On the economic front there were several key trends which emerged from the JCK Show Las Vegas:
Fewer buyers showed up this year; many of them left their checkbooks at home. Pre-registrations were down for the Vegas Show, which still ranks as the largest jewelry show in the U.S. First-day, on-site registrations picked up from last year, but registrations on subsequent days confirmed that many jewelry buyers stayed home. Many of those who shopped the show ap-pear to be delaying their final holiday season orders for the late-July New York Show. The Couture and Luxury shows for high-end jewelers, both of which occur just prior to the Las Vegas show, experienced soft sales and weak attendance.
High-end demand sluggish, low-end demand relatively stable. Reflecting trends which began late last year, first quarter jewelry demand from higher income consumers has generally been weaker versus their lower-income counterparts. Earlier research has determined that the volatile stock market has more of an impact on consumer spending for big ticket durables than any other factor. Thus, with the stock market still trying to achieve stability, stock-owning higher income consumers have tightened their purse strings more than their non-stock-owning lower-income cousins. The low-income consumer is in a perpetual recession and has continued to spend despite a weaker economy.
Gold jewelry demand stronger; diamond demand weaker. Jewelry demand continues to move from “white” (diamonds, platinum, white gold, sterling silver) more toward “color” (gold, colored gemstones); a trend that began last year. Retail margins tend to be greater for gold jewelry and colored gemstones; thus, this shift in sales mix has been one factor that has helped boost merchants’ margins this year. Even though gold and semi-precious stone jewelry is often less expensive than diamond and platinum merchandise, retail jewelers have been able to maintain their average ticket about flat, year-over-year.
Jewelry retailers and suppliers “cautiously optimistic” about holiday selling season. Most retailers and suppliers indicated that they felt the economy would get better later this year. Almost universally, they noted that March and early April were their worst periods, and that late April and May had shown some encouraging signs. Investors should keep in mind that all retail merchants — especially jewelry merchants — are eternal optimists; after all, it is a requirement of the business.
Earnings forecasts for the publicly-held companies are back-end loaded. While many of the publicly-held mass market jewelers are guiding Wall Street analysts toward disappointing earnings comparisons this year, sharp profit declines (or large losses) in the first quarter confirm that earnings for the all-important fourth quarter will need to show robust gains, if full year Wall Street projections are to be met.
Talk of the Show . . .
“When are sales going to pick up?” Retailing is only for optimists; thus, it was no surprise that most of the retailers and vendors in Las Vegas described themselves as “cautiously optimistic.” On the other hand, there are signs that a base may be forming from which sales strength could emanate later this year. But no one could offer any real quantitative data to confirm this trend. Retail is all about art and fashion; thus, we tend to trust jewelers’ intuitive sense about the market. Only one publicly held jeweler reports monthly sales — Reeds Jewelers — and their recent sales trends have shown some improvement (the sales decline was smaller).
Mother’s Day demand was weak. Virtually all of the publicly held mass market jewelers reported disappointing Mother’s Day sales. Most of these jewelers reported a decline in same-store sales. Mother’s Day is the second largest sales event of the year, after the Christmas/holiday period.
Buyers at the Las Vegas Show generally kept their purse strings tight. Most vendors reported soft sales in Las Vegas. Even Gordon Bros., the jewelry closeout specialist, had a thinner crowd than normal. Vendors handed out fewer “freebies,” and it seems that less money was being spent on entertainment. It was far too easy to get a reservation in a restaurant in Las Vegas during this year’s show.
Buyers are waiting until the last possible minute to place holiday 2001 orders. Because of uncertainty about the timing of the economic turn-around, most buyers placed as few orders as possible in Las Vegas. It seems that those buyers are waiting until the New York Jewelry Show in late July. Because much jewelry comes from overseas, this would be the last realistic date to order for the upcoming 2001 holiday selling season.
Jewelry merchandise returns have finally abated. After a weak 2000 holiday selling season, many retailers returned a substantial quantity of merchandise to vendors. However, most of those returns were completed before the end of the first fiscal quarter (ending April for most jewelers). One company which did not need to return a large quantity of goods was Sterling Jewelers, the American subsidiary of Signet Group. Sterling had about $20 million in excess merchandise at the end of the Christmas selling period, but management was able to sell most of this merchandise at a full margin in the first quarter. Sterling has highly sophisticated product management systems; thus, it was able to internally manage its way out of an over-stocked position.
Vendors showed few new products at the Las Vegas Show. When times are tough and orders are sparse, vendors often cut back on new product introductions. It is arguable that this strategy helps preserve valuable capital. Others would argue that new product introduc-tions should accelerate, giving retailers and consumers “something new” which will drive store traffic and sales. The dearth of new merchandise at the Las Vegas show was evident, and likely was a contributor to the weak order rate.
Inventory levels remain high throughout the jewelry distribution chain. Despite a high level of product returns in the first quarter, many retailers and suppliers complained that their inventory levels remain too high, especially in view of the current slow sell-through at retail. Suppliers are over-inventoried as a result of heavy merchandise returns in the first quarter; retailers remain over-inventoried as a result of suppliers who refused to take back additional merchandise.
De Beers and its “Supplier of Choice” continue to create a buzz. Rumors abound about De Beers’ recent privatization and the future of its “Supplier of Choice” program. People at the show asked repeatedly, “What is De Beers’ real motive behind going private?” Others were worried about the future of its sightholder scheme. Finally, retailers continue to believe that the De Beers/LVMH retail partnership will result in loss of market share and lack of availability of high quality diamonds. The quick answers to these issues are as follows: First, De Beers does not need Wall Street capital; further, because of the major changes it is likely to undergo over the next few years, public scrutiny could be restrictive. Second, De Beers has said that it will cut back on the number of sightholders so that the company can work with those who offer the most long-term potential. This process has been delayed from its planned implementation this month, but it is expected to be executed later this year. Third, the De Beers/LVMH plan to open retail stores will ultimately increase the size of the jewelry market and is likely to raise its profile further with consumers. De Beers cannot afford to antagonize its sightholders or their customers, especially in an industry which is experiencing heightened competition; thus, it is unlikely the company will reserve the “best” diamonds for its own use.
Vendors at the Las Vegas Jewelry Show were aggressive. Vendors were buttonholing buyers in the aisles, asking them to come to their booths to see new merchandise. In a couple of cases, where vendors physically grab a buyer’s hand and lead him to their store.
Oh where have the dot.coms gone? Last year’s Las Vegas Show was abuzz with news of the latest jewelry dot.com companies. Many jewelry dot.com start-ups rented fancy hotel suites, held press conferences, and made presentations to show attendees. This year, there were a few — a very few — dot.com companies in attendance. The lack of dot.com presence was most likely related to two factors: 1) the lack of success (i.e. profitability) of any of the pure jewelry dot.coms (or the lack of success of any of the hybrid jewelry retailing dot.coms, for that matter); and 2) the lack of Wall Street capital to continue to fund dot.com operating losses.
Branded diamonds are beginning to show up. With De Beers embarking on its Supplier of Choice strategy, downstream diamontaires are expected to develop value-added programs for diamonds, including diamond branding. As a result, several new diamond brands were displayed at the Las Vegas show, virtually all of which enjoyed successful introductions. For example, Fabrikant’s Asscher cut apparently sold out. Glenn Rothman’s Hearts-On-Fire brand continues to gain market share.
Canadian diamonds were well represented. Along with the Canadian Jewelry Association, the government of the Northwest Territories had a booth at the Las Vegas Show. Canadian diamonds are currently flowing into the market from the Ekati mine, with Snap Lake and Diavik slated to come into production in the future. Canada is attempting to differentiate its diamonds, either through branding or by a “source-mark” so that retail buyers can be assured that they are not purchasing so-called “conflict diamonds.” Conflict diamonds are from war-torn countries including Sierra Leone, Angola, and Congo; proceeds from the sale of these diamonds (estimated at less than 4% of all diamonds sold in the world) are alleged to be financing groups which are engaged in human rights atrocities.
Jewelers remained concerned about “conflict diamonds.” Despite a high level of prime-time television exposure, research shows that most U.S. consumers are unaware of conflict diamonds. None-the-less, the jewelry industry is highly sensitive to conflict diamonds. If there is enough negative publicity, it is possible that diamond demand could dry up, perhaps similar to demand for fur and ivory. The good news is that the Jewelers of America (JA), led by its chief executive, Matt Runci, has helped formulate a bill to be introduced into Congress that will help protect both the jewelry industry and consumers from the possibility of buying or selling “conflict diamonds.”
The rising gold lease rate does not appear to be worrisome. Neither the retailers nor the jewelry suppliers who utilize gold leasing appear to be worried about the recent rise in the gold lease rate. Since the beginning of the year, the gold lease rate has nearly doubled to around 2 percent. While this is still well below the rate for borrowing money from a bank, it has a negative impact on jewelers’ operating margins. The reason for the rise in the gold lease rate relates to central banks that have recently restricted their lending policies. Whitehall Jewellers, Finlay Enterprises and Michael Anthony are the primary public companies which util-ize gold leasing. OroAmerica, which is being acquired by Aurafin, also uses gold leasing, as does Piercing Pagoda, which was recently acquired by Zale. Gold leasing is a cheap method to borrow capital.
Jewelers’ profits are back-end loaded. As the graph above illustrates, jewelry earnings are skewed toward the fourth calendar quarter. Thus, if the economy does not cooperate, earnings forecasts are likely to be