Date February 2018
Approximate net recovery on cost
- Jewelry sales were up 5.9% in the combined November/December 2017 holiday season, largely driven by double-digit growth in online jewelry sales as well as last-minute sales
- In-store holiday sales were flat to mostly down, but were offset by strong online demand
- Total annual jewelry stores’ sales increased 5.2% for 2017 over 2016
- Although jewelry store closures continued in 2017, the total number of store closures was down 36% from 2016, indicating a shift toward stability for brick and mortar retailers
Holiday sales mixed: Jewelry and watch sales rose an estimated 5.5 percent in December 2017 over the same month last year, 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. However, individual results for major jewelers were mixed.
Luxury brand Tiffany & Company reported that its worldwide net sales increased 8 percent to $1.05 billion for the two-month holiday period ended December 31, 2017 due to growth across regions and product categories. Additionally, Tiffany’s global holiday comparable store sales increased 5 percent, and domestic same store sales increased 6 percent.
Signet Jewelers’ consolidated same store sales decreased 5.3 percent, on top of last year’s decline of 4.6 percent, reflecting significant declines across its major mall-based banners Kay Jewelers (-10.8) and Jared (-5.9). Offsetting the decreases, its Zale’s brand generated positive holiday sales of 4 percent, representing an increase over its 2016 trend of -3.7 percent. Creditntell noted that Signet significantly underperformed the jewelry segment for the holiday season, with credit outsourcing accounting for the majority of its same store sales decline in the bridal category. Approximately two-thirds of the company’s bridal sales are credit-based and tighter underwriting has pressured sales for that segment. The biggest positive for the season was the company’s e-commerce sales. The implementation of strategic priorities relative to the channel drove double-digit increases and e-commerce now represents 11 percent of total company sales.
On the whole there is a cautious optimism in the industry according to The Jewelers Board of trade (“JBT”). Many major retailers and suppliers posted better than expected sales for the holiday season and are using the boost to strategically position themselves for a steadier growth and profitability in 2018.
Number of store closings decrease: The Jewelers Board of Trade reported that total U.S. jewelry business listings declined on a net basis by 727 to 19,652 at the end of 2017, as compared to 1,269 closings in 2016. For 2017, 83 percent of the closures fell into the category of “ceased operations,” while 15 percent were listed as “consolidations (sale/merger)” and 2 percent were classified as “bankruptcies.”
Including wholesalers and manufacturers along with retailers, 1,022 U.S. jewelry businesses closed their doors in 2017 compared to 1,669 in 2016. The total number of jewelry businesses, including wholesalers and retailers, was 26,031 at the end of 2017 compared with 27,059 at the end of 2016.
The industry’s rate of closures underscores why it is more critical than ever for lenders to select appraisers with the ability to liquidate stores in the event of a default. The importance of understanding your appraiser’s sector-specific disposition capabilities in the current market cannot be understated.
The impact of human rights and environmental protection on supply chains: Globally, approximately 90 million carats of rough diamonds and 1,600 tons of gold are mined for jewelry every year, generating over $300 billion (U.S.) in revenue, based on reporting by the organization Human Rights Watch. Although the topics of responsible sourcing of diamonds and other precious stones, as well as concerns over the damage done to the earth and environment as a result of precious stone and metals mining have been part of the public discourse for years, there is a changing culture around how these practices are impacting retailers as a younger generation comes of age in the fine jewelry consumer market. Market research conducted by the Responsible Jewelry Council (“RJC”) and the DeBeers Group, found that a growing segment of consumers that purchase jewelry, in particular millennials aged 18 to 34, are concerned about its origins. A 2016 survey of 75,000 customers in the top markets for diamond jewelry found that 36 percent of millennials (compared to 27 percent of older singles) said that the feature of diamond rings they were “least likely to compromise on” was responsible sourcing. This is especially important as this consumer demographic enters the workforce and begins purchasing engagement rings and other fine jewelry items. As a reference point, in 2015 millennials purchased $26 billion (U.S.) in diamond jewelry in the top four markets for diamond jewelry on a combined basis (U.S., China, India, and Japan), which accounted for 45 percent of the diamond jewelry sales in those countries.
What can companies do to address this concern and educate their customers on their own responsible sourcing practices? Human Rights Watch lists the following protocols that companies can adopt to proactively manage how their product is produced and sourced:
- Adopt and implement a robust supply chain policy based on international human rights and humanitarian law, international labor standards and the Organization for Economic Co-operation and Development (“OECD”) Due Diligence Guidance that is incorporated into all contracts with suppliers;
- Show chain of custody for gold and diamonds, including efforts to trace these minerals to their mines of origin by requiring full supply chain documentation from suppliers;
- Complete assessment of all human rights risks throughout the supply chain, including evidence of human rights due diligence by upstream suppliers such as on-the-ground mine assessments;
- Take concrete steps to mitigate identified human rights risks, including by severing contracts with non-compliant suppliers;
- Conduct third-party audits of the company’s and its suppliers’ human rights due diligence by auditors qualified to assess human rights issues;
- Provide annual public reporting on company human rights due diligence, including steps to manage and mitigate risks; and
- Publish the names of gold and diamond suppliers on an annual basis.
As compliance with international standards for responsible sourcing and production of fine jewelry continues to gain momentum with consumers, it may become something that every jewelry manufacturer, wholesaler, and retailer must address in order to build customer loyalty with the upcoming generation.
Jewelry sell-through assumptions impact gross recovery value: For liquidations in the jewelry sector, it is assumed that a percentage of the retail inventory would be sold through wholesale channels in a going-out-of-business (“GOB”) event. For all jewelry appraisals, Gordon Brothers assumes a portion of the inventory would be sold to consumers via the retail stores with the balance sold through wholesale channels concurrent with the retail sale term. Separate gross recoveries and sell-through percentages are assigned to each category of inventory, with a blended recovery value, representing a consolidation of both the wholesale and retail portions, calculated on a departmental level. Typically, the portion assumed to be sold through wholesale channels would not exceed 5 percent of the total retail inventory; however, this percentage can be higher if sales capacity is constrained by high inventory levels (especially in non-peak periods) and/or if lowering recovering categories, including those assumed to be “melt” or “scrap,” comprise a larger portion of the total inventory. For traditional jewelry retailers, lower demand categories that could be expected to sell through wholesale channels include semi-mounts, loose melee diamonds, loose colored stores, wedding bands, remounts, and watch straps and supplies.
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.