Summary
Conflicting sales reports make forecasting fourth quarter sales even more difficult for jewelry retailers. But, volatile consumer spending patterns,large competitors promotional plans, and emerging macroeconomic forces may play a much bigger role in the final outcome than actual sales in August, September, or October. Here's more.
Analysis
Retailers continue to struggle with sales planning for the remainder of 2009. Earlier, the thinking was sales would decline. Now, it’s more complicated. Clearly, sales are improving, but by how much and will the trends continue to escalate? According to ICSC, October sales for U.S. chain stores increased 2.1%. However, the improvement wasn’t the same for all types of retailers and all product categories. For instance, mid-market retailer J. C. Penney saw store for store sales decline 3.5% in October, which was an improvement over last year’s decrease of 13%.
Luxury retailers reported mixed results. Neiman Marcus reported a 6% decline in same store sales, while Saks posted a 0.7% store for store sales decline over the previous year. Interestingly, women’s apparel and shoes were the better performing categories for both mid-market and luxury retailers according to these reports. Jewelry continued to be weak in J.C. Penney stores and Neiman Marcus; however, Neiman Marcus Direct and Saks reported jewelry was a one of the better performing categories. In addition, it’s interesting to note both Saks and Neiman Marcus reported stronger sales in their e-commerce businesses (NM Direct and Saks Direct) as well as value stores like Saks OFF 5TH. Still, overall October sales may have been different than these actual reports suggest.
For example, SpendingPulse analysts believe jewelry sales rose 7.2% in October, while clothing sales rose only 3.4%. Those numbers are inconsistent with the actual reports of at least these three major chain store retailers. The company says it uses sales in all payment forms in combination with their own analytical methodology to estimate monthly sales. Nevertheless, it isn’t clear how accurate their estimates are.
More recently, Zale Corporation said its first quarter sales through October were trending down about 8% from last year. In addition, Signet Jewelers released its third quarter sales figures indicating sales in its US stores (Kay, Jared, J.B. Robinson…etc.) declined 1.7%. Since Zale has been under performing the market and Signet over performing, one point of view suggests specialty jewelry sales for the third calendar quarter of 2009 will have declined between 4% and 6%. That would be consistent with SpendingPulse vice president Michael McNamara’s earlier opinion that underlying jewelry sales had declined to 2005 levels. If his observation was correct, it means 2009 jewelry sales will decline about 9% and September through December sales will likely decline about 5.7%.
Still, regardless of the methodology used, any jewelry sales forecast today is contingent in small part on actual results and a lot more on assumptions about how consumers, the macro economy, and competitor will behave during the fourth quarter. For instance, there is evidence some luxury buyers are reentering the market. That’s good news for higher end jewelers, but it may be bad news for mid market jewelry chains that have benefited from aspirational consumers trading down. To a large extent sustained spending by luxury buyers depends on continued strength in the stock market. Yet, a five hundred or one thousand point drop in the DJI could reduce their spending to a trickle in a day for months to come, which is a distinct possibility in the current volatile political and economic environment.
Add that average selling prices have declined about 10%, meaning at comparable margins, units sold would have to increase by 10% just to break-even with last year. The question, will there be 10% more jewelry buyers in the market this year?
Then there are the macroeconomic forces affecting consumer buying behavior. Gold is increasing, which may mean higher prices for some jewelry products, potentially reducing sales. Jewelers may have to trade margin on both the buying side and at the sales side.
Recent reports say Walmart has already started Black Friday promotions in a number of categories including electronics. For instance, HP Notebook Computer, $298, Sharp 42”HDTVs, $498, Xbox 360 Arcade Console, $199, and Magnavox DVD player for $29 all represent effective product offers that will steal sales from every mid market fine jewelry store.
Simply put, whether of inter or intra competition, the economy, or changes in consumer buying behavior, it’s likely the industry will be in a price war by the beginning of December both with other jewelers and non-jewelry retailers. Accordingly, the sales line may be more about cash flow for thousands of jewelers, rather than profitability, which will change the dynamics of the market through the first half on 2010.
Nicholas White consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
