Page 1 of 10 September 18_ 2009 The Jewelers Board of Trade

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Page 1 of 10 September 18_ 2009 The Jewelers Board of Trade Powered By Docstoc
					 The Jewelers Board of Trade                                                                              September 18, 2009

                                                                                             Frequent Inquiry Report page 5
                                                                                             Financial Embarrassments page 5
                                                                                             Current Items of Interest page 5
                                                                                             Rating Changes page 7
                                                                                             Additions to Red Book page 10

                                             now; but Costco saw a 2% decline          sharp increase in shoplifting and
                                             and BJ’s Wholesale Club fell 6%.          employee theft, up about 7% in `08
                                                                                       according to Jack L. Hayes
                                             The department store segment saw          International’s annual Retail Theft
                                             continued weakness with declines of       Survey ( 9/2/09). The value
                                             about 20% at Neiman and Saks, 8% at       of goods shoplifted increased about
                                             Nordstrom; 12% at Dillards, 8% for        30% and employee theft rose 3%.

                                             Penney and Macy’s and 5% for Bon          An NRF/U. Florida study put the total
                                             Ton.                                      losses just under $37 billion for the
                                                                                       companies it surveyed. Electronics and
                                             One bright spot – the drugstore           luxury goods are the most popular

By: Dione D. Kenyon, President, JBT
                                             segment, where traffic is pretty much
                                             guaranteed and innovative operators
                                             like CVS who has increased its focus on
                                                                                       categories: J.C. Penney recently
                                                                                       reported the loss of significant amounts
                                                                                       of jewelry from Texas and Louisiana
August Industry Overview                     beauty products, have seen good           stores from what appeared to be a
                                             results. As a segment this group saw      well-organized string of robberies.
Retail Overview:                             a 4%+ increase in comps for August.
                                                                                       CIT Group Inc., an important

August comp sales fell just under            STORES Magazine (September 2009)          lender/factor to the apparel industry
3%; not as poor as July’s 5% drop.           reported on research from        and many small businesses continues
There was pretty much no merchandise         and Forrester’s Online Q2 survey          to struggle, announcing on 9/2/09 it
category left unscathed, but results         and “State of Retailing On-line”          would defer a $23 million interest
continued to vary by retailer segment.       including the following:                  payment due 9/15/09 to preserve

                                                                                       liquidity; the deferral is permitted under
The New York Times (9-2-09) carried           -   Average quarterly sales growth       the terms of the notes.
a quote from analyst John D. Morris               for retailers surveyed was just
of BMO Capital Markets who said                   under 12%, suggesting increasing (8/27/09) reported on a

retailers are… “learning the native               market share for this sales          recent study on retail published by
tongue of the new consumer…It’s not               channel.                             Granton Thornton LLP, as follows:
only that you need to dangle value in         -   Free shipping is an important
the face of the consumer…(he is) bored            competitive advantage.                -   Continued consumer migration
with the same old promotions. The             -   Top five areas of focus for on-           from bricks and mortar to on-
smarter companies are…changing the                line retailers are checkout               line.
marketing message.”                               process redesign; richer              -   Online jewelry/watch sales
                                                  product content pages;                    decline in `08 of 34% overall, yet
Discounters continued to do                       enhanced search; home page                only 24% for the online sales
relatively well with TJ Maxx leading              design and help functions.                segment.
the pack, up 5%. Both Target (-3%)            -   Forecast U.S. online retail sales     -   Sustainability, customer service
and Kohl’s (flat) were reported to                are $229 billion in 2013 based            and online marketing are key
have increases in traffic that haven’t yet        on a 10% compound annual                  retailer success factors.
moved their comps into positive                   growth rate of 10% each year
territory, but are expected to drive              beginning in 2008.                   On the economic front, despite
better results this Fall.                                                              consumers’ increased urge to roam the
                                             As if retailers didn’t have enough        retail space, there remain formidable
Wal-Mart reports only quarterly              problems, they are confronting a          obstacles to a resumption of

                                                        Page 1 of 10
spending. Unemployment rose                   -      The online/catalog                   of its unrestricted cash) to fund
to 9.7%; prime borrowers are                         segment saw a lesser                 its operations for the six months
now defaulting on their                              revenue decline at 18%.              ended 8/1/09.
mortgage debt at a greater rate               -      For the `09 fiscal year          -   To address its liquidity needs
than sub prime ones; gold                            Neiman generated a                   the Company continues to
reached the $1,000 mark as                           $668 million loss vs. $143           work on initiatives to increase
overseas investors shifted their                     million of income in `08.            profitability, is considering
sights away from the U.S. dollar on           -      Private equity funds                 potential sale of its Boston TV
concerns about the alarming rate of                  Warburg Pincus LLC and               station and other real estate
increase in America’s debt. A 10%                    TPG Capital own Neiman.              assets, and is in the process of
annualized decline in consumer                -      Recall that Moody’s rated            negotiation for an asset-backed
spending for July exceeded forecasts                 Neiman “Caa1” or                     line of credit.
and dampened expectations for a                      “subject to very high credit     -   Extended payment terms from
consumer led recovery. Credit                        risk” before these results           Vendors are being used to
conditions (Banks’ decreased                         were released.                       fund the asset conversion
willingness to lend and tighter credit                                                    cycle (inventory – receivables –
terms) are a continued damper on         Belk Inc. reported a 15% increase                cash). As a result, payable days
growth. And the Conference               in net income to $9.4 million for                have increased by 20% year-
Board, reporting on August trends        the quarter ended 8/1/09 on an                   over-year.
forecast a flat jobs picture through     8.3% decline in net sales to $760            -   Shop NBC has average annual
year end.                                million and a 9.4% decrease in                   required cash payments of
                                         comps. Tighter management of                     approximately $50 million from
                                                                                          2009-2012 for cable/satellite

Globally, manufacturing output           inventories and expenses helped to
seems to be picking up steam             put the Company in the black.                    agreements and operating leases.
even in the U.S. which recorded a                                                     -   The Company’s accounts
4 point increase to an index of          Valuevision Media, Inc. (Shop                    receivable have grown as a

52.9; China saw a .7 point               NBC), which released its 8/1/09                  result of “increased use of our
increase to 54.0; and the Euro           results (6 mos) in August, supplied              ValuePay extended credit as a
zone rose 1.9 points to 48.2. The        additional disclosures in its 10Q:               promotional tool to stimulate
                                                                                          sales”; this comes with potential
U.S. increase passed the all
important 50 point threshold for the     Jewelry sales dropped from $118                  risk should customer payment
first time since January `08, paper      million to $58 million; this                     delinquencies increase.
and printing products; apparel and       category fell to 24% of total sales          -   And from the Company’s

textiles were categories of strength.    vs. 41% a year prior as the                      discussion of “RISK FACTORS”,
Inventory re-stocking and                Company sought to increase the                   “If we are not able to attain
government stimulus programs             diversification of its product mix.              profitability and generate positive
account for some of these upticks.                                                        cash flows from operations or
The IMF recently revised its forecast     -       Overall sales declined 15%              obtain cash from other sources,
                                                                                          we may not have sufficient

for global economic growth in 2010                to $253 million.
to about 3%, up from 2.5%                 -       Watches, coins and                      liquidity to keep operating.”
previously.                                       collectibles, and consumer
                                                  electronics were growth            Jewelry Industry:
Major Retailers:                                  categories and represented

                                                  33% and 23% of total sales.        Diamond industry analysts are
Neiman Marcus Group Inc.                  -       The Company’s principal            commenting increasingly on the
reported on its fiscal Q4 (8/1/09)                source of liquidity is its         disconnect between activity in rough
as follows:                                       cash, totaling $36 million at      (fueled by suppliers pushing goods
    - $168.5 million loss vs.                     8/31/09; with $8.5 million         into the market) and “pull” for
        $35.6 million in’08.                      restricted; “As a result of our    polished goods on the consumer side,
    - $143.1 million vs. $31                      recent and continuing              especially in the U.S. One analyst
        million in “impairment”                   operating losses, it is possible   suggested there is about $700 million
        charges.                                                                     of excess (not sold) in recently
                                                  that our existing cash…may
    - 25% decline in sales to                                                        polished goods awaiting sale as we
                                                  not be sufficient to fund
        $768 million; comps                                                          embark on the Fall selling season.
                                                  obligations and
        down 23%.                                                                    Seems like an imbalance in supply and
                                                  commitments as they come
    - 23% reduction in                                                               demand….
                                                  due beyond fiscal 2009 and we
        inventories.                              may need to raise additional
    - 24.1% gross margin;                                                            Members are telling us they saw a
        down from 30.5% Q4`08                                                        modest uptick of business in the
                                          -       The Company used about
        and 40% in Spring `08 as                                                     summer months; but August was
                                                  $29 million (or the equivalent
        markdowns took their toll.                                                   somewhat soft.

                                                       Page 2 of 10
The industry banking situation         pending resolution of accounting             associated with renegotiation
is still very difficult, even          issues around prepaid advertising            of its credit agreements in
companies with strong balance          costs/prior period expenses.                 March of `09. Signet
sheets and low reliance on debt                                                     experienced increased pricing
are finding their bank deals (if       Signet Jewelers Ltd.                         and covenant amendments as
they can keep them) priced             announced results for the half-              well as $6 million in fees and
upward with tightened covenants        year ended 8/1/09 as follows:                costs associated with this
and a “take it or leave it” As                                                      renegotiation.
often happens in financing cycles,     Same store sales down 7%.                -   Walker Boyd, longtime
things got way too loose and                                                        Finance Director, will retire
liberal; now lenders have              Pre-tax income of $80 million –              in June 2010; a search for his
moved to the opposite                  down 1.6% (before one-time                   successor is underway.
extreme; those who will fare best      charges).
are those who can self-finance as                                              Tiffany & Co. announced its Q2
much as possible, tough for an         Total sales decline of 7.4% or          and 6 mos. results through
industry with high investment in       $1,473 million, adjusted to a           7/31/09, including lower sales and
inventories.                           decline of 2.2% at constant             earnings but “exceeded
                                       exchange rates.                         expectations’ of management”:
One member said that being
forced “to become lean” over           UK and US comp declines were             -   Net sales for the six
the past two years is serving          roughly even, down 4%.                       months fell 19% to $1,130
the Company well now – it                                                           million. Comps, adjusted for

takes less sales to drive              While operating income                       exchange rates fell 18%.
profitability, and the better          increased about 19% to $99               -   Net earnings from
independents are starting to “turn     million, Signet offset $10.5                 continuing operations of
up” their business.                    million in non-recurring relisting           $84 million fell 44%.

                                       costs with a $10 million benefit         -   U.S. comp store sales
Companies that can combine a           from U.S. vacation policy changes.           dropped 30% with branches
high level of creativity with                                                       down 29%, NY flagship down
low price points seem to be            The Company improved its                     36% and Internet/catalog
getting a good share of the            cash/leverage position taking                down 12%.
business to be had right now.          net debt down by $270 million            -   Asia-Pacific (ex-Japan) was
                                       vs. a seasonal increase of $60               strong with a 5% decline.

DeBeers has a new diamond              million a year prior, reflecting         -   Europe saw overall sales
jewelry design concept called          tight working capital (inventory)            growth due to new store
the “Everlon Diamond Knot”,            management; no shareholder                   openings; on a comp. basis
ready for Fall promotion. Retailers    distributions and earnings from              sales grew 4%.
and sightholders who want access       operations.                              -   Wholesale diamond sales

to this product campaign will                                                       fell 72% to $9 million.
need to “participate” financially in    -   Average sale price                  -   Gross margins declined to
the cost of the promotion,                  declined 7.3% in mall                   55.5%, down 200 basis
reported to roll out to consumers           brands and 9.2% in Jared.               points on higher product
in mid-November. Everlon is a           -   U.S. net store space is                 costs.

follow-up to previous campaigns             expected to decrease 2%             -   Interest expense increased
such as Journey, right-hand rings           in 2010, including closing 75           due to increases in rates and
and three-stone jewelry.                    mall stores as leases expire.           amount of debt.
                                        -   Because over 50% of Signet          -   Net inventories, although (8/31/09) reported on               stores are held by U.S.                 down 4% since the start of
a new Star of Africa ring                   residents, as of 1/31/10                the fiscal year, increased 2%
collection rolled out by Royal              Signet will file its SEC reports        year-over-year.
Asscher with stones “floating” in           as 10K and 10Q.                     -   Cash more than doubled to
a snow globe configuration. The         -   Signet’s Board assessed                 $334 million; about 60% of
line’s proceeds are reportedly              no material change in the               this increase came from
earmarked for the benefit of                Company’s expected                      increased debt to $752
children in Sierra Leone, Africa.           principal risk factors for the          million.
                                            balance of its fiscal year (to      -   Leverage (debt: tangible net
Jewelry Retailers:                          1/31/10).                               worth) has increased from
                                        -   Leverage has declined                   .90x at 1/31/08 to 1.10x.
Zale Corporation has twice                  from .77x to .62x on
postponed its quarterly (Q4 and             reductions in debt, $100           Blue Nile is revamping its
full year ended 7/31/09) earnings           million of which was               website for the first time in 10
call and results announcement                                                  years with the goal of attracting
                                                 Page 3 of 10
more female buyers; recall that        (Palm Beach, NY-Madison, Aspen)           these are secured by all assets
the Company’s initial target           and will open new doors in Dallas,        and cross-guaranteed by
market was the male engagement         Las Vegas, and San Francisco.             Movado’s affiliates. At 7/31/09
ring customer. Other changes           Veronica McMahon Trenk was                the Company had $8.5 million of
include improved imaging to more       named managing director of                unused availability under this $55
realistically represent the product    Bulgari U.S.                              million facility which is subject to
and an easier to navigate one-                                                   a number of covenants.
page engagement ring building          Richemont reports a 16% (21%
page with adjustable size scales.      at constant exchange rates)          Bankruptcies/Failures:
The Wall Street Journal (9-1-          decline in sales for the five
09) reported that                      months ended August 31.              The next milestone in the Finlay
                                       Expectation for the six months       bankruptcy remains the auction of
Blue Nile estimates it has added       thru 9/30/09 are for lower           its assets later in September.
1% market share (U.S.) for             profitability as well. The Asia
engagement rings in the past six       market (ex-Japan) is holding its     Whitehall Jeweler’s intellectual
months to get to a cumulative          own, up 5%. According to a           property was auctioned to,
5.5%.                                  Wall Street Journal (9/10/09)        Inc., Culver City, CA on September
                                       report, Richemont management is      16, 2009. Bidz now owns the
Jewelry Manufacturers:                 not certain “the worst is over for   trademark registrations and domain
                                       its markets”. The article            names for Whitehall Jewelers,
On 9/1/09 Lazare Kaplan                commented that the Company is        Lundstrom Jewelers, Marks Brothers
International Inc. filed a             rich in cash ($1.19 billion) and     and White Star Private Label, as well
Notification of Late Filing form       expected, longer-term “to play a     as customer mailing lists with more

12b-25 with the SEC stating it         role in any industry                 than 800,000 names, addresses and
was unable to file its Annual          consolidation…(but) so far…is        transaction numbers.
Report on Form 10-K for Fiscal         struggling to find any interesting

2009 without unreasonable effort       targets.”                            JBT Statistics/Updates:
and expenses, primarily due to its
inability, at this time, to resolve    Movado Group, Inc.                   After two months of modest year-
                                       announced six-month ended            over-year increases, credit inquiries
a material uncertainty
concerning the collectability          7/31/09 results, including:          tanked in August, down about
and recovery of certain assets          - Net sales decline of 32%          11%. Year-to-date reports ordered
and the Company’s potential                to $157 million.                 are off 9% vs. `08.

obligations under certain lines of      - Gross margin decline from
credit and a guaranty, and the             64% to 57%.                      Listed accounts of 29,960 declined
Company is unable to assess the         - 28% decrease in operating         2.3% year-over-year and broke
potential effect the ultimate              expenses.                        through the 30,000 mark. Year-to-
resolution of these matters will        - Operating loss of $8              date business failures of 80 are just

have on the financial position and         million vs. income of about      about double the level of `08. Total
results of operation of the                $13 million in `08.              discontinuances of 1417 are up
Company. The independent                - Cash decreased from $84.5         56% (vs. 906) year-over-year.
auditors have advised the                  million at 7/31/08 to $47
Company they will not be able to           million after approximately

deliver an unqualified opinion             $40 million in debt              Opinions expressed are those of the writer
with respect to the Company’s              reductions and a $10 million     and not necessarily those of The Jewelers
Fiscal 2009 financial statements as        increase in inventories to       Board of Trade and no liability is assumed
a result. Lazare further reported                                           by either writer or JBT for any damage that
                                           $248 million.
                                                                            may be said to arise on account of reliance
“In light of current adverse            - The balance sheet remains at      on such opinion. Information is obtained
market conditions impacting the            low leverage at .30x             from sources cited as indicated and no
Company and the global diamond             tangible equity, down from       independent verification is attempted with
and jewelry industry…the                   about .40x a year prior.         respect to any such information, and no
Company anticipates that its            - On a segment basis the U.S.       liability shall be imposed upon the writer
reported results of operations for         market generated $15.3           or JBT on account of any inaccuracy.
Fiscal 2009 will reflect significant       million in operating
changes from the fiscal year               losses, offset by $7.4 million
ended May 31, 2008…” The                   in income from International.
company anticipates net sales of        - Movado recently
approximately $192 million for             renegotiated its credit
Fiscal 2009 vs. $370 million for           agreement with Bank of
Fiscal 2008.                               America and Bank Leumi;
Bulgari closed three U.S. stores

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