fewer than 70 stores in the U.S.

Birks & Mayors – Birks & Mayors, the luxury jeweler with stores in Canada and the U.S., reported a total sales increase of 9.2 percent for the quarter ended September 2007. Corporate same-store sales rose by 5 percent, with U.S. same-store sales up 5 percent and Canadian same-store sales up 4 percent. The company does not report segment financials between its Canadian and U.S. markets; management provides only same-store sales trends and the number of stores in each market.

 

• Declaring that “America is on sale for Canadians and Europeans,” Birks’ management said sales were driven by more customers coming from Europe and South America to shop in Birks & Mayors stores. In addition, sales in its U.S. stores are being driven by Canadians crossing the border to use the strong Loonie to buy American goods at bargain prices.  
• In late November, Birks & Mayors reduced prices on most of the merchandise in its Canadian stores in an effort to reduce the price disparity between the U.S. and the Canadian markets caused by currency swings. 
• The Florida market has been weak due to the decline in housing values in that region as well as a credit crunch among customers in Florida, many of whom live on a fixed income.  
• Birks management said that when unusual stock market volatility occurred in August, sales softened “dramatically” in its Florida market.  
• Same-store sales softened as the quarter progressed. Same-store sales in the U.S. market benefited in the quarter from the timing of a promotion which was moved from the spring to late July. 
• Traffic weakened for Birks in its U.S. stores in the quarter ended September. This was offset by a higher average ticket. The company continues to focus on increasing the average ticket and boosting margins by increasing its sales mix of exclusive branded goods as well as increased promotional activities. 
• Sales of goods priced over $20,000 were up 11 percent in the quarter.
• Categories which drove September quarter sales, and which are expected to fuel sales in the all-important holiday period, include jewelry collections and Birks branded merchandise.

 Harry Winston – Total sales at Harry Winston’s 16 stores were down about 1 percent in the October quarter. Strong sales in international markets were offset by very weak revenues in the U.S. division. 

• Sales in Harry Winston’s six U.S. stores dropped by a dramatic 22 percent primarily due to volatility in the U.S. financial markets. U.S. sales were $19.4 million in the three-month period.
• Sales in the company’s ten overseas locations rose by 16 percent to $34.4 million as a result of new salon openings and same-store sales increases, somewhat offset by the effects of a robbery at the Paris salon in October 2007. 
• In October 2007, approximately $23.2 million in company-owned retail inventory at cost was stolen during a robbery at the Harry Winston Paris salon; this loss was charged to “other income and expense” during the quarter. Harry Winston is fully insured against the loss, and has offset the inventory write-off by setting up a receivable of equal value in respect of the insurance proceeds. The insurance claim is subject to investigation by the insurance company and is scheduled to be concluded during the fourth quarter of fiscal 2008 (ending January 2008), at which time the claim will be settled, management assured. The insurance settlement is expected to result in the recording of a gain in the fourth quarter of approximately $13 million pre-tax in retail segment other income, representing the difference between the cost of the inventory stolen and the insurance proceeds received.
• Two new stores were opened in November 2007: one in Chicago and one in Nagoya, Japan. The company now has 18 salons worldwide.
• In the mining and polished diamond portion of its business, Harry Winston noted that there has been steady demand in the U.S. market and growth in Asia, all of which has supported higher diamond prices, both for rough and polished stones. Better quality white goods, three carats and above, posted very strong price increases. 
• The corporate holding company changed its name to Harry Winston from Aber Diamond in early November.

Online Jewelers

Blue Nile – Blue Nile reported that total sales rose by 26.5 percent for the three-month period ended September; sales were about $67.4 million. Year-to-date sales were up 28.9 percent.

 

• All jewelry categories were strong in the quarter. High-end jewelry selling for $25,000 and above was up 50 percent in the three-month period. High-end jewelry is growing solidly; lower-end merchandise is growing more slowly.
• Traffic to Blue Nile’s website was up 20 percent in the September quarter. This was the largest increase since 2004. Earlier this year, traffic to the company’s website was up in the mid-to-high teen range.
• New merchandise offerings include silver jewelry, pearls, and one-of-a-kind diamonds. 
• The company reports that its retail prices are stable. Despite rising costs, Blue Nile’s gross margin rose by 30 basis points.
• The company’s business is slowly shifting toward a broad range of jewelry categories. Previously, over 70 percent of its business was related to diamond engagement jewelry.
• Sales in its international markets – Ireland, Canada, and the U.K. – were $4.5 million in the quarter, double last year’s levels.

Bidz.com – Bidz.com reported a 48 percent increase in total revenues for the quarter ended September 2007. Sales were $40.1 million in the period.

 

• A higher average order – $173 – helped drive sales.
• In addition, an increase in total orders helped boost total revenues.

Abazias – Abazias posted a 69 percent increase in sales to $1.8 million in the three-month period ended September, 2007. Increased market efforts helped boost sales.