summary-date February 2017
Approximate net recovery on cost
- Following another year of heavy consolidation, store closures and discontinuances continued to rise in 2016
- Preliminary holiday sales of jewelry and watches rose modestly
- Increasingly, lenders are inquiring about ecommerce channels as a growing number of jewelry retailers consider adding the platform to their websites
Holiday sales up overall: Jewelry and watch sales rose an estimated 5.5 percent in December over the same month in 2015, according to preliminary data from the U.S. Department of Commerce. It was the fourth consecutive month in which year-over-year growth exceeded five percent. Individual results for major jewelers remained mixed.
Industry icon Tiffany & Company’s comparisons for the November/December holiday period fell four percent in the Americas. Its New York City flagship store reported the largest decline, which was impacted by increased traffic and security at the neighboring Trump Tower. This follows three quarters of lower comparable store sales performance in the Americas. Amidst concerns over the company’s financial performance, Tiffany’s CEO, Frederic Cumenal, stepped down shortly after the announcement. This was the latest in a series of high-level departures including the company’s CFO and design director, who also departed during the past year.
Signet Jewelers, the world’s largest retailer of diamonds, headquartered in Akron, said its sales during the all-important holiday retail season were down 4.6 percent for the nine weeks ending December 31, 2016. The company’s newly revamped ecommerce platform could not handle holiday traffic, CEO Mark Light said in a news release. Signet, which operates Kay Jewelers, Jared the Galleria of Jewelry, and Zales, among other jewelry stores, said it was maintaining the low-end of its earnings guidance.
Internet growth a bright spot: A bright spot among many retailers is ecommerce. Signet Jewelers noted its holiday performance was boosted by its web sales, which were up double-digits compared to in-store sales, which were down mid-single-digits. This was despite issues the site had with handling higher holiday volume.
Traditional retailers have been both helped and hurt by the growth in ecommerce and the emergence of online-only retailers such as Blue Nile, which alone has carved nearly $500 million out of the market. While some market share has been lost to these newer players, they have also helped to widen the channel, increasing expansion opportunities for all. In February 2017, an investor group led by Bain Capital announced it was taking Blue Nile private. Ryan Cotton, managing director at Bain Capital Private Equity, said, “This is an opportunity to acquire a true disruptor in a fundamentally attractive and growing segment of the diamond industry […] We believe the company will continue to grow as educated consumers continue to seek easy and convenient shopping experiences that deliver transparent pricing and enhanced value.”
As a growing number of retailers begin selling online, lenders should talk to their appraiser about whether it’s appropriate to add an ecommerce analysis to inventory valuations.
Number of store closings jump: The Jewelers Board of Trade (“JBT”) reports that North America total listings declined by 1,761 to 27,950 at the end of 2016, a drop of 6 percent. Retail establishments fell the least, with a 5.5 percent decline, while manufacturers declined the most, falling 8.3 percent. While many of these closures were business discontinuances as opposed to insolvencies, cutbacks in discretionary spending along with shifts in consumer preferences towards electronics and experiences have hampered jewelry and watch sales in recent years.
The heightened rate of closures underscores why it’s more critical than ever for lenders to select appraisers with the ability to liquidate stores in the event of a default. In 2016, hit by a weak Canadian dollar and a soft economy in Western Canada, jeweler Ben Moss obtained court protection under the Companies’ Creditors Arrangement Act (“CCAA”). Gordon Brothers, as part of a joint venture, conducted store closing sales across 54 locations.
Branding and its impact on value: Brand names like Tiffany & Co., Harry Winston, and Cartier are synonymous with luxury and quality and have achieved iconic status in the jewelry industry. For many consumers, a brand name defines the value of their jewelry as much as the precious materials used to make it. Branded items already account for 60 percent of sales in the watch market. While branded jewelry accounts for approximately 20 percent of the overall jewelry market today, its share has doubled since 2003 and is expected to continue to grow. Consulting group McKinsey & Company notes that, in the past, most of the growth in branded jewelry came from the expansion of established jewelry brands, such as Cartier and Tiffany & Co., as well as new entrants such as Pandora and David Yurman. By contrast, future growth in branded jewelry is likely to come from non-jewelry players in adjacent categories such as high-end apparel or leather goods - companies like Dior, Hermès, and Louis Vuitton - introducing jewelry collections or expanding their assortment.
Brand names can have a substantial impact on the recovery values achieved in a liquidation event. Names like Rolex, Tag Heuer, Brietling, Patek Phillipe, David Yurman, Cartier, and others present the opportunity to achieve a high recovery on retail; in some cases, minimal discounting would be required to sell through this product. The caveat to clients lending on these exclusive assets is to ensure that all branded product would be available for sale in a liquidation and that significant branded product is not encumbered by additional liens or vendor sales restrictions that may kick in under a distressed asset sale or bankruptcy scenario. Timely appraisals that take into consideration the variability of the Net Orderly Liquidation Value with and without proprietary product can provide clarity to lenders with luxury jewelers, and brands, in their portfolios.