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Jewelry Sales Regain Some of Their Sparkle

Thursday, 17 Dec 2009 | 11:49 AM ET

Although the highly discretionary jewelry market was one of the hardest hit areas in the retail sector last holiday, jewelry stores have an edge over traditional retailers this year, as they look to improve their margins by easing up on discounting and offering more items at consumer-friendly prices.

It's been comparatively easy for jewelers to do this, said Marshal Cohen, chief industry analyst at NPD Group research firm. He said products are selling at prices that are 20 percent to 25 percent lower than last year, without hurting profit margins, because the jewelry pieces tend to have lower average karat counts or fewer stones and embellishments.

"One of the advantages of the jewelry business is they have [more] ways to adapt to price points," Cohen said. "How many pant legs can you take off a pair of pants?"

Jewelry stores were the first retailers to slash prices up to 75 percent last holiday, and spending within the category dropped 22 percent on the year ending in October, according the NPD data.

The industry has been plagued by bankruptcies of local jewelry stores — which make up the majority of the fragmented industry — and the closing of chain locations such as Zale's , which has shut down more than 200 underperforming stores in the past year.

But shoppers battling frugal fatigue have slowly started returning to the jewelry market in the past two months, as fewer people plan to cut back on gifts for their significant others this year, Cohen said.

Self-spending levels have also shown a slight revitalization since Black Friday, as shoppers rationalize jewelry as more of an investment than other purchases.

"[Consumers] want to reward themselves for having survived the economic tsunami," he said. "They're just basically convincing themselves that this is a good way to spend money."

Consumer Nation Holiday Central Edition
Consumer Nation Holiday Central Edition

Department stores will capitalize the most on increased jewelry demand, as consumers continue to hunt for value, Cohen said.

JCPenney , for example, has noted positive sales in its fine jewelry this holiday, specifically among gold and gemstones, said Pam Mortensen, senior vice president and general merchandise manager for fine jewelry.

But the sales increase hasn't been restricted to department stores.

Online diamond retailer Blue Nile, which holds about 4 percent market share in the engagement ring category, told CNBC it had its most successful Cyber Monday in its 10-year history. As such, CEO Diane Irvine said she expects the store's holiday sales to post a double-digit rise this season.

There are also signs that consumers are returning to luxury retailer Tiffany, which has adjusted to thriftier shoppers by adding inventory at lower price points, said Citigroup analyst Kimberly Greenberger. The jeweler now offers two $100 pendants in its popular Tiffany Keys collection, which reaches as high as $17,000.

And the luxury shop — which never participates in massive markdowns — lowered prices on its engagement jewelry by 10 percent earlier in the year.

"Often if you can capture the customer when they're getting engaged you can get them back for anniversaries or other life events," Greenberger said. "Maybe the category could be less profitable, but if it means acquiring a customer for life it's really a fantastic strategic move."

Greenberger said she expects Tiffany to post a 2.5 percent gain in same-store sales in the fourth quarter — its first comparative increase since the first quarter of 2008.

But not all jewelers have shown signs of a turnaround. Zale's November same-store sales dropped 18.6 percent in the crucial November month, well below CL King & Associates analyst William Armstrong's forecast of no change.

What's more, Armstrong noted that 400 of the retailer's leases are set to expire in the next 19 months, which likely means the store will shutter more shops.

This does, however, create a silver lining for surviving retailers, as Greenberger estimates that bankruptcies and store closings have left 5 percent to 10 percent of the $60 billion jewelry market up for grabs.

She predicts many consumers will gravitate toward chains such as Tiffany, as they look for stability amid a flood of bankruptcies. If Tiffany is able to capture just 2 percent of the available market share — which would double its current holding — it could generate 5 to 6 percent revenue growth in the US over the next year, she said.

Still, Cohen said he thinks high-end retailers will make a slower comeback than lower-priced jewelers. And when they do recover, they'll return to levels comparable to 10 years ago, before credit conditions got out of hand, he said.

"What we just went through from [2002 to 2007], that was an abnormal period of unencumbered wealth," he said. "That was just ridiculous."

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