The Jewelry Sector Is Beginning to Look Flawed

Houston, we have a problem!

The jewelry sector has been struggling mightily since the recession began, as it's heavily reliant on consumer discretionary spending for its survival.

On the bright side, whether the economy is good or bad, there will always be weddings, anniversaries, and special occasions, so there will always be a need for jewelry to mark those occasions. However, the magnitude of those purchases appears to be waning, which could be bad news for the jewelry sector as a whole.

Until recently, luxury buyers were largely responsible for keeping sector optimism high. Luxury buyers are the reason extremely high-end retailer Harry Winston Diamond (NYSE: HWD  ) survived the recession, and why Tiffany (NYSE: TIF  ) sells more in dollars per square foot than any other retailer out there with the exception of Apple. But times are changing.

Recently, Tiffany missed Wall Street's expectations for a second straight quarter and lowered its full-year forecast after noting softness in North American spending. Harry Winston ran into similar troubles when it noted that the selling price of rough diamonds fell to $88 per carat in its latest quarter from $132 carat in the year prior. The company attributed this to simply moving out lower-quality inventory, but I see it as a sign that higher-end buyers are holstering their pocket books.

The big question now is what's next for jewelry stores now that luxury buying is drying up? Surprisingly, the higher the price point, the lower the margin generally is, so it may not be as bad as you think. What would really be troublesome is if John Q. Public suddenly began toning down his purchases, which, unfortunately, could also be happening.

Signet Jewelers (NYSE: SIG  ) , owner of Kay Jewelers and Jared the Galleria of Jewelry, reported a 1.2% rise in same-store sales in the first quarter, but it provided guidance for the second quarter below the Street's forecast. One blaring concern that Wall Street analysts predominantly passed over was an increase in bad-debt charge-offs in its latest quarter, despite many major credit card companies signaling delinquency rates are near multiyear lows.

Zale (NYSE: ZLC  ) , owner of Zale and Gordon Jewelers, fared a bit better than Signet in terms of sales growth in the U.S., but it still can't manage to turn that elusive profit. Losses in the latest quarter were halved, and it managed to pass along mild price increases to consumers without alienating its customer base, but its crippling debt and store closures are constraining its growth.

The one company that looks like it'll struggle regardless of what happens is online diamond and mounting retailer Blue Nile (Nasdaq: NILE  ) . The company has been losing its competitive pricing advantage to brick-and-mortar retailers in recent years, and rising commodity and labor costs are quickly eating into its margins.

Only time will tell whether the jewelry sector is turning the corner to the downside, but having worked in the sector for a decade when I was younger, I can say with relative certainty that I don't like jewelers' growth prospects over the near term.

What's your take on the fine jewelry sector? Would you say "I do," or would you leave it standing at the altar? Tell me and your fellow Fools in the comments section below.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He has taken multiple diamond grading courses in his lifetime. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple and Blue Nile, shorting shares of Tiffany, and creating a bull call spread position in Apple and Blue Nile. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that can be described as flawless and transparent.


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