While overall consumer spending has slowed since the Federal Reserve Board’s initial bump in interest rates in June 1999, at press time jewelry sales in 2000 were up over 1999 sales figures. Since the rising rates don’t seem to be restraining jewelry shoppers, jewelers may be tempted to borrow additional funds to keep their showcases packed. But the latest word on Wall Street is that consumer confidence is beginning to head south, inflation is up to 3.1% as of press time (from 2.1% a year ago), and oil prices have increased 50% as well. So what kind of financial picture is in store for retail jewelers?

“Wall Street thinks fine jewelry is particularly sensitive to interest rates because it’s a discretionary purchase,” says retail jewelry analyst Ken Gassman of Davenport & Co., Richmond, Va. That explains this year’s slight drop in stock prices of public jewelry companies. Mall retailers, including jewelry chain stores, say traffic slowed after Mother’s Day. Jewelry sales, however-particularly at higher-end stores such as Tiffany-are generally stable. “But the facts don’t support the prices,” Gassman says.

“Christmas sales will be at least 7% higher than last year,” says Gassman. “Unless gasoline rockets to $3 per gallon, jewelry sales shouldn’t be affected by oil prices. But 2000won’t be another 1999.” The National Retail Federation in Washington, D.C., agrees, stating in a recent newsletter that consumer spending in 2000 would be “a bit slower.” Borrowing can be a risky business during fickle financial times. To help jewelers navigate the fiscal shoals, lenders have these tips:

Before you borrow. Banks ask a number of specific financial questions before lending money to jewelers. For example, banks want to know how much merchandise a jeweler owns vs. how much he or she has on memo, but it’s a matter of record. Banks aren’t necessarily looking for a specific mix of owned product vs. memo, says Gary Koster, vice president and relationship manager of business banking for the Pennsylvania/Delaware region of First UnionNational Bank. More jewelers are requesting memo agreements this year, according to research from Davenport & Co., and Gassman speculates that jewelers might be wagering on another holiday like last year’s.

A jeweler’s inventory turn is vital information for banks-it gives them a reasonable idea of when they’ll see their money again. A turn rate of more than twice a year on stock is ideal, according to Koster. “Turn is a big part of the credit decisions we make,” he says. But according to Gassman, normal turn is once a year. “Jewelers’ inventory turn is one of the slowest in retail. Jewelers fall in love with the product too frequently. You must look at your numbers. If product isn’t moving, then melt it, discount it, send it back, but do something to get your money back.”

Service first. When shopping for a lender, choose a bank that understands the “seasonality” of the jewelry industry, say experts. Banks that understand the peaks and valleys of jewelry sales are better prepared to offer comfortable repayment terms for jewelers. “[Interest] rates are immaterial,” says Jeff Pfeffer, senior vice president of Bank Leumi in New York City. Banks sell services, so don’t shop for a lender based on borrowing rates. Use a bank that provides great service and understands your business.

Spencer Witty, chairman of Merchants New York Bancorp, recalls a gold jewelry manufacturer who took out a $4 million loan with Merchants several years ago. But falling sales left the manufacturer with lots of inventory. “And our money was in that inventory,” notes Witty. “He couldn’t repay us within the original one-year period, so we restructured his loan terms so we could be repaid within two-and-a-half years. Today, the borrower continues to do well in his business.”

Banks with minimal turnover in clients are desirable sources of funding because they work with borrowers in good times and bad. But those banks conduct business only with the “right” kind of borrowers, according to Pfeffer. Desirable borrowers have good industry reputations and are trustworthy and responsible. “We like to know the borrower’s character,” says Pfeffer. Once trust is established, bankers review the borrower’s financial statement to determine the appropriateness of the loan amount.

But even if jewelry sales are high, you shouldn’t necessarily borrow money to replenish stock. If you’re already well stocked, you’ll be paying off June’s inventory loans by January 2001, and if sales slow-as financial gurus predict and the Federal Reserve Board hopes-you run the risk of inventory accumulation. To be sure, some jewelers do take out mid-holiday season loans, but cash is still “king,” according to Art Romweber, First Union’s senior vice president in charge of underwriting business banking in Pennsylvania and Delaware. “Inventory has to sell and be converted to cash, because this expansion economy we’re into won’t last forever.”

Gassman says not to worry too much if certain products don’t sell as well as expected during the Christmas season. Many of this year’s heavily promoted items-such as the three-stone diamond anniversary ring-aren’t fashion driven. But leftovers still tie up capital, so jewelers may be forced to return merchandise or mark down prices. Either option reduces profits. An alternative is to ask for extended or adjusted payment terms and continue to advertise. Although jewelers looking to trim expenses often cut back on advertising, experts say it’s not a good idea. Advertising helps maintain sales momentum and can keep inventory moving.

Other analysts advise manufacturers to spread out sales among many retailers. High sales to a limited number of retailers can be a risky strategy, in case more than one has a bad season. According to Gassman, jewelers weren’t conservative buyers this year. “Manufacturers said some orders in June were late, but purchases didn’t drop off,” he says.

Some financial observers still maintain there are no “added” risks or reasons to be cautious in this economic climate, as long as gross profit margins are large enough to absorb the cost of rising interest rates. Then, when rates decrease, those jewelers will enjoy even greater profits.

Rising Interest Rates /In an effort to slow the economy before inflation accelerates, the Federal Reserve Board began raising interest rates in June 1999. Some financial experts estimate that rates will go as high as 6.75% unless consumers curb their spending.

FRB Meetings	Interest Rate
January 1999	4.75%
June 30, 1999	5.0%
August 24, 1999	5.25%
November 16, 1999	5.50%
February 2, 2000	5.75%
March 21, 2000	6.0%
May 16, 2000	6.50%
June 28, 2000	6.50%
August 22, 2000	6.50%
Source: Bloomberg.com/the Federal Reserve Board