Summary
Growing, not shrinking, problems threaten any fall recovery for retailers in general and jewelers specifically. Here is more.
Analysis
The contraction of credit should be a wake up call to retailers, most especially jewelers. According to reports, the current contraction was totally unforeseen and about twice as big as expected. Now in its fifth consecutive month, consumer credit “dropped $10.3 billion in June as compared to $5.38 billion in May”.
This is very discouraging news for jewelers as well as those investors that are gambling companies like Zale Corporation are undervalued and are on the verge of a turn around. Zale pioneered the use of credit to buy fine jewelry more than 60 years ago, which they later leveraged into a bigger competitive advantage introducing the concept of instant credit.
As of 2008 about 41% of Zale’s fine jewelry sales were made using its 3rd party, revolving credit card programs, which is no competitive advantage in today’s market, but nonetheless essential for the business to survive. These programs not only make diamond engagement rings and fashion diamond jewelry accessible to consumers, but translate into materially higher average selling prices as consumers leverage their down payment to buy more expensive jewelry. Now both diamond product accessibility and higher average selling prices may be in jeopardy as credit contracts. Zale isn’t the only company with this problem, but it is probably has the most to lose.
Signet Jewelers, which operates the Kay, Jared and J.B. Robinson brands in the US reports that as of FY 2009, about 53.2% of its US sales were made using the company’s in-house credit card. That was a 60 base point increase over the previous year. The company attributed that increase to “higher level of applications offset by a significant increase in the level of credit applications rejected,” despite last years sales decline. Unfortunately, Signet’s US brands may not have the luxury of an increased level of credit applications this Christmas season if the credit contraction continues or worse yet, deepens.
That’s exactly what some analysts expect to happen this fall, “believ[ing] consumer spending declines have only just begun.” They back this up saying, “personal incomes and real incomes have had steeper declines than most had expected” as well as point to the fact that “wages and salaries have also declin[ed] by 4.7% from June 2008 to June 2009”.
However, this isn’t just a problem for Signet and Zale. Credit is an important part of almost all modern mid-price jewelry companies business. Clearly, this contraction will have a material effect on jewelry sales, especially the higher price point diamond ones. Concluding, “based on what I [analysts] see, which is beyond the headline numbers, there are growing, not shrinking, problems that have yet to come to light. Government spending will only create a short-term improvement before it is exhausted. Ditto!
Nicholas White consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
