Why Discount Jewelers May Recover First

When consumers cut back on discretionary spending, jewelry is one of the first things to go. The pressure is on for both high end jewelry retailers like Tiffany & Co. (TIF) as well as on discounters or value retailers like Zales Corp. (ZLC).

The problems they face, however, are not the same. It might well be that the discount chain has a quicker chance of recovery than Tiffany’s. The luxury retailer is more dependent upon wealthy Wall St. workers and foreign nationals, both of whom have taken a big hit recently.

In Tiffany’s FQ407 (March 2008) NY sales accounted for a high percentage of overall sales:

As a percent of sales, the New York store increased to 20% of U.S. retail sales in 2007 versus 19% in 2006, and the New York flagship store sales approached $300 million in 2007, with sales productivity topping a record $7,000 per gross square foot.

On Tiffany’s FQ308 conference call it seems Wall Street job cuts and dwindling bonuses for financial workers curtailed NYC sales:

Sales in the New York flagship store declined 5% in the quarter and its low point was in October when sales in that store declined 17%. Total sales in the entire nine store New York region declined 6% in the quarter which includes the Wall Street store.

Our price stratification analysis showed weakness in sales and transactions across the board at most price levels with no meaningful differences.

There is still plenty of sales activity occurring at high price points… While the year-over-year comparison is down there are most assuredly still a significant number of high end purchases.

The designer jewelry category was down in the quarter with pronounced softness in the U.S.

U.S. sales in November to date have softened further from the decline we saw in October. So we are forecasting conservatively. In our judgment for the fourth quarter by expecting U.S. comp store sales to decline 25-35% which will be up against a 1% comp decline in last year’s fourth quarter.

Foreign buyers and locations:

From Tiffany’s FQ407:

Tiffany continued to benefit from higher sales to foreign tourists in 2007, especially Europeans visiting our New York store, as well as our branch stores in Orlando, Las Vegas, and San Francisco, along with customers from Japan visiting our stores in Hawaii.

Our international retail sales increased 21% in the fourth quarter due to very strong growth in the Asia-Pacific region outside Japan and solid growth in our stores in Europe, Canada, and Latin America.

For the full year, international retail sales represented 41% of Tiffany's worldwide net sales… Internationally, we expect to open approximately 20 locations this year.

A different tune on Tiffany’s FQ308:

Comps in Japan began the quarter with a modest increase but then turned down in September and October.

We are taking a conservative position by forecasting relatively challenging conditions to one degree or another in Europe and Asia Pacific… We are looking for worldwide sales to decline 13-20% in the fourth quarter.

We have decided to slow the rate of growth and the number of locations from the longer term 8-10% annual rate to approximately 5-6% in 2009.

Zale’s Corp. FQ109 conference call:

Q: We are seeing a lot of going out of business… liquidations. Could you part out store performance where they are going up against those types of store closures?

A: There is not a meaningful change in that either positive or negative. I think there is market share to be gained over time and we look forward to that. I think there is a promotional aspect they add but I think again on a lot of the key products would you wish to buy an engagement or wedding ring and then not be able to take it back and say I got this for you dear and I hope you like it because we can’t take it back?

Zales stores are mainly mall-based. As mall landlords stuggle, they benefit from better terms:

Our rents are certainly reflecting the competitiveness and nature of the environment so yes. A lot of those savings will be realized in future deals because renewals are done in advance. We are definitely seeing as the year has rolled out a different stance with negotiations with our landlords and we have the ability because there aren’t as many people who are going to take corner locations so we have the ability of when we re-negotiate to be much more aggressive and our expectation is leases should be going down significantly.

Diamonds:

With demand decreasing it is reasonable to expect further declines especially in the diamond market as we move into the back end of the year. Obviously we will be very cautious with our inventory purchases given the current uncertainty. We will take advantage of all opportunities to lower cost.

Comments

[fatcat:]

The high price of gold will continue to put great pressure on sales and margins for all jewelers.Many small ops will close...

2008 Nov 28 09:20 AM