Will Second Half Jewelry Sales Disappoint?

Last week I commented on the state of the jewelry industry. There I discussed several of the macro issues facing the industry including:

 

1.      The fragmentation of the diamond pipeline,

2.      Decline in the emotional connection consumers have with diamonds

3.      Changes in consumer buying behavior,

4.      Decay of industry leadership by DeBeers and large retailers such as Zale

 

These big issues have been transforming consumer attitudes and behavior for most of the last decade and are now accelerating because of the recession.   I would argue that it’s these issues, not the recession alone, that are responsible for much of the decline in sales and profitability that mid- mid-market jewelers are facing as the sector prepares for the all-important fourth quarter. I emphasize mid-market to distinguish it from luxury jewelry business dominated by the uber rich, which, according to some, have continued to buy such items as “$4 million dollar diamonds” despite the economic downturn. The only real change is these purchases have become more obscure to the public.   

 

Will jewelry sales decline further this fall? That’s the question 22,000 some odd jewelry company owners and managers are asking themselves. If inventory trends are the measure, most company’s management expects further declines.  One recent survey showed that only 1 in 4 jewelers expected inventories would be greater than last year. That attitude is consistent with other retailers. Earlier reports showed orders for imported goods like apparel were down at least 20% from the previous year. Whatever their public face, most management is voting yes, sales will decline, with their pocketbook, but how much?

 

The last numbers published by analysts suggested specialty jewelry sales would decline by about 10% in 2009, which means second half sales would have to be about flat with last year. That seems terribly optimistic in retrospect. Clearly, July sales trends are unfavorable to that forecast. For instance, “according to The International Council of Shopping Centers-Goldman Sachs tally fell 5.0 percent in July compared with the year-ago period. July's pace was in line with the 5.1 percent drop in June and worse than the 4.5 percent decline averaged since February”. 

 

Specialty jewelry sales aren’t available yet, but it seems probable they performed much worse. That would be in keeping with declines earlier in the year, which were much lower than necessary to achieve flat sales growth for the second half. Of course, if jewelry sales continue to decline at those rates, it means increases will only have to be larger in the Christmas quarter to achieve flat sales.

 

For many jewelry storeowners, all this seems counter intuitive in light of the media barrage that the recession is over, GDP will increase in the second half, and unemployment claims have moderated. However, that’s the top line, read between them and conditions aren’t so rosy for most retailers, especially jewelers. For instance, programs like “cash for clunkers”, that were designed to improve GDP are taking sales away for jewelers and there are others. Heavy discounts for air travel as well as increased discounts on new cars as thousands of dealerships close across the country have cost jewelers sales too. 

 

Unemployment remains a big reason why jewelry sales are likely to remain down compared to last year. There are three to four million more Americans without jobs today and that number is still growing at an alarming, all be it moderated, rate. According to one Associated Press, article “economists expect it [jobless rate] to show unemployment ticked up to 9.6 percent in July, close to its post-World War II high”. Other economists think the unemployment rate will reach 10% by year’s end. There is “No Joy” in that number for any retailer, most especially jewelers. However, the unemployment figure is only half the jobs story.  

 

For example, many of those that still have jobs are earning less than last year. The average hours worked per week has declined materially since last July. Effectively, many Americans now have part time jobs and cannot find a second one to supplement their income. Then there are the families that have always depended on two adults working full time to make ends meet. Many of those households now have only one full time wage earner. Sadly, many of those that are jobless or earning a lot less today were jewelry buyers last year. 

 

Tighter credit markets and huge stock market losses are also at the root of declining mid-market jewelry sales. Last year, consumers could still count on existing home equity loans and credit card lines to support their spending habits. Even after the financial markets crashed last year, existing lines of credit remained available to many consumers throughout the fourth quarter. That’s not the case today. New home equity loans have all but vanished, while existing lines of credit have been cut down. Moreover, credit providers are issuing fewer new cards, taking away another class of consumer that retail jewelers depended on for incremental sales growth last year.

 

Boomers are a lot poorer too. By some accounts, they were responsible for nearly 40% of all jewelry purchases prior to Wall Street’s meltdown, but no more. Today, boomers are scrambling to rebuild their retirement nest egg, which means they aren’t spending money on jewelry. Granted, the stock market has improved significantly over the last several months. However, on average, it’s still significantly below what it was last December, which means boomers haven’t recovered their losses, assuming they have reentered the market, and that’s a big assumption. 

Like boomers, almost all Americans are saving more, not to spend it, but to pay down debt. Current numbers indicate the savings rate has increase from a negative number to about 5.2% or about a half trillion dollar decrease in consumption annually of which a disproportionate share has come from retailers selling discretionary products like jewelry.

 

Add all these factors together and you have overwhelming force driving jewelry sales down this fall, but not much driving them up. The question for retailers is the magnitude of these forces greater than those that drove jewelry sales down in the November-December period last year. Think of it this way. The collapse of the financial markets sent a shock way through the economy that paralyzed it for the fourth quarter of last year. One effect was to drive all jewelry sales down about 16%. Now some of that damage has been repaired by TARP and stimulus spending, meaning, lacking greater bad news, jewelers could expect positive sales increases during the fourth quarter. 

But, there is more bad news in the form of subsidies, increased joblessness, lower absolute wages, and reduced liquidity that will offset all or at least part of the benefit from a partially repaired financial system and increased government spending. From that perspective, it seems things have gotten worse, not better, for jewelers, despite all the media spin. One indicator may be Signet Jewelers second quarter sales results, which apparently weakened compared to the previous quarter. Signet reported that its same store sales declined 5.5% on a constant exchange basis or about twice the rate of decline as the first quarter. Historically, Signet has outperformed its competitors like Zale, suggesting top-line sales for the industry may also be weakening as jewelers prepare for holiday sales season.   

 

Taken on the whole, there are other factors that may contribute to lower jewelry sales in the second quarter. For instance, sales will likely be larger and in effect for a longer period.  This means average selling prices will be lower, either because of the lower price points or higher discounts, which translates into the need for higher unit sales just to match off to the previous year. That may be intuitively obvious, but what is less obvious is where are those extra unit sales going to come from?   Simply put, in a declining market where there is no underlying growth, increased unit sales has to come from competitors. 

 

Retail strategists call it market share management (MSM) and it’s an effective strategy. Blue Nile is one example of a company that is utilizing MSM to steal sales from its competitors by offering highly targeted items like large diamonds at low margins to attract customers away from traditional jewelers. Combined with a lower cost structure and real time lower diamond costs, the company is able to gain market share and increase profitability too. 

Blue Nile recently reported sales declined by 5.2% in the second quarter, which was a significant improvement over the 11.4% decline posted early in the year. That’s opposite of what seems to be happening in the traditional jewelry industry.

Unfortunately, the traditional jewelry industry isn’t in a position to do the same, because it hasn’t acted aggressively enough to change its profit model, despite the glaring changes in the industries structure. Lower margins without lower costs are a recipe for diasters as Zale’s management can attest to. But that’s a likely consequence for many jewelers as it enters the 2009 holiday selling season.