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Marks Bros. glitters among jewelry chains

By STANLEY H. SLOM

Stanley H. Slom covered retailing for The Wall Street Journal for nine years, and has been an editor at several business magazines.

It is a golden time for jewelers, and one gem retailer is shining particularly brightly.

A major player in the retail jewelry business with 191 stores in regional and superregional malls in 24 states, Marks Bros. Jewelers Inc. is growing at a rate of 30 to 35 units a year, or 18%.

The environment for growth is in place for the industry and for Marks Bros. in particular, according to Hugh Patinkin, chairman, president and CEO of the Chicago-based chain.

Securities analysts agree. Since the fourth quarter of 1997, the retail jewelry industry has strengthened, said Tom Tashjian, an analyst for NationsBanc Montgomery Securities, San Francisco. Noting the cyclical nature of the jewelry business, Mr. Tashjian said, "Both Sterling Jewelry and Zale Corp. became very aggressive in advertising and pricing in 1997." After the two chains increased their advertising dollars, he said, it took some time for the rest of the industry to figure out how to deal with the challenge.

In the last quarter of 1997, the competition started performing better, especially Marks Bros.

"They got their advertising strategy in place. They really hadn't been aggressively advertising for several years," said Mr. Tashjian. Marks Bros. is managed well, especially its merchandising, he added.

Todd Slater, equities analyst for Lazard Freres & Co., is equally ebullient about the industry. "The jewelry industry is one of the more happy industries in retailing," he said.

Mr. Slater said that the industry is benefiting from a healthy economy, and a sense among consumers that jewelry offers more value than apparel.

The bottom line, he added, "has [Marks Bros.'] sales per square foot of $1,315, which is not only the highest in the jewelry industry, but probably of all mall stores."

Jewelry stores in the United States totaled sales of $21.07 billion in 1996. Between 1990 and 1996, revenues grew at an annual rate of about 5.6%, according to the U.S. Department of Commerce.

But during that same period, Marks Bros., which operates under the names of Whitehall Co. Jewellers, Lundstrom Jewelers and Marks Bros. Jewelers, had an average annual sales increase of 15.2%.

Asked why jewelry stores -- Marks in particular -- are doing so well, Mr. Patinkin explained that jewelers are benefiting from the aging of the baby boomers.

"The best time for jewelry purchases are between the ages of 45 and 55, and between 55 and 65," he said. "Obviously, baby boomers are moving into those age brackets, and they're spending their money on jewelry, which is an item that the consumer believes is not only beautiful, but also tends to hold its value. It doesn't wear out, they don't throw it away, they can hand it on to their families."

At presstime, Marks Bros. had not released its financial results for the fiscal year ended Jan. 31, 1998, except to say that comparable-store sales increased 10.4%, compared with the previous year when comps increased 7.9%. Earnings in fiscal 1996 totaled $17.4 million, or 87 cents a share, on sales of $155.5 million. At presstime, Mr. Slater projected earnings per share of $1.07 for the fiscal year just ended, and $1.30 for the current year.

Mr. Tashjian predicted earnings per share of $1.08 in the year just ended, and $1.35 in this year. He also foresaw sales of $188.3 million in the year just ended, a 21% increase over the previous year.

Mr. Patinkin, who tries to be in stores two to three days a week, observed that part of the sales growth has been generated by the opening of additional stores. Marks Bros. opened 30 stores in 1997, and plans to open up to 35 units this year.

"We are growing by 18% new units a year," he said, "And we anticipate doing that for some time to come."

All of the stores are located in regional or superregional malls. "We're a high-end jeweler, and so we tend to open stores in better malls."

These centers include the 3 million-square-foot Roosevelt Field in Garden City, N.Y., and the 1.3 million-square-foot Town Center at Boca Raton, Fla. Current real estate plans include new stores in Garden State Plaza in Paramus, N.J., and Dallas Galleria. For 1999, the chain has already completed a deal for King of Prussia, Pa., among other commitments (see chart, page 48).

The prototype Marks Bros. store -- whether Lundstrom or Whitehall -- is 800 square feet, generally located in center court.

"We've been very successful in getting those locations, primarily because our numbers are so strong," Mr. Patinkin said. "When you can tell a developer we can produce $1,315 a square foot on average, you've got a lot of interest."

Average sales per store are running at $1.04 million, compared with $900,000 a year earlier. That figure rose from $1,247 per square foot a year earlier, he said.

"I believe that it is the No. 1 producer among any national retail chain -- not just jewelry -- any retail chain excluding food stores," Mr. Patinkin said. "I don't know anyone else in malls that does more than we do."

Mr. Tashjian, the NationsBanc Montgomery Securities analyst, agreed.

"Looking at Marks Bros.' sales productivity of $1,315 per square foot (more than twice as productive as most other jewelry stores)," he said, "one can understand why its stores are highly sought after by mall operators. Moreover, an even deeper analysis of this statistic also reveals the company's low-cost operating strategy."

The stores are half the size and buildout cost of rivals, and flexible enough to fit into even the most unusual spaces, said Mr. Tashjian. Therefore, management can cherry-pick center court locations.

"The combination of high sales productivity, space flexibility and lower occupancy expenses delivers Marks Bros. a winning formula that generates high returns," Mr. Tashjian said. "Furthermore, since many of the new openings are former locations of independent jewelers, Marks Bros. also contributes to the ongoing consolidation of the industry."

Moreover, the company's multiple names allow it to open additional stores in malls where it already has profitable locations, said Mr. Patinkin.

Whitehall is its primary trademark and is somewhat more upscale than the average mall-based jewelry store. At the end of fiscal 1996, Marks Bros. operated two stores in 34 malls and three stores in one mall. In most cases, a Lundstrom is added to a mall only after the company has operated a successful Whitehall store in the same center. Generally, Lundstrom is positioned slightly more upscale than Whitehall, with greater emphasis on more expensive diamond and gold merchandise.

Marks Bros. also has a single test store that it classifies as a "guild" type store. Mr. Patinkin describes "guild" as a "Tiffany type," offering extremely high-end jewelry.

"That store has done well," he said, but added that the company is not currently anticipating rolling it out. "We have just too many opportunities for our two main concepts, Whitehall and Lundstrom."

Marks Bros. stores are high-end, Mr. Patinkin said.

"About 15% of our sales are items that sell for over $3,000. About 27% of our sales, or maybe it's 29%, sell for over $1,500 per item," he said. "About half of our business is bridal-related, whether that's the official engagement or a replacement ring when someone's 50 and getting a bigger diamond."

Marks Bros. also specializes in larger diamond solitaires, and sells a large number of solitaires ranging from 1.5 carats to 5 carats.

Both analysts, Messrs. Slater and Tashjian, think highly of Marks Bros. from a financial viewpoint. Mr. Slater pointed out that the company has a significantly higher-than-average revenue growth, earnings growth, return on capital, return on equity and operating net margins.

It also has the least amount of risk because of its nonrecourse credit. The company's private label credit cards, which are available through a third party, impose no customer credit risk for nonpayment by the customer associated with the sale.

Mr. Slater likes the company's disciplined real estate strategy, which focuses on smaller stores. He also praised it for not carrying a whole slew of nonjewelry items such as watches -- jewelry has a higher margin.

"I don't think they're missing much by not having nonjewelry," he said. "Also because of their nonrisk credit, their stores don't need credit offices and so they can make more efficient use of their space."

Comparable-store sales will also be supported by Marks Bros.' continuing to build a deeper selection of more expensive diamond assortments, said Mr.Tashjian.

These efforts have paid off well, lifting the company's average purchase size 10% in the third and fourth quarters of 1997, he said. "Since the company will continue to compare against a more modest priced year-ago selection of diamonds, we expect the average purchase size to continue to rise in upcoming months."