Summary
Volatile gold and platinum prices may slow the recovery of many publicly traded jewelers as small chains and independents still their market share. Here's why and a summary of how some of the larger companies may perform
Analysis
Small chains and independent jewelers probably out performed most of their larger, publicly traded competitors. The question for investors is will the large chains recover and which companies will perform the best. The answer to the first part of the question is yes, but it may be well into 2010 before some of the big chains rebound. In part the timing depends on the volatility of precious metal market. As of the end of December, jewelry retailers had not increased retail prices enough to off set increased operating costs and higher gold costs for the last several years.
Some analysts think retailers will have to raise prices by as much as 15% in 2008 just to catch up. That’s assuming commodity price don’t continue to rise which is probably unrealistic. Some large chains like Kay Jewelers have already announced that they will substantially increase prices after the Valentine’s Day. Many small chains will follow their lead, but investors should expect independents and small jewelry chain’s prices to be lower so long as gold is trending upward.
If gold prices materially decline, large retailers will again gain a value advantage, but only after existing inventories sell through. That could take a minimum of one year from the time gold began its decline. However, reduced price differentials alone won’t overcome the advantages of better service, local merchandising, and accessibility which will continue to be a key segmentation factor well into the next decade. How the publicly traded jewelers will perform will depend on their strategic perspective.
Overall, Signet’s US stores should emerge stronger provided they continue to implement their current new store program, invest heavily in their ecommerce business, and don’t buy Zale. Many analysts think a Signet-Zale merger is a matter of time. But that’s 20th century retail thinking. Signet will be much stronger if the company invests heavily in 21st century retailing formats and continues to steal market share from Zale as it closes stores and becomes less relevant in the markets it serves. However, Signet will continue to be dragged down by its UK stores as they struggle to remain competitive in a tough European dominated market place.
Tiffany will also rebound, but their growth will be subject to some risk because of the number of inland stores they have already opened in the US. That sales volatility will grow considerably if they proceed to open the planned 170 small format stores in lesser US markets targeting the aspiration customer over the next decade. At the risk of focusing on the obvious, one point worth making again is the dilution of the Tiffany brand, especially in the US. There’s a point where high end luxury customers will abandon Tiffany if its aspirational customer base grows too large. If that happens, aspirational sales will also decline. Just where Tiffany is on that image curve is uncertain. But it’s a mistake for investors to assume consumers will view any of these branded companies exactly the same way s the economy emerges from a protracted slowdown.
Zale will continue to decline in spite of the recent change in the board, a new Chairman, and CEO. Breeden Capital’s investment horizon is several years at best. Richard Breeden has to persuade the board to find a buyer to recover his investment and make a profit. That may be more difficult in the current economic environment. Unless the dollar strengthens, energy prices decline significantly, and commodity prices fall, jewelry sales will remain soft for the remainder of this decade. In the interim, the board’s historic impatience and preoccupation with Breeden’s agenda will prolong any operational recovery at Zale. Zale’s recent appointment of a human resource executive vice president only underscores the company’s paucity high quality personnel needed to turn the company around. Recruiting new people and developing a cohesive team can be measured in years, not months, which isn’t what the board has in mind if history is any measure. While Zale’s indecision and constant change makes it easier for competitors to steal its market share, the lack of strong competition between the two largest jewelry retailers reduces industry creativity and innovation which could also contribute to slower industry growth.
Finlay’s only hope is that the luxury market rebounds quickly. Heavily leveraged, liquidity should be investor’s biggest concern. The Bailey, Banks, and Biddle acquisition was at best the right decision at the wrong time. That’s assuming they have the experience to profitably operate a large, disparate, high end jewelry chain. Today, Finlay has to grow its specialty jewelry business at a faster rate than its department store base is shrinking. But, in the absence of a significant increase in luxury jewelry spending, growth will require capital investment. That may be cash the company doesn’t have. While there’s every indication that non-jewelry, luxury brands have continued to grow, aspirational fine jewelry sales may continue to decline because of its relatively lower perceived value in an inflationary environment.
Birks & Mayors growth may also continue to be low as aspirational buyers mentally absorb higher gold prices. Consisting of stores in Canada, Florida, and Georgia, the company is strategically dominated by the French firm that acquired Birks in 1993 which has focused on building its proprietary brands in the stores. Unfortunately, many of the brands continue to be irrelevant to the North American market. Future growth may have to come from increased selling space. But, Birks has saturated Canada and Mayors was unsuccessful in expanding its brand in the late 1980’s much beyond Florida’s borders. Having pocketed the quick gains after the initial acquisition, it’s problematic whether the Birks & Mayors strategy will sufficiently increase profitability for investors over the next decade.
Meanwhile, some big chain jewelers are already in trouble. For instance, Friedman Jewelers is currently fighting an involuntary petition by three creditors to force the company into Chapter 7. Emerging from Chapter 11 about two years ago, Friedman’s was once the third largest specialty jewelry chain in North America. If it is forced into receivership, the liquidation of over 300 stores would disrupt the market for several years.
Similarly, Whitehall Jewelers may have a dim future. Exiting from Chapter 11 about the same time as Friedman’s, new management moved its position down from that of an up scale jeweler to compete in the mid-market. In hindsight, a better move was probably to close about half the stores and focus on the aspirational luxury consumer. In any case, its poor performance over Christmas and continued losses in the third quarter should be a red flag to investors. Again, with over 300 stores, another reorganization of a large chain or its liquidation could prolong large jewelry chains recovery well into 2010.
