Summary
Finlay's management appears to say one thing while actually doing another. Here's why the company may be closer to liquidation than most know.
Analysis
Finlay continues to insist that it's exiting the department store lease jewelry business in order to develop a specialty jewelry business. However, there are many signs that they have other intentions. For instance, according to bizjournals.com, Zell Bros, the prestigious Portland Oregon fine jeweler, won’t move into the Pacific Center.
Harsch Investment Properties which has been developing the 11,000 square foot space for Finlay said Zell would likely remain in its temporary location instead. Zell Bros was acquired by Finlay Enterprises as a part of its ill timed acquisition of Bailey, Banks, and Biddle from Zale Corporation in November 2008 for about $200 million.
It’s generally agreed that the additional debt added to its balance sheet in combination with the recession, pushed the company into a liquidity crisis which remains unresolved. Presently, Finlay is clearing jewelry in most of its nearly 700 lease departments in order to pay down part of its $500 million plus debt owed to secured banks and bondholders. It has closed its New York head quarters and a distribution center, while consolidating management and operations into its Carlyle facilities located in North Carolina. Simultaneously, more department store chains are announcing that they would not be renewing their contracts with Finlay.
The company also has said it plans to sell or close about 40 of its specialty stores. While Finlay has remained silent on which store trade names will be affected, its current actions suggests about 20 BBB stores, including Zell Bros, will be sold or closed. If true, it follows the company may try to sell J.E. Caldwell after liquidating Congress jewelers which has already begun clearance sales.
That will leave about 35 Carlyle stores and 30 BBB stores to form the core of a “National Guild Jewelry” chain that Finlay has talked so much about. But, the company has said nothing about any new financing that would be necessary to take out the remaining secured creditor’s debt.
Moreover, current creditors haven’t agreed to exchange the remaining debt for equity in the new business. Unless the former owners and current management of Carlyle can refinance the business or Finlay finds a “white knight”, the most likely end game for company will be a going out of business sale followed by the piecewise liquidation of company’s remaining tangible and intangible assets.
That’s bad news for merchandise suppliers, some of which agreed to reschedule the payment for 2008 merchandise until August 2009. It’s also bad news for developers which will lose the cash flow from prime real estate leases. But, that may be mitigated in part because Zale Corporation guaranteed the lease payments for the original BBB stores in the event of a Finlay failure.
The jewelry industry is also a big loser. Jewelry stores like Zell Bros and J.E. Caldwell represent some of the last vestiges of America’s fine jewelry retail industry. In most all cases, they have extraordinarily talented people that have the professional expertise and the passion for the business that is so lacking in many jewelry companies today. Ironically, it seems nearly impossible to combine both professional jewelry expertise with financial acumen to build a profitable, quality jewelry business today; except possibly in Western Europe which still rewards purveyors of quality and craftsmanship.
Nevertheless Finlay's management appears to say one thing while actually doing another.
