Retail Bulletin

October 2006

By Rapaport

RAPAPORT... Zale’s Income Slides On Noncash Items

Zale Corporation reported a net loss of $26.45 million for the fourth quarter of its fiscal 2006, down from a $4 million profit for the corresponding period ended July 31, 2005. Based on the same quarterly comparison, group revenues increased 3.9 percent to $490.7 million. The loss included mostly noncash after-tax charges totaling $23.9 million, consisting primarily of an inventory writedown of $16.8 million for its Zales and Bailey Banks & Biddle businesses, plus $3.3 million related to the termination of an information technology initiative, and a $2.9 million asset impairment charge related to certain test stores.

For the full 2006 fiscal year (FY), Zale’s earnings fell 49 percent versus the previous FY to $54.5 million, while total sales rose 2.3 percent to $2.43 billion and same-store sales rose by 1.6 percent. Zale expects to achieve total sales growth of between 3 and 5 percent in the current FY ending July 31, 2007, and comparable store sales growth of 2 to 3 percent.

Meantime, Zale advised the market late last month that the United States Securities and Exchange Commission (SEC) had dropped the investigation into the company with no enforcement action being recommended. Zale announced in April this year that the SEC was looking into various accounting and other matters relating to extended service agreements, leases, accrued payroll, executive compensation and severance, earnings guidance, stock trading, and the timing of certain vendor payments.

Tiffany Profit Lower

Although Tiffany & Co.’s net sales grew 9.2 percent to $574.9 million in the second quarter of its fiscal 2006 compared with the corresponding three months a year ago, its earnings for the period slumped 18.6 percent to $41.14 million. The group’s worldwide same-store sales performance for the quarter ended July 31, 2006, improved 6 percent, with the United States registering a 5 percent lift, Europe a 20 percent increase, and Japan a 3 percent drop.

For the six months ended July 31, 2006, the luxury retailer’s sales reached $1.11 billion, 7.4 percent better than the previous corresponding half-year result, but its profit was 7 percent lower at $84.29 million.Same-store sales for the first half were up 4 percent worldwide, 5 percent in the U.S. and 17 percent in Europe, and eased 1 percent in Japan.

Net inventories were 16 percent higher than they were as of July 31, 2005, which reflected inventories purchased or manufactured in anticipation of new store openings and expanded product assortments, higher precious metal costs and expanded internal manufacturing and diamond sourcing.

“We anticipated these first half results due to above-average expense growth,” said Michael Kowalski, the company’s chairman and chief executive officer. “Our ongoing plans for store openings and new product introductions sustain our confidence in Tiffany’s ability to achieve higher rates of growth over the long-term.”

Tyringham Files For Chapter 11

Tyringham Holdings Inc., the parent company of Boston jeweler Shreve, Crump & Low, has blamed high remodeling costs and its relocation for a decline in business that forced it to file Chapter 11 on September 6. Tyringham also owns the Schwarzschild Jewelers chain in the state of Virginia, which consists of three store locations in the Richmond area.

Prior to the Christmas 2005 season, Tyringham invested more than $7 million to relocate and remodel one of two Shreve brand stores. Tyringham’s 2005 revenue totaled $31 million and net losses came in at $9 million, according to court papers. Court documents list the group’s assets at $24.8 million and liabilities at $24.3 million.

The company has been soliciting bids for both chains and to that end allowed four companies to conduct due diligence in 2006. Tyringham reported that it has signed “a pact” with Carlyle & Co. Jewelers of North Carolina following a $9.8 million proposal to buy out only the Schwarzschild chain.

Harry Winston Earnings Dive

Luxury retailer Harry Winston Inc.’s sales rose 7.9 percent to $48.49 million in the second quarter of its current fiscal year, however, the company’s cost of sales jumped 8.1 to $25.3 million and earnings from operations slumped by 83 percent to $486,000.

Aber Diamond Corporation had until recently held a 52.83 percent stake in Harry Winston, which has 12 boutiques worldwide, but just entered into an agreement to purchase the remaining interest for $157 million (see cover story).

Harry Winston’s gross margin for the quarter was negatively impacted by the sale of certain inventory that was on hand at the date of Aber’s acquisition of the Harry Winston controlling stake (April 1, 2004) and was sold at a lower margin than normal.

In addition, selling, general and administrative expenses swelled 22 percent to $22.8 million in the second quarter versus the comparable quarter of last year, the main components of the increase being salaries and benefits of $1.5 million, advertising and selling expenses of $1.0 million, and rent- and building-related expenses of $800,000, with all increases related primarily to the opening of additional salons.

Birks & Mayors Boosts Sales

Luxury jeweler Birks & Mayors Inc., based in Montreal, Canada, achieved sales that were 22 percent higher at $68.6 million for the first quarter of its current fiscal year (FY). The FY will comprise 53 weeks since the first quarter ran for a period of 14 weeks. Excluding the extra week, revenue improved 14 percent.

Same-store sales rose 10 percent in Canada and 9 percent in the United States, and Canada’s stronger currency against the dollar helped add $2.7 million to group revenue. The company delivered a loss of $913,000 for the quarter. Percentage comparisons are with the 13-week quarter ended July 31, 2005.

Abazias Expects Strong Finish To 2006

Preliminary numbers for year-to-date sales by Abazias Diamonds show that the Florida-headquartered, publicly traded online diamond retailer has already exceeded the 12-month total for last year. Sales through September 24, 2006, had reached about $3.1 million, Abazias advised, compared with the full-year result in 2005 of $3.05 million.

Abazias registered a solid fourth-quarter increase in 2005, so the company is gearing up for a similar or better outcome for the holiday season. “Conservatively speaking, we still have a portion of the third and all of the fourth quarter left, and we expect to exceed last year’s holiday sales, which in the jewelry industry count for approximately 40 percent of the annual sales figures,” said Oscar Rodriguez, the company’s chief executive officer.

LVMH Jewelry Unit Profit Leaps

Paris-based luxury retail group LVMH Moët Hennessy Louis Vuitton reported its revenue for the first half of its fiscal 2006 grew 13 percent to $8.8 billion and net income lifted 46 percent to $1.03 billion. The operating profit of LVMH’s watches and jewelry business division soared 164 percent to $46.9 million.

TAG Heuer had strong growth during the period, with the brand’s Carrera, Link and Aquaracer lines highlighting its move towards the high end of the market and and helping to make gains in market share. In addition, Zenith generated good momentum with the launch of Class Open, the Christal line produced positive results for Montres Dior, and Chaumet continued to have success with the automatic watch Dandy.

Jewelry Stock Index

Company	9/27/06	8/22/06	% Change
Blue Nile	36.77	34.64	6%
Finlay Enterprises	6.97	7.40	-6%
House of Taylor Jewelry	1.90	2.00	-5%
Lazare Kaplan Intl.	9.80	8.60	14%
Signet Group	21.16	21.77	-3%
Tiffany & Company	33.36	32.33	3%
Zale	28.39	27.06	5%