The Death of Zales

It was a bit of good news for the world’s second largest luxury jewelry retailer, Tiffany & Co..  After much speculation, second-quarter profits fell less than expected, thanks to higher than expected sales and expense control.

Jewelry, along with other luxury brands, have taken a significant beat down from the recession.

“There is no doubt this is an earnings beat and I think the primary factor is the cost reductions,” David Schick, an analyst with Stifel Nicolaus & Co. in Baltimore, said in a telephone interview today. “The company took a hard look at expenses and the business has stabilized to some extent sequentially.”.

Tiffiany & Co. stock rose based on the news.  It appears that Michael Kowalski, the Chairman and Chief Executive Officer of Tiffany & Co., has other plans to beat the recession.

“With the number of bankruptcies and reorganizations in the industry, we are hopeful our sales can outpace the economic recovery,” Kowalski said during an interview. “I have been here at Tiffany for 25 years, and in my own personal experience, we have not encountered an environment which we believe provides the long-term opportunity that this one does.”

It’s true many fine jewelers have been overcome by the tough economic climate.  While retailers offering designer inspired costume jewelry have made attempts to take advantage of the bad market by offering low priced alternatives to the traditional high-priced luxury jewelry market.

In contrast to the Tiffany announcement, Zale Corp. of Irving, TX. closed 118 stores in Q4.  So far, this year to date Zale Corp. has closed a total of 191 Zales Jewelers locations. The remaining inventory from closed jewelry stores is valued at $56 million.  Inventory would likely be divided among the remaining 1,931 Zales jewelry store locations, some of which are kiosks.

With all the designers feeling the economic heat, it makes sense that many retailers offering designer inspired fashion jewelry alternatives may be flourishing.  A look at the difference between a retailer like Tiffany & Co., which is truly a high-end brand that is known for being the pinnacle of luxury jewelry, and Zales, a mall store that is known more for being “economical” fine jewelry, can show where the main difference in purchasing lays.

The people who have the means to purchase at Tiffany & Co., continue to do so, just not as often.  Where as the traditional mall shopper who frequents Zales, is in a far worse position right now than they have experienced in decades.

There is also the matter of the “discount diamond brokers” that market themselves as a more direct source to fine diamonds and other precious stones, albeit this is often more a marketing angle than a reality.  Places like Helzberg Diamonds, or Jared’s are likely helping consume what remaining market Zales may have left.

Then there is of course your costume and fashion jewelry retailers, taking advantage of the fact that people still desire new jewelry, but cannot afford high-end brands.  The higher quality fashion jewelry retailers are no doubt taking a high chunk out of the marker share for jewelry buyers.  There is a wind of change in consumer attitudes that are reshaping their buying habits.  Jewelry being part of fashion means that it changes often.  Does it make sense to purchase over expensive jewelry when it may become outdated in the next few years?

The jewelry market will likely be separate into a few markets that thrive: the high end jewelers (Tiffany & Co.), the “discount” diamond brokers (Helzberg diamonds), and the fashion jewelry market.  It’s possible Zales may go the way of other brands like Sears, trying to find their niche in a crowded, incredibly competitive market place experience it’s own macroeconomic crisis.

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