Jewelry Industry Outlook: The View From Wall Street

The jewelry industry had a banner year in 1999, with most major retailers posting high single-digit or double-digit same store sales gains. Small independents also did extremely well. According to a JCK poll, 74% of independents had their best December ever, with sales up 15% over December 1998 results. The entire year was record-shattering for many large and small retailers.

The outlook is positive for 2000 as well—though there are some significant hurdles to jump, such as increased competition, continued consolidation, a shortage of good salespeople, and the tight labor market in general.

What’s Wall Street’s perspective? To find out, JCK spoke with one of the few stock analysts who follow the jewelry industry, Ken Gassman Jr., senior vice president and jewelry/retail analyst with Davenport & Co. in Richmond, Va. In an exclusive interview, Gassman discussed the industry’s performance and prospects.

JCK: What does Wall Street think of the jewelry industry?

Ken Gassman: The stock market treated the jewelry industry very well last year, with Tiffany leading the pack. If you had invested an equal amount in every publicly held jewelry retailer at the beginning of 1999, you would have made a 29% return.

But, along with most consumer stocks (food, auto, retail, etc.), jewelry stocks fell during the first quarter of this year. That was shortsighted. Knowing that retail is so dependent on fourth-quarter holiday sales, some investors routinely pull out of retail and jewelry stocks around every January. Portfolio managers tell me: “I don’t need to be in this stock until Christmas.” They don’t understand that Valentine’s Day and Mother’s Day are also major sales events.

JCK: Which public jewelry companies are you bullish on?

Gassman: From an investment viewpoint, Zale and Whitehall top our list (see p. 200). Friedman’s is also in a mode to show significant growth. Tiffany is an outstanding company, but its stock is expensive. Sterling is a good operation, but as a U.S. investor, you can’t buy its stock on a pure basis. You have to buy its corporate parent, Signet, which is based in London but whose stock trades on the NASDAQ.

JCK: What are the factors driving the industry’s success?

Gassman: Holiday sales were very strong, and trendwise, the business is being driven by the strength of the “white” look, including diamonds, platinum, white gold, silver, and pearls. Consumers are also buying bigger diamonds—.5 ct. to 1 ct. were most popular last year, vs. .25 ct. to .5 ct. in 1998 (see Diamond Notes, p. 72). Long-term, it’s been the strength of the stock market, real wage gains, lower consumer debt, record consumer confidence levels, high spending levels, and the fact that there are no real geopolitical “hot spots” in the world right now to rattle the market. All these factors have created an atmosphere where people are willing to buy luxury goods.

JCK: Has “millennium fever” played a role in the industry’s recent sales growth?

Gassman: Interestingly, we haven’t found anybody willing to step up and say their millennium promotions were great. In fact, a lot of millennium merchandise was returned in January. The most savvy merchants have millennium marketing programs planned for the entire year, on the theory that everyone will have a birthday in 2000, and many will have an anniversary. So millennium merchandise should boost sales for most jewelers this year, but not to the level that many had hoped.

JCK: What kind of impact are Internet retailers having on the jewelry market?

Gassman: Our estimates suggest that e-commerce holiday jewelry sales [November and December] accounted for only about 0.2% to 0.3% of total jewelry sales. By comparison, e-commerce accounted for an estimated 1.6% to 1.8% of all retail sales during the period. So while jewelry e-commerce did create some demand and took some market share, it was such a tiny piece from everyone—including some non-jewelry categories—that the impact was minimal on most traditional jewelers.

JCK: As the Internet evolves, will that change?

Gassman: While jewelry e-tailers didn’t appear to experience some of the infrastructure problems other e-tailers did this Christmas [stock, delivery, and other fulfillment breakdowns], I am less enthusiastic about the prospects of e-commerce for jewelry than for other industries.

At the high end, jewelry is an item people still need to see and touch before they decide to buy. At the low end, a lot of these potential customers are just getting computers or still don’t have them. Industry veterans tell me that 50% of jewelry is “sold,” not purchased—meaning that good salespeople with persuasive skills make half of their sales to people who wouldn’t have purchased jewelry otherwise. On the Internet, that aspect of romance and sales contact just isn’t there.

Meanwhile, the Internet’s not going to create any new customers; it’ll have to take them from someone else. For these reasons, jewelry’s a much tougher sell online than some other categories.

But on the plus side, we know that jewelry can be sold in a non-store retail environment—look at the success of QVC, HSN, and catalogs like Ross-Simons. Also, the Internet represents a new channel of distribution; it’s an excellent marketing vehicle for companies and an excellent information vehicle for consumers, who use it to narrow down their purchasing choices. There is a definite role it can play, but as for e-commerce, we just don’t know.

JCK: Aside from the Internet, what development will have the greatest impact on the jewelry sector over the next 10 years?

Gassman: There’s tremendous consolidation potential. It’s one of the reasons I follow the industry. You have a lot of mom-and-pops with a few larger players like Tiffany, Zale, Sterling, and Friedman’s. Most industries with this kind of makeup eventually evolve into a duopoly—two dominating players—or a triopoly—with two strong companies and a weaker third. From the manufacturing side, it will become increasingly harder to supply these giants. Consolidation will be a means of survival for manufacturers.

JCK: What’s your outlook for the industry?

Gassman: Selling jewelry is all about trying to “create an event” and sell that event—weddings, engagements, Valentine’s Day, Mother’s Day, anniversaries, birthdays, and the like. The industry needs to become less reliant on events and more geared toward everyday, year-round selling.

But with the technological gains retailers have made in data mining, the growing wealth of the country, and the Baby Boomers in their peak earning years, jewelry has a good chance of becoming an everyday fashion purchase. And we don’t envision the bottom dropping out of the U.S. economy. So our outlook is positive; we expect to see sales gains in the 7% range or better over the next several years. This is almost double the gains expected for total retail sales.

JCK: What advice would you have for independents?

Gassman: In other retail categories, independents have learned they can’t compete head to head with Wal-Mart, Home Depot, or Circuit City [see “Fending Off the Chains,” p. 234]. So jewelers shouldn’t try to compete head-on with Zale, Sterling, and Whitehall. What independents must do is differentiate themselves from the chains. How do you do that? First, consider an upscale niche, moving away from the middle market to the upper market. Second, emphasize service. Independents probably have less personnel turnover than the chains, and their salespeople take more time with customers. This is a strength they should capitalize on. Third, independents should become known in their communities. Join civic clubs, give jewelry and gem seminars at the local library, generate news releases, join the local retail merchants association, and partner with other merchants. You won’t see anyone from the mall chain stores doing these things.

Jewelry Stocks to Buy Now

In the accompanying article, analyst Ken Gassman Jr. ranks Zale and Whitehall among his top buys in the jewelry industry. Both trade on the New York Stock Exchange. Here’s his latest analysis of the two companies.

Zale Corp. “Zale is revolutionizing the way jewelry is sold. Rather than selling goods like a traditional jeweler—one item to show and the same item to go—Zale approaches the business like a specialty retailer. Its promotions are focused on a few key items—one to show, but 100 duplicates inventoried to go. Thus, it’s been able to increase customer traffic dramatically and build store volumes by about 50% over the past five years. Recently, there have been promising shifts in top management that should bring renewed vitality to the company. Acquisitions will also contribute to growth; it’s possible Zale will acquire other large chains, perhaps similar to its recent purchase of Peoples Jewellers of Canada. Finally, it has developed an effective and highly successful Internet retailing concept, modeled after its store merchandising strategy—promoting a few key items heavily.”

Zale currently sells for about $45 per share; Gassman’s prediction is $60 within a year.

Whitehall Jewellers. “Whitehall is more upscale than the typical mall-based jewelry chain and therefore is somewhat less sensitive to economic cycles. Its stores are up to 30% smaller than the typical mall jewelry store, but sales productivity per unit is in line with the industry average. Thus, mall developers target Whitehall when new retail space becomes available, creating opportunity for good growth through expansion. In addition, Whitehall uses third party non-recourse credit, avoiding consumer credit volatility and uncertainty.”

Whitehall currently sells for about $21, and it should reach $35 in the next year or so, Gassman predicts.