U.S. jewelers’ margins were under significant pressure in the third quarter. Three-fourths of the publicly held jewelers posted lower gross margins in the fall selling period. Only two jewelers – Tiffany & Co. and Blue Nile – were able to generate improved gross margins during the current recessionary environment.

 

Two key factors put pressure on jewelers’ gross margins in the quarter:

 

1)     Higher costs of goods driven by higher commodity costs.

2)     An increase in price-based promotions.

 

In addition, there were other factors that individual jewelers cited such as a change in their sales mix as well as reduced accrual for sales associates’ bonuses that are normally based on both sales and profit levels.

 

Gross Margin Defined

A jewelers’ “gross margin” is generally defined as “sales less cost of goods sold.” Expenses included in “cost of goods sold” vary by jeweler, but always include actual product cost, and can include shipping, buying, warehousing and administrative expenses associated with buying and occupancy functions. Costs associated with selling of merchandise as well as overhead and administrative expenses are included in a separate line item on publicly held jewelers’ income statements.

 

The graph below summarizes jewelers’ gross margin comparisons for the third quarter of 2008.

 

Source: Company Reports

 

Jewelers Highlight Reasons for Gross Margin Pressure in the Third Quarter

IDEX Online Research gleaned the following factors affecting jewelers’ third quarter 2008 gross margins from company conference calls, news releases and legal filings.

 

These Companies Posted A Higher Gross Margin

Tiffany & Co. – 56.3 percent vs 54.4 percent – Tiffany & Co., the world-renowned jeweler, was one of only two publicly held companies to post a higher gross margin in the third quarter. Several factors helped drive margins higher, including the following:

 

1)     Tiffany’s sales mix included a greater percentage of lower-ticket items which carry an inherently higher margin.

2)     Precious metals hedging activities helped boost margins. Few jewelers have the ability to engage in hedging activities; it proved profitable for Tiffany in the third period.

3)     Bonus accruals were reduced due to weaker-than-expected sales.

4)     A geographic sales mix change helped boost margins (sales in less competitive overseas markets were stronger than the highly competitive U.S. market where sales were weak).

 

Blue Nile – 20.3 percent vs 19.8 percent – Blue Nile was the only other retailer of jewelry to generate a higher gross margin in the third quarter of 20089. Last year, the company conducted a special price-based promotion that drove margins down below its normal 20 percent range. The promotion was not repeated this year; hence, margins were at relatively normal levels.

 

These Companies Posted a Lower Gross Margin

Harry Winston – 46.4 percent vs 46.8 percent – A slight change in sales mix hurt this company’s margin by 40 basis points during the quarter. Management did not provide much information about its margin levels in the retail division.

 

Signet Group (U.S. and U.K. Markets) – 27.8 percent vs 28.8 percent – Five factors had an impact on Signet’s margins, including the following:

 

1)     An unfavorable change in sales mix.

2)     A more promotional retail environment.

3)     An increase in the bad debt charge (Signet maintains an in-house credit operation; bad debt is included in “cost of goods sold.”

4)     A lack of sales leverage for relatively fixed costs.

5)     Costs related to new immature stores with below-average sales levels (it takes 4-5 years for a store to reach maturity).

 

Movado – 63.5 percent vs 64.7 percent (excluding liquidation sales from last year) – Movado’s decline in its gross margin resulted primarily from a change in its sales mix in the third quarter. We note that Movado reported that its gross margin rose this year, but last year’s numbers included margin-depressing liquidation sales. Its press release reported that last year’s margins were 61.0 percent including liquidation sales, but it also clearly disclosed margins excluding liquidation sales as 64.7 percent.

 

Finlay Enterprises – 41.8 percent vs 45.1 percent – Four factors were cited by management which had a negative impact on Finlay’s gross margin in the third quarter, including the following:

 

1)     An unfavorable sales mix.

2)     A higher mix of liquidation sales related to closing of some leased department locations.

3)     Increased cost of goods related to higher commodities costs (the LIFO charge was higher this year).

4)     Other higher costs primarily related to buying and occupancy costs.

 

Birks & Mayors – 44.8 percent vs 48.3 percent – Lower prices in its Canadian stores hurt margins (retail prices were reduced in Canadian stores earlier this year due to the disparity between the Canadian Loonie and the American Dollar). In addition, price-based promotions hurt results in the third quarter.

 

Zale Corporation – 48.5 percent vs 52.5 percent – Zale has been running heavy clearance sales to move discontinued and obsolete merchandise. Hence, its margins have been under pressure this year.

 

Gross Margin Summary for Third Quarter 2008

The table below summarizes the difference between this year’s gross margin and last year’s gross margin for the key U.S. publicly held jewelry retailers.

 

Source: Company Reports