Moody’s Downgrades Finlay Fine Jewelry

Finlay Fine Jewelry Corp.’s poor holiday sales, department store closings, and weaker margin performance were factors cited this week for Moody’s Investors Services downgrading of three of the jeweler’s credit ratings. Upon the news, Finlay Enterprises' shares fell sharply on the Nasdaq Stock Market.

According to Associated Press reports, the company’s corporate family rating was lowered from B2 to B3, which are considered “highly speculative.” Its probability of default was also downgraded to B3, while its senior unsecured notes rating was reduced to Caa1, which is designated a “substantial risk.” According to the service, the ratings outlook is “negative.”

Finlay’s sagging sales and its eroding margins produced poor operating results in the 2006 fiscal year, Moody’s said. The closure of about 236 May stores and several Belk and Parisian stores harmed sales while higher gold costs and lower vendor concessions hindered any improvement in operating margins.

"While the company has taken steps to diversify its revenue stream by acquiring two small specialty jewelry retail chains, nearly 85 percent of its revenue is generated from its leased jewelry departments located within its department store hosts" whose doors continue to close, Moody's said.

In addition, the downgrades reflect "the modest erosion in liquidity as a result of increased borrowings under its revolving credit facility to finance the termination of its leased gold consignment program."

IDEX Online Research Analyst Ken Gassman says Finlay management is focused on developing new business opportunities beyond the leased department operations. While closing department store doors, it has been on the street seeking acquisitions.

They have been slow to come, with only two in the past three years. But, according to Gassman, those acquisitions are important and will generate $130-140 million in sales in 2007, or roughly 17 percent of the company’s projected revenues.

"If you roll revenues from Congress, Carlyle, and Bloomingdale’s business into a single category – guild jewelry – sales will be about $250 million in 2007. That’s nearly one-third of Finlay’s business, and it appears to generate a significant portion of the company’s profit," according to Gassman.

Finlay Fine Jewelry is a holding of Finlay Enterprises Inc. The company operates 720 leased jewelry departments in major retailer stores.