Summary
Finlay's bankruptcy illustrates several fundamental challenges in managing large jewerly store chains. Here's more.
Analysis
The industries ordeal with Finlay Enterprise is about to come to an end. Like a badly written Broadway play that drags the audience through endless scenes only to reveal in the last act, the butler did it; Finlay has come full circle back to its obvious end, bankruptcy. In retrospect, it’s surprising that investors didn’t recognize that the company brought no competitive advantage to luxury jewelry retailing and it’s even more surprising that bondholders played table stakes poker with investor’s money, backing management gambit to acquire Bailey Banks, and Biddle. But, no matter, Finlay’s chairman picked up a couple of million dollars for playing the lead role as the entrepreneur, while the company choreographed the sub plot to liquidate most of its inventory and other assets to pay off secured creditors. Now, that gig is over as the bankruptcy judge becomes the star in the final act, which is work in progress.
Company spokes people said it declined two offers to buy what remains of Finlay and now has a stalking horse bid from Gordon Brother Retail Partners for $116 million, which “could be used to repay creditors” according to court documents. Just what else it “could” be used for remains to be seen.
Court records reveal that as of July 4, the company still had about $385 million in liabilities, offset by $332 million in assets. About $33 million of assets were classified as property, equipment, and improvements as of the end of April 2009 balance sheet, while another $44 million was identified as other long terms assets, netting out receivable of about $24 million, Finlay’s got about $225 million in liquid assets like inventory that it could turn into about $150-$160 million in cash to pay off $385 million in liabilities. Keep in mind, that’s an estimate, but it underscores the point that the last act of this play will likely have an unhappy ending for vendors with subordinate claims and all unsecured creditors, unless, in an unlikely event, the presiding judge rules distributions should be made pari passu among all creditors.
It will also be the ugly end for several prominent fine jewelry brands such as Zell Bros, Carlyle, J.E. Caldwell, and Bailey, Banks and Biddle. Interestingly, BB & B was near bankruptcy about 40 years ago until M.B. Zale bought the business for Zale’s Fine Jewelers Guild. Eventually, that group of over 400 stores prospered, becoming the largest distributor of Rolex watches in the US market in the late 1980’s. Zell Bros was also a part of the Fine Jewelers Guild.
J.E. Caldwell was originally acquired in 1969, joining J.B. Hudson and Shreve & Co, as a part of the Dayton Hudson Jewelry Group. In 1982, it was sold, along with the groups other brands to Henry Birks & Sons Ltd. of Montreal, Quebec, Canada, which subsequently filed for bankruptcy in 1992.
Whether any these prestigious brands will cheat the auction block again is problematic. Perhaps if times were different and luxury jewelry sales were better, there would be a willing buyer, because there certainly is a willing seller. Worst of all will be the loss of a very special group of highly skilled, professional, jewelers that not only understand the nuances of the fine jewelry business, but are daily practitioners of it. Trade names can be revived, but the loss of talent and skill could take a generation to replace, if at all.
Regrettably, there’s no shortage of existing jewelry companies that await the auctioneer’s gavel and that’s a problem for investors. The fact is large jewelry businesses don’t respond to traditional turnaround strategies. The recent liquidation of Freidman and Whitehall Jewelers in 2008 is just two examples were hedge fund models haven’t worked. Zale is another example where Wall Street tactics, in combination with an inexperience management team, has failed to revive the business. Zale was expected to report a substantial loss for FY 2009 in September, which is now likely to be even bigger, since the company announced it had closed about 118 additional stores in the fourth quarter, at a cost of about $50 million.
Part of the problem is jewelry business is very different from other types of retailing. For instance, unlike in the department store business that is driven by national branded merchandise. There are few national recognized jewelry brands, which mean in-house product development is a much bigger part of the management process. Moreover, with more than 22,000 jewelry company’s, the market is highly fragmented unlike big box retailing where several brands may dominate the entire market. Another difference is the nature of the product sold. Unlike many products where there are considerable economies of scale for large volume users, a kilo of gold or 1,000 kilos costs almost the same, while large diamond users may actually pay more per carat for certain sizes and qualities of diamonds. Moreover, jewelry fabrication is labor intensive; meaning any economic advantage from long production runs is about the same for both small and longer users alike. Lastly, jewelry isn’t bought, but sold to consumers by sales people, which adds the extra dimension of knowledge and skill to the marketing game board. In fact, comparing traditional retailing to mid-market jewelry retailing is like comparing a regular chess game with three dimensional chess.
Still, investors, Wall Street analysts, board members, and recruiters insist on filling jewelry companies with big box executives with little or no experience in specialty jewelry retailing. Perhaps that’s because they view jewelry retailing as mostly an administrative exercise, perhaps it’s because there are a lot more unemployed department store executives as a consequence of the consolidation of the department store industry, and perhaps it’s because skilled jewelers aren’t viewed as cable of managing a business while simultaneously acting as the company’s chief merchant. What ever the reason, few forms of retailing require as much from its CEO as jewelry retailing, which is another reason why these big company’s have failed.
Finlay’s carefully orchestrated pre-filing liquidation was a skillful example of what good administrators and strong financial management can accomplish. But it also illustrates the fundamental company weakness which was the lack of a jewelry merchant’s mentality. Regrettably, that problem isn’t exclusive to Finlay.
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.
