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Lending to the Jewelry Industry: Prudence Will Pay Off

Date: Feb 17, 2016 @ 07:00 AM
Filed Under: Appraisals

From a jewelry industry ABL position, calendar 2015 was quite a rollercoaster ride.

It began with some upbeat news: Signet Jewelers Limited (“Signet”), the largest specialty retail jeweler in the U.S., UK and Canada, reported a 52% appreciation in its stock price based on record sales and earnings for its fiscal year (February 2014 to January 2015). However, the record results and stock appreciation resulted in large part from Signet completing the largest transaction in the jewelry industry’s history when it purchased Zale Corp. in May 2014.

Despite this bright news for Signet — which continued to post strong sales and earnings through the first nine months of fiscal 2016 — the performance for the rest of the industry was mixed.

Here’s an overview of how the year progressed:

  • The first quarter showed signs of growth and positive attitudes on a consumer level. The consumer was purchasing “less for more” — i.e., buying fewer items at higher price points, or acquiring better-quality pieces.
  • Q2 still had some fire to it and the feeling was optimistic. Manufacturers seemed comfortable with the sector’s lower costs, overall, along with a moderate demand to replenish inventory.
  • Q3 ebbed a bit as the stronger dollar and world events (Greece’s uncertain role in the EU, the collapsing asset values in China, and the plummeting price of oil, to name a few) started to erode the positive attitude, and thus spending.
  • The Q4 holiday season was an abnormality at best. Terrorist attacks in France and the U.S. scared the rest of the world; weather defied logic; the stock market fell and the Fed raised its key interest rate for the first time in nearly a decade. Thus, the positive consumer attitude turned into a “proceed with caution” signal. Ever cautious in the first place, jewelry retailers relied heavily on their December sales and especially the sales on the last few days prior to Christmas. This gave them little time to special order or track down special requests not in inventory. Holiday sales as reported by respondents to a Centurion Survey were quite uneven: 20% of jewelers posted sales increases of more than 10%, but another 20% saw sales decline by more than 10%, while the balance ranged from a plus 6%-10% to a minus 6%-10%.

If you’re a lender to the trade, the challenges endured by the industry are apparent and exhausting. How do you deal with the volatility of the daily metals and diamond markets, as well as the change in buying mentality to a more conservative demeanor?

Whatever you believed your collateral was worth, chances are, you are wrong. The jewelry industry is still waking up to the new normal, as it pertains to the value of product, with significant fluctuations occurring often on a weekly basis. This uncertainty can, in turn, lead to disposal or acquisition of goods at numbers that might not make sense to an outside observer. Little wonder that so many banks have left the jewelry asset-based lending arena in recent years.

As a result, venture capital/PE firms have started stepping into the void. This has greatly changed the game because the business model employed by these firms (unlike that of asset-based lenders with more experience in jewelry) often fails to fully appreciate the industry’s volatility — not only in the cost of goods, but also with respect to currency imbalances and swings in consumer demand amid an unsettled stock market. That said, be it GMROI or EBIDTA, the mantra for venture capital/PE lenders is still “Show me the money!” Some firms are prudent enough to have the collateral verified as well as valued through an appraisal. However, the real-time or “new normal” number should not be based on historical data. It must be a derivative of what diamonds, gemstones, precious colored gemstones, watches, and antique jewelry are actively trading for today.

In setting plans for stock levels and sales projections, we in the jewelry industry kick off this New Year with a great deal of apprehension. Amid today’s global economic headwinds, we should look at 2016 as a year to be conservative, while balancing that against the need to maintain sales growth and market share. While investors in the jewelry and watch sector might only look at the bottom line, taking account of the turmoil in major markets would be prudent. China, Russia,
Brazil and India, which were all the sweethearts of commerce not that many years ago, are now upsetting the flow of manufactured goods into their markets with their economies slowing down and currencies being devalued.

2016 Projections:

  • With lower sales at retail, manufacturers will be seeing larger-than-normal returns from their retail partners. This, combined with major chains demanding more “markdown dollars,” will greatly squeeze the wholesaler/manufacturer.
  • Q1-Q2 will be a period of little-to-flat growth. The ability to react and reposition your business will be important until the volatility settles down.
  • Q3 should have us somewhat used to the new normal in demand and pricing of product. In this conservative market, basics should sell better than fashion-forward goods.
  • Q4/Holiday - With an anticipated decline in brick-and-mortar sales and an increase in online business, merchants should consider catering more to online shoppers.

We live, as the saying goes, in “interesting” times. Amid all the volatility and change, lenders need to better understand their clients’ business — the levels of inventory needed, pricing, competition and more. Their prime consideration should be the current, true recovery value for the inventory they lend against. Forget about historic values. Embrace the new normal.

Michael Lebowitz
Director of Jewelry | White Pine Trading, LLC
As the Director of Jewelry at White Pine, Lebowitz manages the division’s delivery of consulting and appraisal services, as well as leads the jewelry consignment program for major retailers. He also oversees all jewelry acquisitions and production, along with distribution channels.

Prior to joining White Pine in 2013, Lebowitz served as executive vice president at Buxbaum Jewelry Advisors, where he directed appraisals, store closings, promotional sales, inventory augmentation programs, wholesale auctions, and consulting assignments for retailers, wholesalers or their asset-based lenders. His earlier positions include roles as a consultant to M. Fabrikant & Sons, fine jewelry merchandise manager for Shreve Crump & Low, and closeout buyer and asset appraiser at Gordon Brothers Corp.
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