Israeli Diamond Portal :Depressed Holiday Roundup Combines with Cautious Optimism for the Future

Feb. 1, 2009 - PRLog -- As this year came to a close, United States retail data are emerging which paint a picture of some of the lowest Holiday results in 40 years.  Even after Christmas, many retailers continued to discount items, in the hopes of encouraging even a small amount of additional turnover.  

Retail jewelry sector seriously weakened

The effects of events in the USA took some time to be felt in the retail jewelry sector as it pertains to Holiday Shopping.  Towards the end of the year, large jewelry and chain stores introduced dramatic discounting throughout November and December 2008.  This did not help profits, and sales volumes showed an overall estimated 35% decrease over the previous year.  Some 80% of retailers reported an expected decline in sales.

SpendingPulse (an analysis division of Mastercard) reported sharp discounting in the weekend following Christmas, which aimed to entice customers into stores as part of a last-ditch effort to bump up their 2008 sales-turnover numbers.  As the holiday this year was followed by a Friday, many renamed December 26th to be “Black Friday 2” due to the discounts used to lure shoppers.

Higher levels of discounting was viewed with skepticism, as some have considered this to be akin to “eating soup with a fork – you eat and eat but are never satisfied”.  Late-December and early-January price-cuts were introduced to prevent retailers’ inventories from climbing, but this served to negatively impact those retailers’ profit margins.  In an effort to report higher sales (or, more precisely, to report a lower drop-in-sales), retailers have been offering jewelry and other items at such high discounts as to exclude any profit.  In some cases, items were even sold at a loss (to “clear” inventory or to encourage foot-traffic).  

This unhealthy custom may address some of the short-term cash-flow problems of an unexpected decline in retail spending, but more importantly it creates more serious repercussions for the longer-term profitability of these businesses.  Some reports have been that retailers are already beginning to reduce prices on spring merchandise the moment it hits the shelves, forced by street consumers having grown accustomed to not paying full price.

On the wholesale and manufacturing level, companies are dealing with another unfortunate byproduct of the US recession – namely cash-strapped customers, late payments, partial returns (in lieu of payments) and even bankruptcies.  

Bankruptcy threat looms

Several jewelry and diamond companies, as well as retail stores and chains have declared bankruptcy in the latter-half of 2008, including (but not limited to):  Whitehall, Downey Creations, Dunkin’s Diamonds, Christian Bernard and Shane & Co.

Sources among major diamond suppliers and also national jewelry brands explain that it is still too soon to know the actual effects of the recent Holiday period – as retailers have not yet reported their sales to the suppliers.  One well-known jewelry manufacturer noted that select retail chains are not due to send their returns (i.e. memos sent back to their jewelry supplier) until February 15th, and thus they do not yet have any confirmed data on how well their brand sold this season, nor at what precise discount levels.

An additional problem caused by goods being returned and/or the lack of confirmed sales data is the fact that banks provide higher financing for receivables than for inventory.  In other words, when diamond / jewelry sales are made (to chain-stores and independent retailers), the supplier of these goods is given financing from their banks’ line of credit – more than if those goods were still sitting in their safe’s inventory.  Once a retailer returns some of those goods (which were initially invoiced), the lending bank no longer considers this to be a “receivable” and the supplier’s available line-of-credit is immediately reduced – leading to financing problems.  Indeed, many banks are doing away with inventory-based financing.

This fiscal uncertainty is leading to much speculation on the market with regards to emerging retail data figures and the financial stability of several companies.  Media reports point to the tightening lending terms of GE Capital, CIT Group and Wachovia, which are among the largest lenders to the retail industry.  These companies have embarked on plans to reduce their exposure to retailers, leading many to cash-flow shortages and an increase in filings of Chapter 7 (liquidation) as opposed to Chapter 11 (reorganization) – since companies are unable to procure capital necessary to reorganize and emerge from bankruptcy.  

A general-retail example of this is the electronic chain Circuit City, which has been in Chapter 11 protection since November 2008, but has now warned that it may be forced to convert to Chapter 7 (i.e. to liquidate and close down completely) due to their inability to raise needed capital to fund their reorganization plans.  

Some of the players in the jewelry sector are backed by other private equity firms, which have called their funding into question recently.  An example of this is the Chapter 11 Bankruptcy declared by Shane & Co. (Western Stone & Metal) which was forced by a sudden $15m pull of funding (sources say that there may well be alternative arrangements which will be finalized to replace this equity and restructure the company, thereby staving-off its demise).

In accordance with these trends, the jewelry retailer Finlay’s (operator of the Bailey Banks & Biddle chain) has been rated by Standard & Poors as “CCC”, which equates to junk-bond status.  This has let the media to speculate that they may be “at significant risk of default”; a worry echoed by others in the industry.  In a letter sent to vendors this week, Ultra Diamonds has announced to its suppliers that they are currently “suspending payments to our vendor partners on asset purchases for the time being” in accordance with Ultra’s bank instructions.

Credit crunch felt
The new economic reality has produced a trend for diamond manufacturers and wholesalers to seek “C.O.D.” terms from their customers, and for those customers to encourage the same terms down the pipeline.  There is hope that, given time, the accepted customers’ payment-terms will tighten – reversing the creeping trend of recent years in which the diamond industry provided interest-free financing for its customers, exposing itself to unnecessary financial risks.

The general sentiment is one of cautious optimism in the diamond and jewelry industry, with US economic conditions expected to improve in the next year.  It is hoped that the shakeup within the industry will create more favorable long-term positioning for the sustainability of the market – with new emerging trends in credit-terms, retail margins, and efficiency improvements emerging as the silver-lining in the recent cloud.






By: Steven Silverstein, CEO IDI New York

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