In the past months, the U.S. jewelry market registered already several bankruptcies. According to mass media, staff reduction, mergers and acquisitions of jewelry companies appear to be one of the ways to optimize the situation in the industry.
Charles & Colvard, a moissanite manufacturer, is named as one of the most probable candidates to be merged. The company reported a 25% drop in sales in the fourth quarter (down to $7.9 million) as compared with 2006. The gross profit decreased 42% down to $5.4 million as compared with $9.3 million in the previous year.
On this background, Charles & Colvard marketing expenses accounted for 62% of net sales compared with 52% in 2006. The company explained that its marketing budget had been compiled before the fourth quarter. When it was clear that sales would not reach the desired figures, it was too late to change the budget.
U.S. sales dwindled 40% to $6.6 million, while international sales, on the contrary, went up 20% reaching $1.3 million.
Bob Thomas, Chairman of the Board, Charles & Colvard, informed that his company had decided to resort to services offered by Kanter International, a branding agency, “to provide an assessment of the Company’s current business model and suggest recommendations for improved sales performance.”
In the run up to the New Year, Charles & Colvard teamed up with JCPenney to organize a large-scale female contest called “Milestone Moments.” The contest was promoted by the mass media belonging to the empire of Oprah Winfrey, a favorite of all American housewives. The winner, 18-year old Hichelle Eggleston of Newcastle, who dedicated her story to fighting cancer, which made her having her leg amputated, was awarded a 5-carat moissanite pendant worth $10,500. However, from their financial report it was evident that this action had not succeeded in spurring moissanite sales.
The analysts of Merriam Curhan Ford (MCF), a holding specialized in financial services, in the first decade of March raised the Charles & Colvard investment rating from “neutral” to “buy.” According to the MCF report, Charles & Colvard “could well become an acquisition target based on inventory value alone.”
“We downgraded the shares in January 2007 due to the high manufactured inventory in the company’s assets, but the current valuation does not account for the potential wholesale value of the inventory and method patent — these two aspects make Charles & Colvard a potential acquisition target for companies in the jewelry or consumer products industry.”
MCF emphasizes the significance of Charles & Colvard’s manufactured inventory in evaluating the company stock. “Even though the company’s sales trends have currently suffered, Charles & Colvard has built up $43 million in inventory of moissanite stones. Considering Charles & Colvard’s 72.6 percent gross margins in fiscal 2007, we estimate the market value of this inventory as exceeding $157 million or almost 7 times the company’s current market capitalization,” MCF experts say with confidence.
Among the mergers being discussed for the second time in recent month, there is a possibility that Tiffany will be taken over by LVMH, a French group of companies.
While a bid from LVMH would help Tiffany expand abroad more quickly, says MarketWatch, a British publication, some analysts warn that the U.S. blue-box brand may not be sufficiently upscale for the French luxury empire.
The Societe Generale analysts say Tiffany has a “mid-range” positioning in the market, while LVMH has indicated it would like to shift even further upscale in the jewelry segment.
Although Tiffany is best known for selling diamond engagement rings, it derives a significant percentage of sales from its silver jewelry collection. The company is seeking opportunities to develop this line of business.
LVMH has taken a different tack. It is home to ultra-exclusive brands such as Chaumet, which was founded in 1780, and do not cater to the lower strata of the market.
Meanwhile, Tiffany engagement rings have become a social status symbol worn by so-called “Park Avenue princesses” (family members of the New York business elite).
“Tiffany has greater exposure to financial risks in the weak U.S. and Japanese markets than any of its European rivals,” said Societe Generale. However, the strong international growth is an encouraging sign for the jewelry company.
Antonia Branston, an analyst with research firm Euromonitor believes that LVMH could give Tiffany the sort of financial might and operational know-how to continue its international expansion. She noted that such a merger probably would not affect Tiffany’s independence and creativity, since the French group is well known for leaving much operational and marketing freedom to its brands.
Even if the merger with the French LVMH empire is a myth, Tiffany may face this kind of “courtship” in any case. The company abandoned the “poison pills” method that could have protected it from a hostile takeover, when it voted in 2006 against the possibility to issue additional shares in this case.
Maureen Hinton, an analyst with consultancy Verdict Research, believes the companies’ positioning in different market segments would not be a major stumbling block for a merger. “Although silver jewelry is a distinguishing mark for Tiffany, I do think Tiffany itself as a brand still has a very luxurious image,” the analyst said.
Investor group Trian Partners, which owns 8.4% of Tiffany and did not ask for a seat on the company’s board, is believed to be pressuring management to consider potential disposals, develop a new accessory line and accelerate the share-buyback program.
JCKOnline analysts note that in case of a merger Tiffany will be beneath the same roof with De Beers Diamond Jewellery, its immediate rival in engagement rings sales. However, even now the companies are connected by remote “relationship,” since Tiffany is a sightholder of De Beers.
U.S. jewelry trade corporation Zale announced that it would close 105 stores and cut more than 200 jobs in 2008. This action is taken within a program to increase the company’s operational efficiency and save $65 million a year starting with the fourth quarter of 2008.
Zale notes that the main element of the program is to reduce the company’s staff by 225 positions (about 20%). The major part of $65 million will be obtained by way of decreasing overhead costs. The program is to curtail capital spending from $85 million in 2008 to approximately $45 million in 2009.
As was reported earlier, the company plans to reduce its inventory by $100 million in 2008 and in the ensuing years.
Zale President and Chief Executive Neal Goldberg noted, “In order to improve Zale’s performance and provide our customer with an exceptional experience, it is essential that we reduce the company’s infrastructure costs, which have outpaced its sales growth since 2002.”
Stuller has also announced reorganization. Under the company’s plan to restructure its system of management, it will lay off 45 employees. This is 2.5% of the total number of company employees (1770).
Explaining the reasons for this move, the company pointed to the increasing prices of precious metals coupled with a challenging national economic outlook for 2008.
