Rapaport Magazine

Christopher Ellis on Reality of Economic Recovery

Rapaport International Diamond Conference 2009

By Margo DeAngelo
RAPAPORT... "There’s so much noise out there about pending and imminent recovery and a lot of it is just noise,” declared Christopher Ellis, managing member and president of the Boston-based Consensus Advisors, at the 2009 Rapaport International Diamond Conference (IDC).

Ellis, who has worked on bankruptcies with clients such as L.I.D., the receiver of the Colibri Group and the creditors’ committees in the Fabrikant and Shane filings, reported that U.S. household net worth dropped 18 percent in 2008 to the tune of $11 trillion. That’s the same amount as the annual output of the U.K., Germany and Japan combined, he explained.

“The models that we’ve all built — consumer activity patterns over the last half dozen years that we are still using to look forward — are probably not applicable,” Ellis pointed out. The reduction in use of consumer credit is greater than it’s been since the 1970s and its pace is accelerating, he said.

In the past 25 to 30 years, specialty jewelers, having previously sold about three quarters of the jewelry to U.S. retail consumers, are now selling less than half. The rest of it is sold by mass merchants and on the internet. Despite this fact, sales volumes in specialty are still better than they were in 2004, according to Ellis. “If people’s net worth is back to 2004 levels, then maybe we’re just in a flashback relationship. And there are fewer stores. So people should be able to make money if they can figure out their balance sheets,” Ellis reasoned.  

“Lenders are exiting the industry in droves,” Ellis noted, which exacerbates reliance on memo. “For retailers, it’s like crack. It’s addictive. It’s harmful.

Everybody knows it’s bad, but people carry on doing it.”

Consensus is putting the finishing touches on a system it calls Retailer Health Ratings (RHRs), designed to gauge the overall health of retail businesses.

Dismissing what he calls an “overreliance on comparable store sales,” Ellis explained the RHR’s measure of asset utilization, which reveals how often inventory turns. “Perhaps not surprisingly, you’ve got a very healthy showing from Blue Nile,” Ellis stated. Occupying the bottom rungs of the scale were Tiffany and Zale. But Blue Nile didn’t rate highly on “pricing power.”

Ellis recognized that a number of deals are being made that involve vendors investing downstream into retailers. Citing “all types of synergistic benefits,” he remarked, “That’s something that we’re very keen on.”

When asked if there will be more bankruptcies among jewelers, Ellis responded, “I think it’s tailing off, largely because everybody’s been well enough educated now that they know bankruptcy doesn’t necessarily favor them.” Consensus is helping some clients avoid bankruptcy. “We’re doing a sort of reorganization, but without spending the hundreds of thousands or millions of dollars actually going through the court system.”

However, Ellis does see more bankruptcies looming. “I think January will be an interesting time. There are a lot of people who are doubling down on Christmas and that’s what I’m fearful of.” He urged independent retailers to clean up their balance sheets, plan for sales levels below 2008, stop thinking about inventory as a store of wealth and streamline and spice up offerings.

Article from the Rapaport Magazine - October 2009. To subscribe click here.

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