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After Rough Patch, Jewelry Retail Business Sparkles

Thursday, 23 Dec 2010 | 11:47 AM ET

It seems that Americans want their diamond rings after all.

A rare Patek Philippe 18 karat pink gold watch is displayed 11 May 2007 during a preview in Geneva.
FABRICE COFFRINI | AFP | Getty Images
A rare Patek Philippe 18 karat pink gold watch is displayed 11 May 2007 during a preview in Geneva.

After a rough 2009 that saw the demise of several stores, jewelry merchants have emerged as the shining star of the retail sector this holiday, with chains from tony Tiffany

to mass-market Signet Jewelers' Sterling Jewelersposting robust sales gains.

Jewelry sales typically spike during the holidays as the category is a big gift purchase and because it’s a popular time of year for engagements.

And after a recession, more people get engaged, noted Paul Swinand, equity analyst for Morningstar.

But the rebound of the jewelry sector also reflects an uptick in spending among high income consumers as stock market gains have made affluent shoppers, feel, well, more affluent, once again.

What’s more, the jewelry retail sector has whittled down to fewer, stronger retailers who are benefiting from the pent-up demand for this highly emotional purchase, analysts said.

“Jewelry is a discretionary purchase. As Americans see that the economy is improving, slowly, they have begun to loosen their purse strings,” said Ken Gassman, president and founder of the Jewelry Industry Research Institute.

“Shopping is culturally ingrained in Americans—for better or worse,” Gassman said. “So, when there's money available, Americans go shopping.”

In addition, “high-end customers have come back into the jewelry market,” he said.

The rebound marks a reversal of fortunes for the sector.

Last year, jewelry merchants were pummeled by the economic downturn, weak consumer spending and lack of available financing, which forced companies such as Finlay Enterprises and Robbins Brothers to liquidate.

As a result, an estimated five percent of the nation’s jewelry retailers shuttered their doors for good, said Gassman, citing figures from the Bureau of Labor Statistics.

The remaining players have picked up that market share, Swinand said. “And if you have a swing back in demand on top of that, your sales will have to outpace demand.”

Spotlight on High-End Retail
An outlook on where wealthy consumers are spending, with Ken Stumphauzer of Stern Agee and Hitha Prabhakar of the Style File Group.

The average specialty jewelry retailer drums up about 30 percent of its annual sales during November and December, Gassman said. “So this is a make-or-break season for them.”

Season-to-date, the jewelry retail sector is up 2.6 percent over the same period last year, according to MasterCard Advisors’ SpendingPulse, which measured results for the holiday shopping season between Oct. 31 and December 11.

Jewelry retailers’ gains reflect both a rise in the number of sales transactions as well as an increase in the average ticket, Gassman said.

Indeed, it’s the pricier goods across retail channels that have been selling briskly.

For the quarter ended in October, Tiffany’s sales were up 9 percent, primarily driven by higher average prices per unit retail of fine and designer jewelry, Goldman Sachs’ analyst Adrianne Shapira said in a research note.

U.S. sales at luxury jewelry retailer Harry Winstonsoared 75.6 percent.

At Sterling, sales at its high-end Jared chain led the company with a 16.9 percent sales increase, Gassman noted.

And after sales declines in 2008 and 2009, Richemont’s sales are up over 20 percent this year, noted Swinand.

What’s more, merchants that sell more than just jewelry, such as Macy’s, J.C. Penney and Nordstrom, called out the category as a bright spot.

“There is some other psychological thing going on” driving purchases, Swinand said. “People are buying small things for themselves—shoes, accessories, handbags—rather than a new suit, car or refrigerator.” They will treat themselves to something small, even if that small thing is a $1,000 ring, he said.

Diamond Ring
Photo by: Stephen Durham
Diamond Ring

Blue Nile, the online jewelry merchant, has sparked buzz in the investment community for its business model. It enjoys exclusive agreements with suppliers and zero store-operating costs, which enables the retailer to pass those savings on to shoppers with affordable prices.

But although Blue Nile’s chief executive officer Diane Irvine said the retailer enjoyed “record” Thanksgiving and Black Friday sales and traffic, the business has lost some traction, analysts said.

Sales were flat, nudging only 0.2 percent during the most recent third quarter.

(Blue Nile’s sales volume is equivalent to roughly a 300-unit jewelry merchant, Gassman said.)

The retailer recently entered new product categories, such as silver and pearls, but their core business is down, Swinand said.

Blue Nile’s model, which is tied to lower-priced fare, “is more exposed to the low-end than they realized” and less affluent shoppers, for whom the recession has not ended, he said.

And Zale, the 1,900 unit chain, is not out of the woods.

“Zale is still at risk,” Gassman said. “It’s been a revolving door for top management.”

In September, Killion was promoted to CEO following the ouster of Neal Goldberg. He is the retailer’s fourth CEO in the last five years.

To right the ship, the retailer has closed stores and reduced expenses, which helped boost profit margins during the company’s first quarter ended Oct. 31.

Consumer Nation - Holiday Central Edition - See Complete Coverage
Consumer Nation - Holiday Central Edition - See Complete Coverage

“Since February 2010, when we began implementing our turnaround plan, each fiscal quarter has shown improvement,” said Theo Killion, chief executive officer of the retailer, in a statement. “The second fiscal quarter will provide an important barometer of the progress we’re making in our turnaround.”

Looking ahead, U.S. jewelry merchants will continue to tap international markets for growth as they face cost increases in gold silver and diamond prices. Blue Nile recently expanded into Canada and the United Kingdom. And for Tiffany, which operates stores in Europe, Asia and Japan, global expansion is key to the company’s growth strategy.

Questions? Comments? Email us at consumernation@cnbc.com

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