Finlay May Need More Cash Despite Improving Sales Trends

Implications: The addition of Baily, Banks, and Biddle sales may more than off set the lose of 94 Macy's jewelry departments.  However, the company may need a lot more cash than the current business can generate to sustain its current specialty jewelry store growth strategy.  Here's why.

Analysis: Finlay’s numbers always confuse me.  According to the article sales for the year ending February 2, 2008 increased 13.1% to $836.2 million compared to $739 million in 2006?   Reported revenue for 2006 was $709.7 million, while sales for the year ending February 3, 2007 was $760.8 million.  So I am confused.   However, $836.2 million ties to reported quarterly sales for FY 2008 of $162.9 million, $148.0 million, and $141.9 million for Q1, Q2, and Q3 respectively.  That’s a 9.9% increase over the previous years reported revenue or about $75 million.  

Assuming Bailey, Banks, and Biddle will generate about $325 million in for the next fiscal year, department stores sales decline (6%), and Carlyle/Congress grows at about 6%, Finlay’s FY 2009 sales would be about $1.05 billion which will decline to about $927 million for FY 2010.  That’s assuming the company doesn’t loose any more department stores over the next 24 months and that is a big if.  

Clearly, Macy’s is hedging its bet on Finlay by not renewing it leases for 94 stores.  While, those stores make up about 29.7% of the Macy’s jewelry departments under Finlay’s management, it represents more than 35% of the revenue.  That means the jewelry departments remaining under Finlay’s manage are the less productive ones which will probably mean disproportionately lower stock turn over and cash flow for Finlay  That equates to increased working capital needs and higher financing cost for a company that is already highly leveraged.  

It may also be a model other department store chains may follow as jewelry department leases expire. If so, it means the company would be losing operating productivity at a faster rate than it was losing sales which could significantly decrease the liquidity of the business.  

That’s one of the weaknesses in the revised Finlay business model.  Historically, Finlay had the advantage of significant off balance sheet financing through gold leasing, consignment inventory, and economies of scale in purchasing.  Now with gold prices escalating and Finlay’s supplier base diversifying, its working capital needs have escalated too. 

Add to that the fact there is little product synergy between department store and specialty store inventory and you have even more pressure on liquidity.  The fact is the luxury jewelry store business is a ‘cash hog’ which may inevitably make the Finlay strategy unsustainable, especially if the margin productivity of its department store jewelry business declines significantly which appears to be the current trend.