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By Margo DeAngelo and Lara Ewen
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Posted: 11/01/09 13:59
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RAPAPORT... After one of the worst years for U.S. retail jewelry in a generation, the industry is watchful, wondering what Christmas will bring. At a time when double-digit sales declines are the norm, which players are poised to gain market share while others wither?
To find out, RDR examined recent sales figures for publicly traded U.S. jewelry retailers across the spectrum: specialty chains, luxury jewelers, department stores and big-box discounters.
To understand what’s happening at retail, you must first understand how fundamentally the market has changed. By the end of 2008, the world’s population of high-net-worth individuals (HNWIs) — those having investable assets of $1 million or more, excluding primary residence, collectibles, consumables and consumer durables — dropped to 8.6 million, a 14.9 percent drop from 2007, according to the 2009 World Wealth Report by Capgemini and Merrill Lynch Wealth Management. Furthermore, HNWIs’ wealth plummeted 19.5 percent to $32.8 trillion. “The declines were unprecedented,” the report said, “and wiped out two robust years of growth in 2006 and 2007.”
The loss of the midtier and aspirational customer has also been devastating, as many jewelry companies depend on them. Finlay Enterprises, which ran licensed jewelry concessions in department stores and its own specialty jewelry stores, filed for Chapter 11 in August 2009. Howard Davidowitz, chairman of Davidowitz & Associates Inc., a national retail consulting and investment-banking firm, calls Finlay’s demise “a barometer for what’s going on in department stores right now.”
Ultimately, large numbers of jewelry consumers are trading down. Big-box chains and discounters appeal more than ever, especially as “recession chic” makes such shopping more socially acceptable. A lot of sales will be driven by “a whole bunch of basics that people can understand at the best possible price on the planet,” notes Harry Friedman, founder and chief executive officer (CEO) of The Friedman Group, a retail consulting and training group.
These days, flat sales are a victory and a ready supply of cash is critical. Who has staying power might come as a surprise.
Luxury
Cartier
Cartier experienced “another record year in sales and profitability” in the fiscal year that ended March 31, 2009, according to the annual report released by its Swiss-based parent company, Compagnie Financière Richemont S.A., in May. Richemont posted a combined sales increase of 4 percent for the year by Cartier and its other jewelry house, Van Cleef & Arpels. “High jewelry sales, which are made exclusively through Cartier’s own boutique network of 172 stores, were particularly strong, together with sales of high jewelry watches and Ballon bleu,” the annual report noted. “Sales of other products were broadly in line with the prior year.”
More recent sales figures, however, told a different story. In September 2009, at Richemont’s annual general meeting, Johann Rupert, the company’s executive chairman, unveiled data on the first five months of fiscal 2010 through the end of August, and said, “The jewelry maisons and the specialist watchmakers experienced declines in sales of 14 percent and 18 percent, respectively.” The continued sales decline through the first half of the company’s current fiscal year will be reflected in the company’s next annual report.
There was also action taken on the costs front. In May 2009, Cartier was forced to reduce work hours for 400 employees at its Neuchâtel plant, following similar reductions at its Fribourg plant in February, which affected 200 people. These cuts were in production staff hours only, and are not expected to be permanent.
Certain brands, including Cartier, are finding that the customer base they are losing in Western markets is reappearing in emerging markets, according to Hana Ben-Shabat, a partner in the retail and consumer products practice at A. T. Kearney, a global management consulting company. “There was a survey that was published recently that showed that Louis Vuitton and Cartier were top choices for Russian and Chinese consumers,” she says. “Richemont is targeting the Gulf and Asia, and they’re planning to open at least 60 stores in these markets because they’re not getting the numbers in the main markets. But they were not specific about which brands these stores would carry.”
Ben-Shabat feels that luxury brands that target the highest-net-worth consumers will weather the current climate the best. “Some brands are so powerful that they can go through these periods quite well,” she says. “Cartier is a good example of that.”
Van Cleef & Arpels
The smaller of Richemont’s two jewelry houses, Van Cleef & Arpels has continued to hold its own in terms of market share. In Richemont’s fiscal 2009 financial statement, for the year ended March 31, Van Cleef & Arpels reported “good sales growth.” Operating profit for the business area as a whole increased by 2 percent to approximately $1.1 billion.
At the Reuters Global Luxury Summit, held in Paris in June 2009, Van Cleef & Arpels Chief Executive Officer (CEO) Stanislas de Quercize said that although the brand has plans to open eight boutiques this year in locations including Kuwait, Jeddah, Bahrain and Milan, he did not expect sales to improve as a result, and described his outlook as “cautious.” He noted that demand for midrange items was not as strong as it was for high- and entry-level product.
The company also plans to open four to six doors in China, and a new store at The Streets of Buckhead, a luxury development in Atlanta, in spring 2010.
The company, which currently has 80 shops internationally, has a history of opening stores in times of economic downturn and, in fact, opened its first New York boutique at the beginning of World War II. “You have a bigger impact when you open a boutique in times of crisis,” said Nicolas Bos, vice president and artistic director.
De Beers Diamond Jewellers
De Beers Diamond Jewellers, Ltd (DBDJ), De Beers jewelry store division, is an independently managed, 50/50 joint venture between Louis Vuitton Moet Hennessy (LVMH) and the De Beers Group. As of August 2009, DBDJ operates 50 stores worldwide, with 11 in the U.S. De Beers has no plans to open any new stores for the remainder of 2009, and will instead focus on fortifying its existing boutiques. In 2008, De Beers launched its branded Forevermark diamond and jewelry collections, which are currently retailing in Asia, with a South Africa launch planned for late-2009. There are no plans to retail the brand in the U.S. as yet.
Despite the launch of the Forevermark, a strong first half and its opening of 25 new outlets in 2008, a slowdown in the second half of the year reduced DBDJ’s annual sales increase through the network to 14 percent versus 2007, and the revenue increase to 6 percent compared with 2007.
According to the company’s most recent report, “2009 is likely to remain challenging for the entire luxury goods retail sector. DBDJ’s primary focus will be on maximizing cash and returns from its existing assets and network. Close attention to inventory and overall working capital levels will continue throughout 2009.
Development and marketing in 2009 will focus on core bridal and classic lines, on which demand is expected to be maintained.”
In May 2009, Guy Leymarie announced his plans to step down as CEO when his contract expires on January 1, 2010, saying he intends“to pursue other interests.” Francois Delage, who has been the CEO of Forevermark for the past two years, has been appointed to replace him. Replacing Delage as CEO at Forevermark is Stephen Lussier, who will also stay on as the De Beers Group executive director for external and corporate affairs.
Harry Winston
In June 2009, Harry Winston, Inc. reported that it expected “sales in the luxury diamond jewelry industry to be negatively impacted by a weak global economy for the remainder of the year.” It came as no surprise then that the company posted second-quarter losses in September 2009 for the period that ended July 31. In its earnings conference call, Alan Mayne, chief financial officer (CFO) of Harry Winston Diamond Corporation (HWDC), said the company “reported a net loss for the quarter of $24.5 million, compared to net earnings of $49.9 million in the second quarter” of 2008.
During the call, Robert Gannicott, HWDC’s chairman and CEO said, “Although our retail business has remained unprofitable during the quarter, we have seen transactions grow in number as we have introduced new product at more accessible price points into the Asian market. It is the large-ticket sales that are being missed during this period as the world struggles to find its economic feet again. With our own sales recovering in Japan, and some improvement in other markets outside the U.S., we believe that we have now passed the low point.”
Winston’s retail-segment sales plunged nearly 40 percent to $48.8 million from $81.1 million for the quarter, year on year. Thomas O’Neill, company president, conceded, “Sales were driven down by continued weakness in the U.S. market while sales in other markets were down, but to a lesser degree than in the U.S.” He said that to combat the losses, the company would be further reducing employee costs and inventory levels, and cutting back on marketing costs. In addition, the 18-store network limited its expansion during 2009 to a single salon in Singapore, which opened in July.
Among the company’s limited marketing initiatives are the launch of a New York jewelry collection, which hit stores in mid-fall, and a collaboration with the Smithsonian Institution to reset the Hope Diamond to celebrate the fiftieth anniversary of Harry Winston’s donation of the gem to the museum. The Hope Diamond project, with the reset stone scheduled to be unveiled in 2010, will be accompanied by a new line of jewelry at accessible price points, targeted at the people who voted for the Hope Diamond redesign online. In other activity, Harry Winston is revamping its website.
Tiffany & Co.
Tiffany’s earnings are down. According to its second-quarter earnings report, released in August 2009, net sales in the quarter that ended on July 31 declined 16 percent to $612.5 million. Worldwide, both net sales and comparable store sales declined by 16 percent in the second quarter.
In the Americas, sales declined 23 percent to $324.9 million in the second quarter and 27 percent to $583.9 million in the first half of 2009. In the U.S., comparable-store sales declined 27 percent in the second quarter and 30 percent in the first half; comparable-branch-store sales declined 26 percent and 29 percent, while sales in the New York flagship store declined 30 percent for the quarter and 36 percent for the half. Combined internet and catalog sales in the U.S. declined 8 percent in the second quarter and 12 percent in the first half.
During a May 2009 conference call discussing the firm’s first-quarter results, Mark L. Aaron, Tiffany’s vice president of investor relations, attributed the already-declining New York numbers in particular to “weak spending, especially by customers tied to the financial sector, as well as to a decline in foreign shoppers.”
To combat the losses, the company has made some cuts. Early in 2009, Tiffany offered early retirement to approximately 800 staff members, though the company would not disclose how many accepted the offer. Additionally, it was announced that Tiffany would be closing all 16 of its Iridesse pearl jewelry stores. As of July 2009, Tiffany operated 211 stores worldwide, with plans to open two more by the end of the year.
In May 2009, Tiffany announced its decision to buy handbag company Lambertson Truex, which had filed for bankruptcy earlier in the year, a sign that some analysts see as positive. “When you talk about merchandise mix, I think Tiffany is an excellent lesson,” says Howard Davidowitz, chairman of Davidowitz & Associates, a national retail consulting and investment-banking firm. “In this market, you have to think about add-on products. You can be known for quality, but you might have to look for certain complementary categories.”
Still, according to A. T. Kearney’s Ben-Shabat, this move may not be enough to pull Tiffany out of its slump. “Tiffany is not doing that well right now, because they have a very core U.S. business and the U.S. consumer is not feeling as affluent as she used to,” Ben-Shabat says. “Tiffany is looking into expansion, and opening a presence in department stores in Europe and Asia. But that won’t help its short term.”
Specialty
Fred Meyer Jewelers
Fred Meyer Jewelers is a wholly owned subsidiary of The Kroger Co., which as of September 2009 operates 388 stores, including locations within Fred Meyer Marketplace and Kroger Marketplace stores. Kroger operates jewelry stores under the names Barclay Jewelers, Fred Meyer Jewelers, Fox’s Jewelers and Littman Jewelers.
While Kroger does not break down financials publicly by subsidiary, its second-quarter results, reported in September 2009, showed net earnings totaled $254.4 million, compared with net earnings of $276.5 million year on year. In addition, W. Rodney McMullen took over as president and chief operating officer (COO), effective August 1, 2009.
In February 2009, all Littman Jewelers stores in Tennessee changed their names to Fred Meyer Jewelers as the company announced plans to open 15 new Fred Meyer Jewelers stores nationwide during 2009.
Online marketing is also a big push for Fred Meyer, which is in the midst of a four-year overhaul of its online presence and has partnered with NearbyNow, an online marketing services company, to help improve the number of online customers coming to Fred Meyer stores to complete their purchases. In May 2009, Marketing Daily, an online publication, reported that due to that partnership, “The pickup rate, meaning the percentage of customers who pick up an item and complete a purchase after reserving products online, during the first three months increased to 83 percent.”
Signet Jewelers
Signet Jewelers, Ltd., incorporated in Bermuda, refers to itself as the world’s largest specialty retail jeweler. As of August 2009, Signet operated 1,952 stores in the U.S. and the U.K. Sterling Jewelers, Signet’s U.S. affiliate and a wholly owned subsidiary, operates Kay Jewelers, Jared the Galleria of Jewelry and a variety of stores under a number of regional names in the U.S. In the U.K., Signet’s division includes H. Samuel, Ernest Jones and Leslie Davis.
According to the second-quarter earnings report released September 2009, same-store sales at Signet’s U.S. stores fell 5.5 percent in the quarter and total U.S. sales declined by 4 percent to $552.5 million from $575.6 million. Sales for the half year were down by 2.4 percent, to $1.18 billion from $1.21 billion.
In January 2009, Akron, Ohio–based Sterling laid off 114 employees. The company previously announced that it had no plans to expand in 2009, choosing to focus instead on existing locations. Signet also has plans to close 60 stores in the U.S. market, and 10 additional stores in the U.K. in fiscal year 2010. In addition, the company plans to reduce staff hours and advertising expenditures in an effort to cut costs by approximately $100 million.
That isn’t to say the company won’t be focusing on product. “We continue to develop and test exclusive and differentiated merchandising programs, such as the Leo Diamond, the Peerless Diamond, Open Hearts by Jane Seymour,” said David Bouffard, vice president of public relations at Sterling.
“The Jane Seymour heart was innovation, and keeping your product line fresh is clearly a part of managing the business,” says Nicholas White, retail consultant and president of White & Co. “I think everyone agrees with that.” White also feels that because Sterling’s parent company is so large, its affiliates may stand to benefit from the current industry shake-up. “Kay Jewelers is the beneficiary of everyone’s problems, and so long as the collapse of the industry continues, Kay will pick up pieces,” he says. “Kay is a public company, and these companies want to maximize return. So what they’re doing is gaining market share as people around them are less successful. It’s a good strategy.”
Helzberg Diamond Shops
Since the abrupt departure of Marvin Beasley, Helzberg’s former chairman and chief executive officer (CEO) of Helzberg Diamond Shops, in April 2009, his replacement, Beryl Raff, the former executive vice president and general merchandise manager of fine jewelry for J.C. Penney Company, Inc., has been keeping a low media profile.
Helzberg, an indirect wholly owned subsidiary of Berkshire Hathaway Inc., operates 233 stores in the U.S., and is one of three jewelry subsidiaries at Berkshire Hathaway, which also owns the 75-store Seattle-based Ben Bridge Jewelers chain, acquired in 2000. The other, Borsheim’s in Omaha, Nebraska, is a single store, which laid off 13 employees in June 2009, the first cuts in its 139-year history, reducing its total workforce to 267. At Helzberg, the staff is also being restructured: four key players in the merchandising sector left directly following Raff’s arrival.
While Berkshire Hathaway does not release numbers for its jewelry divisions, its second-quarter report, released in August 2009, indicated $1.78 billion in operating earnings, which is below the $2.27 billion from the previous year’s second quarter, but still better than the $1.71 billion from the first quarter of 2009.
Zale Corporation
At the end of 2008, in an effort to drive sales, Zale advertised holiday discounts instead of focusing on emotion-driven purchases. That strategy cost the company. In its May 2009 earnings conference call discussing third-quarter fiscals for 2009, Cynthia Gordon, Zale’s senior vice president and interim chief financial officer (CFO), said, “We believe our promotional stance over holiday was too broad and cost us margin with minimal impact to sales.”
For its third quarter, which ended on April 30, Zale Corporation posted a net loss from continuing operations of $23.2 million, compared to a loss of $17.4 million for the same period in 2008. Total revenues for the quarter were $379 million, a decline of 20.5 percent from the $477 million in the same quarter in 2008. Quarterly comparable-store sales were down by 20 percent, compared to the 5.8 percent increase in 2008.
To combat these losses, Zale took aggressive steps. In July 2009, Zale reported the hiring of Richard A. Lennox as executive vice president, chief marketing officer, effective August 17, 2009. Lennox, who has a track record of setting successful industry trends, such as the Right Hand Ring and Journey jewelry, comes to Zale from J. Walter Thompson (JWT), where he had served as executive vice president and director of the De Beers Group’s “A diamond is forever” marketing campaign since 1998.
In August 2009, Zale said it closed 118 stores in its fiscal fourth quarter, ending the fiscal 2009 year on July 31 with 1,931 locations, approximately 15 percent of which the company considers unprofitable. Additionally, Zale agreed to take responsibility for leases and costs associated with the closing of Bailey Banks & Biddle stores it no longer owns, after they were sold to the now-bankrupt Finlay.
At press time, Zale had postponed the release of its fourth-quarter earnings for the second time “to finalize a review of accounting for prepaid advertising costs that surfaced during the company’s year-end closing process.” White predicts that their results will “probably get worse.”
Department Stores
Macy’s & Bloomingdale’s
In the mall jewelry arena, “Macy’s seems to dominate the marketplace,” states Nicholas White, retail consultant and president of White & Co. The parent company of 807 Macy’s and 40 Bloomingdale’s stores in 45 states, Macy’s, Inc. reported that total sales decreased 9.7 percent year over year to $5.2 billion in its second quarter that ended August 1, while same-store sales dropped 9.5 percent.
Bloomingdale’s flagship store on 59th Street in New York City is currently revamping its main floor. The new layout will dedicate nearly twice the space to David Yurman in the form of a new “shop-in-shop” concept slated to launch in spring 2010.
Finlay Enterprises ran jewelry counters as licensed concessions for a number of department stores, including Macy’s, before its bankruptcy filing in August. There is little doubt that Finlay’s liquidation will throw a wrench into Macy’s jewelry plans for the holiday season.
“This is probably the worst time in history for Macy’s to have to basically go in and reinvest in a product category when they thought they had a sure 15 percent rent factor coming in for the next 12 or 24 months. My sense is that you’ve got a business where assortments are broken and merchandising and buying departments really aren’t well established to deal with it,” White remarks.
However, compared to some other Finlay clients, Macy’s might have an advantage, White notes. “Macy’s was doing their own jewelry business in a couple of their regions, so they probably have a bit of a leg up.”
White warns that Macy’s debt puts the company at risk. “If you take a look at their asset sheet, almost their entire asset base is propped up by goodwill, which isn’t so good today. I personally think Macy’s will be broken up.”
The company expects same-store sales to drop 5 percent to 6 percent in the second half of its fiscal year, which ends January 30. A company statement forecasts that the firm will save $250 million in 2009 and $400 million per year, beginning in 2010, due to cost cutting.
The Bon-Ton Stores
The Bon-Ton Stores, Inc., another Finlay client, is the parent company of 280 stores, including Bon-Ton, Bergner’s, Boston Store, Carson Pirie Scott, Elder-Beerman, Herberger’s, Younkers and Parisian stores. It reported that its second-quarter sales fell 9.5 percent to $609.2 million and same-store sales decreased 9.8 percent. Bon-Ton said it would take over the 86 fine-jewelry departments in its stores that were formerly run by Finlay and that it will offer former Finlay employees, working in its stores, positions with Bon-Ton.
Looking ahead, Keith Plowman, executive vice president and chief financial officer (CFO), raised Bon-Ton’s guidance on earnings before interest, taxes, depreciation and amortization (EBITDA) by a range of $10 million to $15 million under the assumption that comparable-store sales would decrease between 7 percent and 9 percent, instead of the previously estimated 6.5 percent to 9 percent.
According to Howard Davidowitz, chairman, Davidowitz & Associates, a national retail consulting and investment-banking firm, “A lot of companies are raising their guidance. But here’s what it comes down to — it’s unsustainable. If your sales are going down, like Bon-Ton, and you’re closing stores and having tremendous losses, as Bon-Ton has, raising your guidance means that you’ve reduced your expenses, inventory and capital expenses. So for a quarter, your earnings go up. Is Bon-Ton even a sustainable company? I doubt it. In the retail business, if you want to really leverage your costs, you’ve got to improve your top line. You can’t do it just by cost cutting because there is an end to cost cutting, unless you want to have robots run the stores.”
Dillard’s
Dillard’s, a chain of 304 department stores and 10 clearance centers in 29 states, posted net sales of $1.4 billion, a decline of 15 percent, for the quarter that ended on August 1. Same-store sales were down 13 percent and the company posted a net loss of $26.7 million. During the quarter, Dillard’s closed one store and identified five others for closure by the end of 2009.
White points out that Dillard’s has relied heavily on Finlay for its jewelry department since the mid-1970s. “I think that piece of the industry is going to be in pretty big disarray,” he contends.
Kohl’s
Kohl’s net sales gains for its latest quarter were among the strongest in the department store category, increasing 2 percent over 2008 to $3.8 billion. Comparable-store sales decreased a mere 2.2 percent, while net income was $229 million, a 3 percent drop for the period that ended on August 1.
The company opened 19 stores during the first six months of 2009, and held a grand opening of 37 new stores in six states on September 30. Of those 37 stores, 35 were former locations of now-bankrupt Mervyn’s. Kohl’s currently runs 1,059 stores in 49 states. Kevin Mansell, president and chief executive officer (CEO), told Bloomberg News that his firm is accumulating cash to grab locations abandoned by shrinking or defunct retailers.
This holiday season, White believes Kohl’s will be a strong competitor in the jewelry arena. “If you look at Kohl’s — which has a huge jewelry department relative to many department stores, and it’s front and center — it’s a very important piece of their business. It’s deeply discounted, I mean, 70 percent off is kind of the rule. They’ve got full assortments. Their business hasn’t changed.
They’re considered a value — I don’t know if they are considered a value leader, but certainly as a good place to buy — and they are considered a company that has a sense of fashion.”
J.C. Penney
In an environment where single-digit declines are a bit of an achievement, J.C. Penney’s second-quarter total sales decreased 7.9 percent to $3.9 billion and same-store sales slipped 9.5 percent. Management expects total sales to decrease 3 percent to 5 percent in the third quarter and comparable-store sales to sink 5 percent to 7 percent.
The company opened its first store in New York City and four other stores at the end of July, and now operates 1,106 stores. The firm was silent as to whether it would embark on another viral marketing campaign during the holidays similar to its breakout “Beware of the Doghouse” campaign in 2008.
Pam Mortensen was named senior vice president and general merchandise manager of fine jewelry on July 1. Mortensen previously served as vice president and divisional merchandise manager of Walmart’s fine jewelry and watch division. The announcement came in the wake of the resignation of Ken Hicks, president and chief merchandising officer, who left to become Foot Locker’s president and CEO.
“J.C. Penney has always been a strong jewelry merchandiser,” says White. “I certainly don’t see that changing. When I look at their assortments, they are clearly emphasizing lower price points, silver and precious stone jewelry to a much larger extent than they have. They are still going to be in the diamond business, but I don’t think they see that as being their growth area.”
Sears holdings
Sears Holdings reported that total revenue from its approximately 3,900 Sears and Kmart stores in the U.S. and Canada decreased 10.2 percent to $10.6 billion during its second quarter. The firm posted a net loss of $94 million for the period that ended August 1, compared to net income of $65 million in the same quarter of 2008.
Same-store sales for Sears’ U.S. stores declined 12.5 percent and its EBITDA to $160 million for the quarter, a 16.2 percent drop. Despite the fact that Kmart’s comparable-store sales slipped a mere 3.9 percent, its EBITDA for the quarter was $14 million, a whopping 74.5 percent fall from 2008. During the quarter, 28 underperforming stores were closed, of which 22 were Kmarts and 6 were Sears.
In a late-August 2009 cover story for Barron’s, writer Jonathan R. Laing asserted that Sears Holdings’ cost cutting, led by billionaire chairman Edward Lampert for the past five years, has harmed the firm’s ability to generate the cash flow necessary to compete with its rivals. Lampert shot back in a letter to the editor, calling the article “misleading, inaccurate and poorly researched.”
White believes that Sears’ jewelry business has moved down market, possibly to their advantage. “They’ve put a lot of Indian goods in their stores…. My sense is that that strategy has probably paid off for them.” On the other hand, Davidowitz describes the stores as “horrendous, they’re falling apart.”
Jeff Matthews, of hedge fund RAM Partners, also cited a lack of investment in stores, as well as an interim CEO — W. Bruce Johnson — running the company for more than 18 months, when, in a September interview, he told Yahoo’s “Tech Ticker” that Sears had “totally lost touch with the American consumer.”
In September, Michelle Pearlman joined the firm to become senior vice president and president of jewelry for both Sears and Kmart. She was most recently executive vice president of Ann Taylor Direct, leading the internet sales division. Prior to that, Pearlman spent five years at consulting firm McKinsey & Company, managing turnaround and growth strategies for retail clients.
Neiman Marcus
For The Neiman Marcus Group, the parent company of 40 Neiman Marcus and two Bergdorf Goodman stores as well as 25 Last Call clearance centers, total revenues sank 25.4 percent to $768 million, with same-store sales plunging 23.4 percent in its fourth quarter. The company’s net loss widened to $168.5 million during the period that ended on August 1, compared with a loss of $35.6 million in 2008. Burton M. Tansky, chairman and CEO, stressed that in fiscal 2009, “We tightly managed our expenses, resulting in a total reduction of $183 million.”
For the first time, Neiman Marcus’ Christmas Book, with its legendary fantasy gift list, turned frugal and did not include a single item priced at $1 million. The most expensive gift was a $250,000 two-person Icon aircraft that comes with flying lessons.
Harry Friedman, founder and CEO of The Friedman Group, a retail consulting and training group, notes that the sale mentality at some midtier department stores sets them up for markdowns and the loss of profit margins. He predicts that for this holiday season, “You have Nordstrom, Neiman Marcus and Saks, which will probably do a better job than most guys at maintaining some margin because of the nature of who they are. If the retailers can get clever and not put the entire store on sale, or save some things for a little bit more margin, then they can get out with a couple of points here or there.”
Nordstrom
Nordstrom’s second-quarter summary stated that solid execution of the firm’s popular annual 17-day anniversary sale in late July combined with disciplined inventory and expense management allowed the 175-store firm to exceed its earnings plans, with net earnings of $105 million for its second quarter that ended August 1. Net sales were $2.1 billion, a relatively small 6.2 percent drop from $2.3 billion in 2008. Full-line same-store sales, which exclude the 61 Nordstrom Rack and two Jeffrey boutiques, decreased 12.3 percent. Nordstrom Rack’s same-store sales increased 0.8 percent.
The firm improved its outlook for the fiscal year that ends on January 31, with management now expecting same-store sales to decrease 9 percent to 12 percent. Prior to that adjustment, the outlook was for declines in the range of 10 percent to 15 percent. One Nordstrom and six Nordstrom Rack stores are slated to open during the upcoming quarter.
Saks
Saks posted a net loss of $54.5 million for the quarter that ended on August 1, compared to a net loss of $32.7 million in 2008. Total sales for its 53 Saks Fifth Avenue stores, 54 OFF 5TH stores and saks.com fell 14.5 percent to $561.7 million, compared with $657 million in 2008. Comparable-store sales tumbled 15.5 percent, and excluding the effect of a spring clearance event brought the figure down further, to approximately 18.5 percent. Management expects Saks’ comparable-store sales to decline in the mid-to-high single-digit range in the second half of fiscal 2009.
On September 9, Stephen Sandove, chairman and CEO of Saks, spoke at the Goldman Sachs Sixteenth Annual Global Retail Conference, where he conceded, “Within jewelry, we are seeing better trends in our fashion jewelry than we are in our fine jewelry.”
His company is cutting costs, but Sandove assured those who recall Saks as being one of the first to enact dramatic — and, many thought, risky — luxury goods markdowns in fall 2008 that the company is working at “getting back toward a full-price selling environment, which is what luxury is all about: limited distribution, limited supply, training the organization, again, full-price selling.”
Regarding sales figures, Sandove pointed out that year-on-year comparisons will start improving for all companies, simply because fall 2008 numbers are so low. “The comps are going to look better even if the economy is not getting any better, just because you are off of poorer bases.”
Retail consultant White warns, “Saks has a huge jewelry business, but it is extraordinarily high end. There doesn’t seem to be any trend at this point in time suggesting that the high-end shopper — who would be the frequent shopper at Saks and Neiman’s — is back in the marketplace.”
Big Box Stores
Walmart
Walmart’s second-quarter results for its 3,533 stores and supercenters in the U.S. showed net sales of $64.2 billion, an increase of 0.3 percent compared with nearly $64 billion during the same quarter in 2008. Same-store sales, excluding fuel sales, slipped a mere 1.5 percent for the period that ended on July 31.
The company’s 605 Sam’s Clubs reported net sales of $11.9 billion, a 3.2 percent drop compared with $12.3 billion in 2008. Same-store sales — not counting fuel sales — were virtually flat, with an increase of 0.6 percent.
During the earnings conference call for the quarter, Brian Cornell, president and chief executive officer (CEO) of Sam’s Club, noted that big-ticket discretionary categories, including jewelry, “continue to face sales pressure.”
Tom Schoewe, executive vice president and chief financial officer (CFO), expects comparable-store sales for Walmart U.S. to be between flat and 2 percent in the quarter that ends on October 30. Sam’s Club’s same-store sales are forecasted to be flat, plus or minus 1 percent.
At his first conference as Walmart’s president and CEO since he took the reins following Lee Scott’s retirement in February 2009, Mike Duke spoke at the Goldman Sachs Sixteenth Annual Global Retail Conference on September 8. In the U.S., Duke predicted last-minute holiday shopping. “I think there will be deferred spending. It will be a late Christmas,” he said.
Howard Davidowitz, chairman of Davidowitz & Associates, a national retail consulting and investment-banking firm, recognizes Walmart as the largest retail jeweler in the U.S. “The name of the game is price point. I’m talking about the big piece of the jewelry business, not the high-end stuff. I think Walmart is the winner and I think Walmart is gaining.”
Walmart’s game plan for jewelry appears to have shifted, according to Nicholas White, retail consultant and president of White & Co. “If you look at what Walmart is doing in its brand-new stores, jewelry departments, which used to be front and center, are now buried back in the apparel departments. One-tier showcases are now three-tier-deep showcases. Fine gold jewelry and diamonds are taking a huge backseat to stainless steel, tungsten, silver and a whole menagerie of bridge product categories, with quite a bit of expansion of the costume jewelry side of the business. I think that’s the strategy that is evolving.”
Costco
Net sales for Costco Wholesale Corporation’s fourth quarter contracted 3 percent year on year to $21.9 billion, a figure that covers 560 warehouses, 407 of which are in the U.S. Comparable-store sales in the U.S. were down 6 percent. The company plans to open six to seven more warehouses by the end of December 2009.
The warehouse club chain has always catered to business owners, and White believes that Costco has been an opportunistic buyer when it comes to jewelry. “Their margins run about 12 to 14 percent, so the product in the showcases is a great deal, but they have no depth and very little breadth.”
BJ’s Wholesale Club
BJ’s reported total sales for its second quarter that ended on August 1 as $2.5 billion, a 5.2 percent decrease from the same period in 2008. The warehouse chain, which operates 184 clubs in 15 Eastern U.S. states, experienced a drop in comparable-club sales of 7.7 percent.
In August, BJ’s management updated its sales and earnings guidance for fiscal 2010, which ends January 30, reducing net sales and same-store sales forecasts but improving its net earnings expectations. The firm is now forecasting that net sales will increase from 0.5 percent to 1.5 percent instead of the 0.6 percent to 2.6 percent predicted in May 2009. Comparable-club sales are now expected to decrease 1 percent to 3 percent, as opposed to declining 0.5 percent to 2.5 percent. Net income in fiscal 2010 is now expected to range from $134 million to $140 million, instead of the previous $132.7 million to $138.2 million.
In a conference call discussing the company’s second-quarter results, Laura Sen, BJ’s president and CEO, noted “positive membership trends” and stated that the chain plans to open seven new clubs by the end of this fiscal year, a jump from four clubs in fiscal 2008. However, in October 2009, the firm named jewelry among its “weaker departments” versus 2008 in a statement regarding its September sales results. Sales rose 4.1 percent for BJ’s during September to $928 million.
Target
Target’s sales decreased 2.7 percent to 14.6 billion in its second quarter compared with $15 billion in 2008. Same-store sales for its 1,719 stores declined 6.2 percent during the period that ended on August 1. At the conclusion of the quarter, Target was operating 71 more stores than one year ago. Gregg Steinhafel, chairman, president and CEO, explained in a company statement that the firm is focusing on “initiatives to drive incremental traffic and sales in our stores.”
Harry Friedman, founder and CEO of The Friedman Group, a retail consulting and training group, notes Target’s more fashionable reputation among its big-box competitors. “Target’s hipper than all of them, right? So you have the chance of appealing to a higher-income guy.”
But White feels the retailer has paid little attention to its jewelry. “Their jewelry collection doesn’t reflect what they are trying to do elsewhere,” he says. Describing their selection as “quite disappointing” and primarily “low-end price pointed” he states, “I wouldn’t call it fashionable. I guess in some ways I would call it safe.”
Though Davidowitz views Walmart and Costco as potentially stronger on the jewelry front, he stresses, “Target certainly is a winner compared to Zale and other specialty jewelry chains.” In addition, he says: “In the jewelry space, the discounters are winning big time and gaining market share. Number one, they are building stores, as opposed to closing stores. Number two, financing is very tough for the jewelry business. JPMorgan Chase had a jewelry division, but discontinued it. That means they are not seeking jewelry business. JPMorgan Chase was the biggest lender to the jewelry industry. These big boxes have unlimited financing. When you talk about Walmart, Target or Costco, they’ve got billions. They can weather the storm. Can Zale weather the storm? That’s questionable. Whatever happens, the big boxes are going to gain.”
Conclusion
In order for jewelry companies in both the luxury and midtier markets to retain and expand their customer base today, analysts say they will need to learn to do business differently. “One of the scary things is that despite all the changes, there haven’t been many salient changes,” observes Nicholas White, retail consultant and president of White & Co. “Zale and Signet have cut overheard, but these cuts don’t reflect a change in how they do business. When I look at what’s been done, it’s been reactionary and professional, but it’s been a temporary fix at best.”
Many retailers are expanding into emerging markets. Hana Ben-Shabat, a partner in the retail and consumer products practice at A. T. Kearney, a global management consulting company, says the decline in watch and jewelry sales decreased from the first quarter of 2009 to the second, but “a lot of this recovery is coming from emerging markets such as China, India and Russia. When you add it all up, with emerging markets and these core consumers, it’s still not enough to bring things back to where they were.” Ben-Shabat feels it may be a while until things pick up. “We won’t have an amazing Christmas, but we may start to see recovery in 2010.”
Matthew Katz, managing director of AlixPartners, a global business advisory firm, also is wary about predicting a recovery. “A lot of jewelry is bought on credit cards and layaway. And that’s gone. The upper end has less disposable income, but they’re paying down their debt quicker. We might have hit bottom, but it’s pretty slushy and there’s not a lot of traction. And certainly, we need the rest of the globe to recover.”
Howard Davidowitz, chairman of Davidowitz & Associates Inc., a national retail consulting and investment-banking firm, believes that credit has the potential to affect retail jewelry sales. “ Consumers have a problem because their credit has been slashed to the tune of a trillion dollars in the past three months. That’s why layaway has become more popular — it’s a form of credit. That’s why pawn shops have become more popular — it’s credit. The risk is huge, but it’s a business decision. Credit, if used very wisely in this economy, can be an important aspect of doing business.”
White weighs in that “All jewelers have to reconsider their profit model and say, ‘Look, moving down the road, I’m going to have to make better product. I can’t sell it for a three-time markup. I can’t even sell it for a two-time markup, but I have to make a profit. What does that mean for my cost structure and how do I achieve it?’ I don’t think very many people are thinking that way.”
Harry Friedman, founder and chief executive officer (CEO) of The Friedman Group, a retail consulting and training group, stresses that there is still plenty of work to be done in terms of the fundamentals of customer service. “I keep walking into stores with the worst service I’ve ever seen in my life and I keep thinking to myself ‘Well, at least figure this out. This is a no-brainer.’ Forget the fact that they should be hiring me anyway. I’m quite serious. Go to my competitor. Do something.” Some brands rolled out new ad campaigns for 2009 to drum up business. But insiders say this may not be enough. “With all due respect, the old European model, with great product and service and heavy-duty image advertising, doesn’t cut it anymore,” says Greg Furman, founder and chairman of the Luxury Marketing Council. “One trend that’s emerging is not so much innovative new product as much as bespoke product, customized product and customized service.”
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