November 30, 2011
Based on guidance given by Blue Nile (Nasdaq: NILE ) three weeks ago and Tiffany (NYSE: TIF ) yesterday, it appears this holiday season isn't going to be as jubilant as jewelry retailers had once anticipated.
Tiffany's report yesterday wasn't all that bad, much like Blue Nile's results. The company reported robust international sales growth of 44% in Asia-Pacific, 12% in Japan (which isn't bad considering the devastating earthquake that occurred in March), and 19% in Europe. Third-quarter profits handily surpassed expectations by $0.10 and revenue came in $20 million ahead of the consensus estimates.
So what's the problem? Once again it relates to the company's fourth-quarter guidance. Tiffany forecast a profit of $1.48 to $1.58, whereas Wall Street was looking for $1.63. Although Tiffany didn't discuss specific problems affecting their forecast, I have four ideas why the jewelry sector may have a rough go of it this holiday season.
- Metal costs are up: Unless you just woke up from a decade-long nap, you're likely aware that the costs of gold and silver have dramatically risen in recent years. Jewelers can only front-run their purchases of gold for so long, much the same way an airline company can only hedge against fuel costs for a certain length of time. Metal costs are simply eating into margins faster than they can pass along price increases to consumers.
- Labor costs are up: Diamonds need to be cut and stones need to be set. Unfortunately, just as the price of metals has been rising, so has the cost of trained labor. India and China control a majority of the diamond cutting market and also represent the least-expensive labor force for rough diamond cutting. As wages in these countries rise to meet demand, even minute bumps higher in the wages can have huge effects on U.S. businesses' bottom lines.
- Diamond costs are up: Blue Nile knows this all too well. In the past five years, loose diamond prices have risen by a staggering 49%, all while the U.S. economy has predominantly muddled along. As with metal costs, jewelers who buy their product can only front-run diamond prices for a certain length of time before those costs eventually catch up. Even jewelers like Signet (NYSE: SIG ) and Zale (NYSE: ZLC ) , which typically deal with lower-quality items relative to Tiffany, aren't immune to rising diamond prices.
- The U.S. dollar stinks: Keep in mind that a majority of the jewelry you see in stores, from Costco (Nasdaq: COST ) , to Wal-Mart (NYSE: WMT ) , to your traditional brick-and-mortar locations, comes from overseas. In order for those overseas vendors to keep their profits consistent worldwide, they will need to adjust their prices up and down according to the movements of the U.S. dollar; needless to say, the U.S. dollar has been on a steady downtrend for many years now. Retailers like Costco, Wal-Mart, Tiffany, and Blue Nile have done what they can to pass along rising prices to consumers, but luxury products like jewelry require a certain level of finesse when passing along price increases, otherwise you risk alienating your customer.
The holiday season is still young and I could wind up all wet when all is said and done, but things are looking rather bah-humbug for jewelry, if you ask me.
What's your take on the jewelry sector? Is this going to be a December to remember or a year to forget? Share your thoughts in the comments section below and consider adding these top jewelry outlets to your free and personalized watchlist to keep up on the latest news in the sector.