INDUSTRY PROFILE

Jewelry Retail
QUARTERLY UPDATE 7/7/2008
SIC CODES: 5944
NAICS CODES: 44831

Industry Overview
The US jewelry retail industry generates annual revenues of about $25 billion from 30,000 specialty stores. Large
companies include Zale, Tiffany, and Sterling Jewelers. The industry is fragmented: the top 50 jewelry chains hold less
than half of the market.

COMPETITIVE LANDSCAPE
Jewelry sales depend partly on consumer income. Small jewelers can effectively compete with large chains because
price isn't the main factor determining sales. Profitability depends on merchandising and effective marketing. Average
industry revenue per worker is about $160,000.

Jewelry is also sold in department and discount stores, and by mass merchants. Because regular gross margins are
very high, often 50 percent, mass merchants have been able to cut prices and take market share. Wal-Mart is the
largest jewelry retailer in the US.

PRODUCTS, OPERATIONS & TECHNOLOGY

Jewelry is often classified as bridal merchandise (engagement, bridal and anniversary rings - about 35 percent of the
market); fashion jewelry (rings, bracelets, earrings, pins, gold chains); and watches, silver flatware, and other giftware.
Diamond jewelry and loose diamonds account for the largest share of total jewelry store sales (46 percent); gold jewelry
for 11 percent; colored gemstone jewelry (rubies, sapphires, emeralds, etc.) 9 percent; and watches 4 percent.
Jewelry is expensive, intimidating, difficult for consumers to evaluate, and usually not branded. Purchases therefore
require a good deal of service and expertise. Consumers are most likely to buy jewelry from a merchant they feel is
trustworthy: either a well-known local jeweler or a trusted retailer such as Tiffany.

Jewelers' operations consist of buying jewelry from manufacturers and wholesalers, training sales staff, and marketing
products through various channels. Many jewelers also operate repair services, which can account for 10 percent of
annual revenue. Company buyers must be both technically skilled and aware of fashion trends. Most retailers buy
merchandise fully finished from many different manufacturers. Some retailers also create pieces themselves. Tiffany
manufactures about 30 percent of its jewelry, and has licensing arrangements with several jewelry designers who sell
their designs only through the company. Retailers also sell merchandise on consignment from manufacturers.

SALES & MARKETING

Selling costs are high for jewelry retailers, who generally wish to project an upscale image, because high quality sales
space, furnishings, and expert sales personnel are expensive.
Marketing is typically through newspaper and magazine advertising, although some retailers also use direct mailing, and
is typically directed at a particular demographic group. Whitehall, for example, targets middle- and upper-middle-income
women over 25.

Larger companies like Zale Corporation operate several chains that target different shoppers. The average sales price
of an item is less than $200 at its Peoples Jewelers chain and close to $1,000 at its Bailey Banks & Biddle chain.
FINANCE & REGULATION
An average jewelry store has annual revenue of $1 to $2 million. Stores are often smaller than 2,000 square feet, and
the average selling price per item is close to $300.

Jewelry sales are highly seasonal, with 40 percent of revenue and the majority of profits generated in fourth quarter:
25 percent of annual jewelry sales are in December. Merchandise inventories are high, often more than 50 percent of
annual sales, and inventory controls must be tight to prevent embezzlement. Accounts receivable are very high for
companies that offer their own credit card.
Credit is an important consideration for all jewelers, since credit availability is necessary to sell an expensive product.
The average cash purchase is usually much lower than the average credit sale. About 50 percent of a typical jeweler’s
sales are financed on credit cards. Some local jewelers extend credit themselves on large purchases to well-known
customers, a practice that has had disastrous results for some companies in recent years. Big chains like Whitehall
typically offer a private credit card through a third party, taking no credit risk themselves. Most small retailers avoid risk
by taking only third party credit cards.

Like other retailers, jewelers are basically unregulated by the government except insofar as they must adhere to
standard fair trade and credit laws. The FTC provides guidance to jewelers to accurately advertise and describe
gemstones, especially if they have been treated to change color.

REGIONAL & INTERNATIONAL ISSUES

Most jewelry sold in US stores is imported. Imports have increased rapidly in recent years. The largest sources of
jewelry imports in 2005, excluding costume jewelry, were India, China, Italy, and Thailand. Israel and Belgium are the
major world centers for cutting rough diamonds into finished gemstones. The US is the world's largest diamond jewelry
market, accounting for about 50 percent of global sales.
The world supply and price of uncut diamonds is still largely controlled by the Diamond Trading Company (DTC), an
arm of De Beers of South Africa. De Beers controls a majority of the world's trade in uncut diamonds through its own
production and purchase agreements with other major producers, like Russia and Angola. Retailers don’t buy directly
from De Beers, although most of their manufacturers do. As the operator of a cartel, De Beers isn't allowed to own
companies in the US.

HUMAN RESOURCES
Employees of higher-priced jewelry stores usually require special training and may be bonded for security reasons.
Because of the special expertise required, most workers at high-end stores are full-time. Salespeople often work on
commission. Typical hourly wages are below the national average. Retail jewelry stores have an exceptionally good
safety record.

Industry Employment Growth

Bureau of Labor Statistics

Average Hourly Earnings & Annual Wage Increase

Bureau of Labor Statistics
Recent Developments

MONTHLY NEWS
Texting jewelers: R U with Gen Y?
National Jeweler Network, 26 June, 2008, 1177 words
Seattle-The children of the baby boomer generation are here, and, if the marketing radar is right, they are ready to
shop. Born between 1978 and 1993, and dubbed "boomlets," "echo boomers" or members of "Generation Y," this 15-
to ...

Study: World's uber-wealthy still crave luxury; New York-Despite increasing costs and financial market turmoil, the world's
high-net-worth ...
National Jeweler Network, 26 June, 2008, 440 words
New York-Despite increasing costs and financial market turmoil, the world's high-net-worth individuals (HNWIs) and ultra-
high-net-worth individuals (Ultra-HNWIs) continued to seek luxury items last year, according to the 12th annual World ...

The Jewelry Channel going off-air; Austin, Texas-In yet another sign of tough economic times, a Texas-based jewelry
television network announced it ...
National Jeweler Network, 18 June, 2008, 341 words
Austin, Texas-In yet another sign of tough economic times, a Texas-based jewelry television network announced it will
cease operations in early August. In a letter to the Texas Workforce Commission obtained by National Jeweler, Austin, ...

QUARTERLY INDUSTRY UPDATE

Jewelry Demand Down to Start 2008 - Sluggish US and global economies seem to be the culprit behind a worldwide
slowing of demand for gold jewelry, which was down 21 percent in first quarter 2008 compared to one year ago,
according to the World Gold Council. US demand was also slow, off 15 percent. The World Gold Council didn't expect
demand to pick up in second quarter 2008.

Retailers Buying Gold Due to High Prices - Gold prices have increased significantly over the past several months.
Many jewelers, to combat higher gold costs, have started buying used gold jewelry. Jewelers who buy gold pay
customers cash and then resell the jewelry to a processor for a profit. Some jewelers say that the process will help them
survive otherwise lean times, while also generating consumer interest in other items.

Richest Emerge as Customer Focus - Economic downturns often mean hard times for retailers, but high-end jewelers
can take comfort in new research suggesting that ultra wealthy consumers aren't planning to cut back. Americans who
claim $10 million in net worth plan to increase spending near-term, according to research firm Prince & Associates. The
80 percent of the ultra wealthy consumers planning increases may be the customer base of many high-end jewelry
retailers looking to weather the hard economic times affecting most consumers.

Business Challenges
CRITICAL ISSUES
Sales Tied to Economic Growth - Jewelry sales are tied to the health of the US economy, particularly changes in
disposable personal income and consumer confidence. Sales of expensive jewelry, especially, depend on good
economic growth. For example, during the last recession, jewelry store sales dropped 5 percent.

US real disposable personal income, an indicator of jewelry retail activity, increased just under 1 percent in
March 2008 compared to March 2007.

Competition from Mass Merchants - Specialty jewelry stores continue to lose market share to mass merchants like
Wal-Mart. Specialty stores now account for only about half of all jewelry sales in the US. The share sold by traditional
department stores has been declining as well.

Wal-Mart plans a large expansion in Canada of up to 27 new supercenter stores, which may impact sales at
local jewelry stores in many Canadian cities.

OTHER BUSINESS CHALLENGES

Influence of De Beers - The world diamond supply and pricing are strongly affected by De Beers, the South African
group, which controls 65 percent of the world's rough diamond supply. However, De Beers faces increased competition
from Canada, Australia, Angola, and Russia, and has encountered legal obstacles in the US and the EU because of its
business practices.
Exposure to Credit Risk - Some local jewelers extend credit themselves on large purchases to well-known customers,
a practice that has had disastrous results for some companies in recent years. Extending credit is common, and expands
during good economic times. Credit collection is lower during difficult economic times, at the same time that profit
margins slip within core jewelry sales.
Public Mistrust of Jewelers - The public is wary of, and intimidated by, jewelers, a perception not unfounded given
the average 100 percent price markup in the industry and the difficulty consumers have assessing product quality. Wal-
Mart's success in selling jewelry stems partly from consumer perception that it has the lowest prices.

Crime Exposure - The small and expensive nature of the merchandise makes jewelry a target for potential thieves. The
Jewelers Security Alliance reported 1,275 crimes against the jewelry industry in 2005, totaling $112 million. Crimes
include thefts in stores and off premises, such as robberies of traveling salespeople.

Trends & Opportunities

BUSINESS TRENDS
Chain Expansion in Malls - Jewelry chains, with stores located mainly in malls, are expanding rapidly. New stores are
often 4,000 square feet, much larger than traditional stores, and devote 70 percent of floor space to retail selling.

Branding - To increase consumer confidence, retailers and manufacturers are trying to establish brand names. While
branding has been successful for signature pieces from famous retailers like Tiffany, gemstone branding has so far had
little impact. Branding has been most successful for watches.
Business Sales - In addition to selling jewelry to individuals, some companies like Tiffany sell items like cups, pens,
watches, and pins to business accounts for use in employee programs.

INDUSTRY OPPORTUNITIES

Private Credit Cards - Jewelers offering private credit cards have targeted promotional materials to customers to
enhance connection with the store; some have also been able to sell other types of merchandise to them. Zale
Corporation markets insurance and credit insurance to its credit card customers, 48 percent of whom buy some form of
insurance product from the company.

Internet Sales - Luxury jewelry giant Tiffany and many other jewelers have set up websites to sell a limited amount of
jewelry.

Favorable Demographics - The number of Americans 45 to 65, the segment of the population with the highest income,
will increase 30 percent between 2000 and 2010. This group will probably increase demand for higher-end jewelry.

Executive Insight
CHIEF EXECUTIVE OFFICER - CEO

Establishing Compliance Programs

While jewelry retailing is relatively unregulated, its large amounts of cash and intrinsic product value make it subject to
Treasury Department anti-money laundering regulations and the Patriot Act. Jewelers joined with the National Retail
Federation (NRF) to promote a theft task force that creates an organized crime database. Jeweler associations provide
stores with information regarding anti-money laundering regulations.

Ensuring Access to Gemstones

The world’s supply of diamonds is controlled by DeBeers, a monopoly that has agreements with other world suppliers to
buy their output. In the past, DeBeers had the power to exclude jewel merchants that bought from other suppliers. As a
result of several successful lawsuits against DeBeers, DeBeers must grant access to its events to all qualified store
owners.

CHIEF FINANCIAL OFFICER - CFO

Increasing Security
A jewelry store’s inventory values are high. Theft of jewelry while in transit is not unusual. Some jewelers are participating
in a joint security effort by the Jewelers Executive Conference that reduces the opportunity for criminals to steal from
traveling salespeople. While most jewelers are insured against theft, participating in such cooperative efforts reduces
losses and demonstrates an attempt to comply with anti-money laundering programs.

Managing Credit Risk

Credit is very important for jewelers due to the expensive nature of their product. Although most stores’ purchases are
bought using credit cards, many jewelers extend credit themselves to well-known customers. To avoid risk, most stores
accept only credit cards.

CHIEF INFORMATION OFFICER - CIO

Creating Websites
Many jewelers are creating websites to display their merchandise. Online sales are small but growing. Zales’ e-commerce
grew over 30 percent in 2005 and it believes that e-commerce has long-term growth potential. Online jewelry sales at
Amazon and Blue Nile were up significantly in 2005.

Investing in Technology
Many stores are starting to invest in technology to improve efficiency. Multi-location stores are redesigning store
processes using point-of-sale software to improve communication with other stores, vendors, and customers. Data
processing improvements such as purchase order management, merchandise planning, accounting systems, and bar
coding are being implemented by even single-location stores to help with inventory and financial controls.

HUMAN RESOURCES - HR

Training Staff
Jewelry store staff members usually require special training. Many are technically skilled and have a sense of fashion.
Product knowledge training is required for expertise in diamonds and colored gemstones. Some stores provide training
through the Diamond Council of America (DCA) to train key employees and managers. Companies also train buyers on
merchandise quality and negotiation techniques.

Implementing Crime Prevention Programs

Theft and embezzlement are continuing problems for jewelers, given the small size but large value of inventory. Stores
install surveillance equipment to protect themselves from both internal and outsider theft. To comply with anti-money
laundering regulations, most stores buy risk assessment services, train employees, and have third parties test their
security systems.

VP SALES/MARKETING - SALES

Marketing Based on Demographics

In a highly fragmented market, retailers go to great efforts to identify their customer base and try to differentiate
themselves from competitors through targeted marketing campaigns. Most retailers use local print advertising. National
chains supplement print advertising with radio and TV ads. Increasingly, stores are developing sophisticated direct mail
campaigns aimed at specific demographics.

Competing with Big-Box Retailers

Large discounters have entered the jewelry market, adding competition primarily at the lower end of the market.
Independent jewelers compete by having a wider selection and a highly trained staff. Although Wal-Mart is now the
largest jewelry retailer, jewelers still command over half of the market and dominate the middle to upper end of the
marketplace.

Call Preparation Questions

CONVERSATION STARTERS

How does the company manage changes in the economy and consumer spending?
Jewelry sales are tied to the health of the US economy, particularly changes in disposable personal income and
consumer confidence.
How will the jeweler compete against big box retailers like Wal-Mart?
Specialty jewelry stores continue to lose market share to mass merchants like Wal-Mart.

How reliant is the company on its suppliers?

The world diamond supply and pricing are strongly affected by De Beers, the South African group, which controls 65
percent of the world's rough diamond supply.
Does a third party handle extending credit or does the company manage credit risk itself?
Jewelers offering private credit cards have targeted promotional materials to customers to enhance connection with the
store; some have also been able to sell other types of merchandise to them.

How successful is the company's Internet strategy?

Luxury jewelry giant Tiffany and many other jewelers have set up websites to sell a limited amount of jewelry.

To what demographic does the company market its products?

The number of Americans 45 to 65, the segment of the population with the highest income, will increase 30 percent
between 2000 and 2010.

QUARTERLY INDUSTRY UPDATE

Has the company experienced lower sales volume in 2008?
Jewelry demand, especially for gold pieces, was down in first quarter 2008.

Are the company's high-end products still selling well, despite economic difficulties in the US?
Ultra wealthy consumers plan to increase spending in the near future.

OPERATIONS, PRODUCTS, AND FACILITIES

How many stores does the company operate?

Most jewelry retailers have a single store.

What is the average size of company stores?

The average Zale store covers 2,000 square feet; the average Whitehall store, less than 1,000.

What type of merchandise does the retailer carry?

Jewelry is often classified as bridal merchandise (engagement, bridal and anniversary rings - about 35 percent of the
market); fashion jewelry (rings, bracelets, earrings, pins, gold chains); and watches, silver flatware, and other giftware.
Diamonds often account for more than 50 percent of a company’s sales.
What is the split in sales among diamonds, gold items, watches, and other items?
Diamond jewelry and loose diamonds lead in the largest percentage of total sales (46 percent). Karat gold jewelry
accounts for 11 percent, colored stone jewelry 9 percent, watches 4 percent, and jewelry repairs for 10 percent of total
jewelry store sales.
How many suppliers does the company use?
Most retailers buy merchandise fully finished from manufacturers; a few also create pieces themselves. Tiffany buys from
150 vendors, Whitehall from 120.

CUSTOMERS, MARKETING, PRICING, COMPETITION

What segment of the market does the company sell to?

Stores often target a specific demographic by income and age.

How does the company predict and respond to new jewelry trends?
Trade shows are a common source of new product ideas.
What types of marketing does the company use?
Newspaper ads are common; direct mail catalogs are often used. Discount promotions are most common at the lower
end of the market.

Does the company cater to individuals who make frequent, expensive purchases?
Small jewelers may depend on a few wealthy buyers.
How does the company make pricing decisions?

REGULATIONS, R&D, IMPORTS AND EXPORTS

How much of the company's products is manufactured overseas?

Most jewelry sold in the US is manufactured abroad.

How does the company avoid selling Conflict Diamonds?

Conflict diamonds originate in rebel areas and are used to fund military action, although the actual amount of diamonds
involved is a small share of the total market. A Certificate of Origin is meant to ensure that only legitimate diamonds
reach the marketplace.

ORGANIZATION AND MANAGEMENT

What types of training does the company provide employees?
Sales employees, especially at high-end retailers, must have special expertise.
Do salespeople work on commission?
This is more common at higher-end stores.

FINANCIAL ANALYSIS

How does the company manage the seasonal nature of jewelry sales?
Jewelry sales are highly seasonal, with 40 percent of sales and the majority of profits generated in fourth quarter.

What is the average sale amount?

The sales price of the average item is around $300, but can be much higher at high-end stores.

How large an inventory does the company carry? How often does inventory turn over?
Inventory may turn over only one or two times per year.
How does the retailer manage inventory to prevent employee theft?

Has the company had loss due to transit theft or store robberies?
Theft of wholesale jewelry in transit to stores is fairly common.

Does the company extend credit, either through a credit card or to favored customers?
Some large companies manage their own credit card operations. Some issue cards managed by third parties.
BUSINESS AND TECHNOLOGY STRATEGIES

What product lines does the company plan to introduce?

What future does the company see for independent jewelers competing against chains?
Although the industry is still fragmented, chains have increased their market share.

How is the company impacted by the influence of diamond giant De Beers?

The sales and marketing arm of De Beers, called the Diamond Trading Company, sells almost half of the world’s rough
diamonds by value.

How does the company plan to use the Internet to increase sales?
Internet jewelry sales aren't expected to grow rapidly, but informational websites that show a wide range of inventory and
prices that customers can view at home are expected to be popular.

Financial Information

COMPANY BENCHMARK INFORMATION

Jewelry Stores - (NAICS: 44831)

12 Month Rolling Data Period Last Update February 2008

Small Company Data Sales < $607,398
Table Data Format Median Values

US Private Company Data

Aggregate Small Company
Company Count in Analysis 556 139

Income Statement
Net Sales 100% 100%
Gross Profit 51.5% 49.7%
Operating Income 3.7% 3.5%
Net Profit After Tax 2.2% 1.6%

Balance Sheet
Cash 5.4% 7.2%
Accounts Receivable 2.4% 0.3%
Inventory 67.8% 67.7%
Total Current Assets 76.3% 75.5%
Total Fixed Assets 5.2% 5.2%
Other Non-Current Assets 18.5% 19.3%
Total Assets 100.0% 100.0%
Accounts Payable 11.6% 8.1%
Total Current Liabilities 20.7% 16.5%
 Total Long-Term Liabilities 0.8% 0%
Net Worth 78.5% 83.5%

Financial Ratios
(Click on any ratio for comprehensive definitions)
Quick Ratio 0.44 0.44
Current Ratio 2.66 3.67
Current Liabilities to Net Worth 48.0% 23.0%
Current Liabilities to Inventory 50.0% 35.5%
Total Liabilities to Net Worth 64.5% 32.0%
Fixed Assets to Net Worth 9.0% 6.0%
Collection Period 4.8 1.4
Inventory Turnover 2.5 2.1
Assets to Sales 61.0% 84.0%
Sales to Working Capital 3.0 1.9
Accounts Payable to Sales 8.0% 7.0%
Return on Sales 2.0% 2.0%
Return on Assets 3.0% 2.0%
Return on Investment 10.0% 10.5%
Interest Coverage 4.8 2.5

Financial industry data provided by Fintel -- offering leading benchmarking with a database of over 900 industries. Utilize financial analysis through
profitability, liquidity, sustainable growth rate, business valuation, custom research, and other tools. Visit us on the web at
www.fintel.us/firstresearch to find out how we can help you.

ECONOMIC STATISTICS AND INFORMATION

Change in Producer Prices - Bureau of Labor Statistics

Retail Annual Sales Growth - Census Bureau

Change in Consumer Prices - Bureau of Labor Statistics

VALUATION MULTIPLES

Jewelry Retail

Acquisition multiples below are calculated using at least 3 middle-market

(valued at less than $1 billion) industry transactions completed between 7/2002
and 11/2007. Last update: May 2008.

Valuation MVIC/Net MVIC/Gross

MVIC/EBIT MVIC/EBITDA
Multiple Sales Profit
Median Value 0.3 0.6 1.8 19.6

MVIC (Market Value of Invested Capital) = Also known as the selling price,
the MVIC is the total consideration paid to the seller and includes any cash,
notes and/or securities that were used as a form of payment plus any interest-
bearing liabilities assumed by the buyer.
Net Sales = Annual Gross sales, net of returns and discounts allowed, if any.
Gross Profit = Net Sales minus Cost of Goods Sold..
EBIT = Operating Profit
EBITDA = Operating Profit + Noncash Charges.

SOURCE: Pratt's Stats™ (Portland, OR: Business Valuation Resources, LLC) To purchase more detailed
information, please either visit www.BVMarketData.com sm or call Business Valuation Resources
at 888-287-8258.

Industry Forecast
US personal consumption expenditures for jewelry and watches are forecast to grow at an annual compounded rate of
6.3 percent between 2007 and 2012.
Spending on Jewelry Growth Strong but Declining

First Research forecasts are based on INFORUM forecasts that are licensed from the Interindustry Economic Research
Fund, Inc. (IERF) in College Park, MD. INFORUM's "interindustry-macro" approach to modeling the economy captures
the links between industries and the aggregate economy.

First Research Industry Growth Rating

The First Research Industry Growth Rating reflects the expected industry growth relative to other industries, based on
INFORUM's forecasted average annual growth for the combined years of 2008 and 2009.

Demand: Depends on consumer income

Strong marketing skills required
Risk: Slowing economy limits spending on non-essentials

First Research Industry Drivers

Changes in the economic environment that may positively or negatively affect industry growth.

Consumer Spending: Change in overall level of consumer spending on goods and services

Commodity Prices: Changes in prices for commodities, such as crops, metals, and other raw materials

Web Links & Acronyms

INDUSTRY WEBSITES

American Gem Society

Education in diamond grading.

Gemological Institute of America

Education about precious stones.

Jewelers Circular Keystone

The primary industry magazine; industry news; list of associations; trade fair calendar.

Kitco
Precious metal and jewelry news, charts, and pricing.

Modern Jeweler
News.

Professional Jeweler Magazine

News, articles, search engines, statistics, and more.
 GLOSSARY OF ACRONYMS

DTC - Diamond Trading Company

POS - point-of-sale

WGC - World Gold Council

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