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Rapaport Weekly Market Comment Aug. 29, 2014

Market sentiment weak with liquidity difficulties for manufacturers as banks tighten credit. Polished suppliers offer greater discounts to generate cash as rough and polished inventory levels remain high. Low expectations in India for Hong Kong show but Hong Kong dealers hoping show will increase sales of large diamonds. De Beers Aug. sight est. at $715M. Registration opens for 2015 De Beers sightholder contract with focus on financial compliance. ALROSA to start client contract negotiations in Sept. Signet 2Q revenue +39% to $1.2B, profit -14% to $58M. Tiffany 2Q revenue +7% to $993M, profit +16% to $124M. Chow Sang Sang 1H revenue -34% to $1.2B, profit -15% to $67M.

RapNet Data: Aug. 28
Diamonds   1,234,271
Value $7,661,799,328
Carats   1,322,224
Average Discount -27.02%

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  The HENRYs, with incomes ranging from $100,000-$249,999, feel decidedly middle-class and penny pinch, even if they are by every other measure at the upper tier of the income pyramid. Ultra-affluents who are at the top of the income hierarchy tend to feel more financial stable, yet they are worried too, especially about the growing public opinion about income inequality, so they purchase luxury items incognito.

Pam Danziger | Unity Marketing


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De Beers Sight Estimate at $715M

The De Beers August sight closed with an estimated value of $715 million as the company maintained steady prices despite liquidity concerns in the diamond manufacturing sector. Rough trading slowed on the secondary market and premiums on boxes declined, selling at an average of low-single-digit percentages during and after the sight.

Observers noted that polished trading is resuming at a weaker than expected pace, which further strains rough demand and cash flow. De Beers anticipates a positive year for the markets, however, as global gross domestic product (GDP) growth targets and consumer demand for diamonds remains fairly stable. Sightholders noted that the short time between the July and August sights, which were the two largest De Beers rough sales of the year so far, added to the liquidity pressures among manufacturers.

Rapaport anticipates that the three remaining sights of the year will be relatively small, especially given that the August sight pushed De Beers rough sales past the $5 billion mark, representing a 23% year on year increase. Sightholders forecast additional softening of prices on the secondary market, reinforcing the imbalance between rough and polished prices.

In other news, De Beers opened registration to apply for sights in the new three-year contract period that begins on April 1, 2015.

Signet's Profit -14%

Signet Jewelers' sales rose 39.3% year on year to $1.23 billion during the second quarter that ended on August 2, which was the first reporting cycle following the acquisition of Zale Corporation in May. Excluding Zale's contribution of $247.5 million from sales, Signet's increase was still strong at 11.2%. Cost of sales increased 43.2% to $816.9 million. Profit fell 13.9% to $58 million or 73 cents per share.

Same-store sales company wide rose 4.8%, however, there were noticeable differences by brand. Kay's same-store sales jumped 8.1%, while Jared's improved 4.9%. H.Samuel's comparable-store sales rose 2.6% and Ernest Jones' rose 6.4%, both reflecting solid growth in the U.K. Meanwhile, Zale Jewelers' comparable-store sales fell 1%, Gordon's Jewelers' dropped 5.7%, Peoples Jewellers' rose 3.9% and Mappins' declined 4.3%. Zale Canada's same-store sales improved 2.5%.

The retailer observed strong U.S. consumer demand for bridal brands, fashion diamonds and watches at its Sterling Jewelers division, with the average transaction price up 4.6%. In the U.K., sales growth was driven by a strategic marketing initiative to improve diamond sales, coupled with higher consumer demand for watches, but the average transaction price fell 0.9%. At Zale, the strongest categories were branded bridal and fashion jewelry. Signet's inventory level at the close of the quarter totaled $2.35 billion, up 65.4% year on year, with the acquisition of Zale accounting for $841.3 million in goods. The company's Sterling Jewelers division added $61.2 million in inventory during the period, primarily in bridal and fashion brands. Signet's diamond sourcing initiative added $8.1 million in inventory. The group's U.K. division increased inventory level by $17 million; however, the figure was related to the impact of foreign currency translation.

Chow Sang Sang's Profit -15%

Chow Sang Sang's revenue plummeted 34% year on year to $1.2 billion (HKD 9.33 billion) for the first half of the year that ended on June 30. Jewelry retail sales fell 25% to $1.1 billion, but the group's "other" areas of business experienced a 65% drop in revenue at $144.3 million. Profit attributable to shareholders fell 15% to $67.1 million. Inventory was basically flat at $889 million.

The company stated that tourism to Hong Kong in the first half of the year had increased compared with 2013; however, this trend did not translate into higher retail sales for jewelry and watches in the region. Demand for gold products was greatly reduced, political disputes in Hong Kong and an anti-corruption drive coupled with tight credit in Mainland China contributed to sales weakness in the first six months of 2014. Chow Sang Sang stated that jewelry retail comparable-store sales fell 32% in Hong Kong and Macau, primarily due to a dramatic drop in gold sales. Same-store sales in Mainland China fell 20%, even though jewelry sales were strong, according to management. Online sales surged 40%.

Tiffany's Profit +16%

Tiffany & Co.'s revenue rose 7.2% year on year to $992.93 million in the second fiscal quarter that ended on July 31. Same-store sales increased 3%. The jeweler held cost of sales in check and noted that favorable product costs and price increases for all product categories pushed gross margin higher to 59.9% from 57.5% one year earlier. Profit rose 16.2% to $124.12 million or 96 cents per share.

The company's cash and cash equivalents and short-term investments totaled $398 million at the close of the quarter, down from $490 million in July 2013. Short-term and long-term debt totaled $1.03 billion, up from $964 million and the retailer's inventory level increased 9% to $2.5 billion.

Sales across the Americas rose 9% year on year to $484 million, with comparable-store sales increasing by 8%. In the Asia-Pacific, Tiffany & Co.'s sales increased 14% to $237 million, while same-store sales rose 7%. Consumers in Japan pulled back on spending since the government implemented a tax scheme in April and Tiffany reported that revenue and same-store sales both fell 13% in the quarter to $119 million. In Europe, total sales increased 8% to $120 million; however, same-store sales declined 8%. Tiffany & Co. observed strong sales increases in Russia and in the United Arab Emirates.

Movado's Profit -4%

Movado Group's revenue improved 3.8% year on year to $143.6 million for the second quarter that ended on July 31. Gross profit as a percentage of sales was basically flat at 54% due to an unfavorable impact of changes in foreign currency exchange rates, offset by the leverage gained on certain fixed costs due to increased sales. Operating expenses rose 4.6% to $60.4 million due largely to increased payroll and related costs and expenses associated with the Baselworld show. Profit fell 3.8 percent $12.17 million, or 47 cents per share.

Affluent Spending Hits a Bump

Unity Marketing found that the U.S. luxury retail market is experiencing a "Tale of Two Cities," with a sharp divide between spending habits of ultra-affluents and those of mass-affluent HENRYs (high-earners-not-rich yet). During the second quarter, Unity stated that luxury goods spending dropped 13.7% year on year to approximately $11 billion. Additionally, the Unity Marketing's Luxury Consumption Index (LCI) for the current third quarter did not recover a 15.9 point loss.

Unity stated that HENRYs are financially skittish, while the top 2% ultra-affluents feel more stable, but are opting for inconspicuous, as opposed to conspicuous, consumption. Across the board, affluents are worried, but their worries differ; nonetheless, this will take a toll on marketers who target the high-end and luxury sectors.

Pam Danziger, the president of Unity Marketing, said, "The mass-affluent HENRYs are watching their pennies and saving their discretionary income, rather than spending it. As a result, HENRYs are trading down to less premium brands and shopping in more mass-market oriented stores. Ultra-affluents, on the other hand, are turning to inconspicuous consumption. They are confident enough to pay premium and luxury prices, but they don't want to make a spectacle of their wealth. So, their spending is going undercover toward purchases that are private, like things for their home, or less showy, such as brands with subtle logos and markings, or to luxury purchases made online where the FedEx truck delivers the goods and nobody sees them walking down the street with a Neiman Marcus, Barney's or Bergdorf Goodman bag."

Danziger advised retailers to create different approaches and different strategies. Get a fix on the type of customer they want to sell, meet those very different and distinct needs. HENRYs want bargains and less expensive indulgences, while ultra-affluents need to stay undercover.

Malak Jewelers Opens New Showroom

Malak Jewelers opened a new 5,000-square-foot showroom at The Arboretum Shopping Center in Charlotte, North Carolina. The retailer relocated to this larger space from a more moderately-sized showroom, where it had been operating for almost two decades. The new location also provided Malak Jewelers with a larger workshop area for its in-house goldsmith and design team. The display area is quadrupled in size from the previous location to allow for more inventory and the addition of brands, according to the company.

Embee Diamonds Schedules U.S. Tour

Embee Diamonds scheduled a series of in store diamond cutting and polishing events for the Southern U.S. and Midwest, featuring master diamond cutter Mike Botha. The special tour will provide the company's clients with a firsthand view into precision diamond cutting, facet definition, light performance and some beautiful stones. The tour begins at Stanley Jewelers in North Little Rock, Arkansas on September 24 and 25, which will also include a day to dig for diamonds at Crater of Diamonds National Park. Event attendees at all of the brand's tour stops will have an opportunity to experience using the cutting wheel themselves, courtesy of Embee Diamonds' mobile polishing bench, which is named "Belle."

Embee Diamonds next visits the New Approach School for Jewelers and the AGS Tennessee Guild in Franklin, Tennessee on October 1. The following day, the team appears at J. Bacher Fine Jewelry Design in Harrisburg, Illinois and on October 3, they travel to Summa Jewelers in St. Louis, Missouri. On October 6, Embee Diamonds will continue the tour at Underwood Jewelers and at the AGS Northeast Florida Guild in Jacksonville, Florida, before closing on October 8 at Bromberg's in Birmingham, Alabama.

IDE Cancels Diamond Week

The Israel Diamond Exchange (IDE) postponed the fourth International Diamond Week that was scheduled to begin on September 1. IDE's board made the decision following the assessment of logistical difficulties caused by the ongoing conflict with Gaza, added security and insurance measures required.

SA Police Nab Dealers

South Africa police arrested 19 business leaders who were allegedly involved with illegal diamond trading. Following the arrest, eight additional suspects turned themselves in and all have since been arraigned. Authorities launched a sting operation in 2012, targeting diamond traders and believe the suspects are members of a 35-member syndicate. Suspects face charges of illegal diamond dealing, possession and sale of unpolished diamonds, tax evasion and money laundering.

GJEPC, Panyu to Boost Trade With China

India's Gem & Jewellery Export Promotion Council (GJEPC) signed a memorandum of understanding with the Guangzhou Panyu Economy & Trade Promotion Bureau of China to strengthen cooperation in economic, trade and investment deals. The GJEPC is looking to open avenues for exporting gems and jewelry to China. The agreement will create special benefits for the gems and jewelry industry of Jaipur, owing to its prominence in the colored stone and manufacturing sectors, and given China is becoming a large market for colored gemstones.

GJEPC also conducted a seminar, “Your Gateway to the China gemstones Market,” for exporters to learn about Panyu's offerings at the China Gem Centre. The vice mayor of Panyu, Chen De Jun, was present for the event and he invited the Indian exporters to visit Panyu on a sponsored trip from Hong Kong during the upcoming September jewelry fair.

ALROSA Begins Contract Screening

ALROSA will begin considering candidates for its long-term contract period, which runs from 2015 to 2017. Companies will be examined in accordance with “Regulations on the Procedure and Terms of Sales of Natural Rough Diamonds by OJSC ALROSA,” approved by the federal anti-monopoly service of the Russian Federation. Other requirements will consider prior trading activity, legal capacity, business reputation and financial stability, trade experience and solvency. ALROSA will commence signing long term agreements on rough diamonds supplies for the new contract period starting in November 2014.

Grib to Hold First Auction

LUKOIL's diamond subsidiary, Grib Diamonds NV, will conduct an invitation-only first rough diamond auction online on September 23. The company will host a viewing session in Antwerp on September 15. The diamond inventory up for sale originated from V. Grib in the Arkhangelsk region of Russia. The online tender will be a multi-split, ascending clock auction with the clearing price set by the highest losing bid.

Grib Diamonds intends to operate with maximum transparency, according to Martin Leake, the head of sales for Grib Diamonds. "In the Grib Diamonds auction model, we let the market set the price, since that creates a win-win situation for both the seller and the buyer," he said.

Kimberley Diamonds to Raise $10M

Kimberley Diamonds announced a pro-rata non-renounceable rights issue offer of new shares at 19 cents each in an effort to raise $9.9 million. The funds raised, coupled with existing capital, will be used to recommission the Lerala diamond mine in Botswana and for general operating requirements. Eligible shareholders will be able to purchase one new share for each two existing shares.

Kimberley Diamonds anticipates production from Lerala to be approximately 400,000 carats per year, increasing the company's potential rough diamond production to 700,000 carats annually. The mining company operates the Ellendale mine and Smoke Creek alluvial diamond mine in Australia as well as holds interests in the Slave and Superior Cratons projects in Northwest Territories of Canada. 

Debswana Extends Life of Mine Plan

Debswana extended the projected life span of its diamond mining operations in Botswana to 2050. The joint-venture mining firm between De Beers and Botswana stated that a longer life further strengthens the nation as a long-term, leading global diamond center. Debswana continues to support beneficiary efforts in the country and believes that Gaborone can become an international hub for diamond aggregation, marketing, polishing and cutting and jewelry production.

DiamondCorp's Loss Widens

DiamondCorp's loss rose 25% year on year to $4.6 million (GBP 2.75 million) for the six months that ended on June 30. The loss included a fair value adjustment of $2.6 million on the derivative component of convertible bonds. Cash on hand at the end of the period was almost $12.2 million. Capital expenses on the Lace diamond project totaled $7.1 million, which included underground development and infrastructure. The Lace processing plant operated on tailings during the first half, resulting in the additional recovery of 13,055 carats. The company sold 14,583 carats for proceeds of $907,308. The most valuable diamond sold was a 5.60-carat rough stone that sold for $3,250 per carat.

Diamond Industry Stock Report

U.S. shares mixed with Movado (-15%) and Signet (+10%) the largest movers, Hong Kong shares lower except ValueMax (+11%) and Europe all higher except for Damiani (-1%). Indian shares mainly lower, led by C. Mahendra (-22%) and mining shares all lower except for Kennady (+12%), Gemfields (+5%) and Stellar (+5%). View the extended stock report.

  Aug. 28 Aug. 21 Chng.  
$1 = Euro 0.759 0.753 0.006  
$1 = Rupee 60.62 60.59 0.0  
$1 = Israel Shekel 3.57 3.52 0.05  
$1 = Rand 10.64 10.71 -0.07  
$1 = Canadian Dollar 1.09 1.09 0.00  
Precious Metals        
Gold $1,289.40 $1,277.00 $12.40  
Platinum $1,419.00 $1,412.00 $7.00  
Stock Indexes       Chng.
BSE 26,638.11 26,360.11 278.00 1.1%
Dow Jones 17,079.57 17,039.49 40.08 0.2%
FTSE 6,805.80 6,777.66 28.14 0.4%
Hang Seng 24,741.00 24,994.10 -253.10 -1.0%
S&P 500 1,996.74 1,992.37 4.37 0.2%
Yahoo! Jewelry 1,002.92 986.73 16.19 1.6%

Polished and Rough Trading Activity

Polished trading is slow, sentiment leading into Hong Kong show preparations is cautious if not weak. Liquidity remains an issue and impacting trading. Read the full report.


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