Ratio Workout For the New Year

Before you meet with your banker to request a loan or a line of credit, you’d be smart to master the six key financial ratios the banker will use to analyze your creditworthiness. You should know how your ratios compare with national averages and be able to explain how and whether your store’s financial performance can be brought into line with them. (See box below.) If you find the numbers daunting, consider having your accountant coach you before you meet with your banker.

Most credit-request meetings take just 15 to 20 minutes. That may seem too short to make your pitch, but if you’re prepared, it’s enough time. “There’s no need to get into a detailed conversation,” counsels Joe Romano of the North Bergen, N.J., management-consulting firm Scull and Co. “But you’ve got to be very familiar with the numbers and understand how you’ll pay back the money you borrow.”

It’s also important to present the banker with a loan-request book that has answers to virtually every question about your company’s financials. The cover page should be an executive summary that explains how the company does business, why it’s borrowing money, and how it will be paid back. You might include a corporate mission statement about your core values and a statement of specific business objectives. Provide financial statements, budget projections, cash-flow analysis, open-to-buy, and tax returns for at least three years. That way your banker won’t have to waste time asking for more data after you meet—strengthening your chances of getting the loan.

One last point: Once you get the loan, if you feel the need to negotiate for better rates or terms, and your current banker won’t give you what you want, consider meeting with a loan officer from a competing bank to explore options. Let your current banker know. “Light a fire under them. Let it be known you are interested in switching the account,” advises Romano. “Be an up-front negotiator. Cultivating other banking relationships is good because it keeps the playing field open and independent. That’s how you retain control.”

JA Introduces Training Program

Your sales professionals probably know plenty about “romancing the stone.” But do they know enough about “enhancing the stone” and other sensitive issues? If they can’t communicate credibly about the complexities of gem treatments, synthetic gemstones, appraisals, quality marks, trademarks, and lab reports, then their performance on the job will fall short.

To raise the level of expertise among jewelry sales associates—even novices—Jewelers of America and 23 other industry trade organizations have collaborated to create a training program called Counter Intelligence. This self-study course is designed to bring salespeople up to speed quickly. It not only prepares them to help customers make informed choices but also helps them uphold their employer’s reputation.

Copies of Counter Intelligence are available for $79 (plus shipping) from JA at (800) 223-0673. The training program consists of five learning modules plus a video, a manager’s guide, and self-study materials (shown in the photo at right).

The modules, which take 45 minutes each to complete, deal with the following topics:

• What it means to be a jewelry sales professional.

• Communicating gemstone and cultured pearl enhancement information.

• The facts about quality marks and trademarks.

• Understanding laboratory quality reports and jewelry appraisals.

• Discussing synthetic and imitation gem materials with your customers.

Counter Intelligence was underwritten with grants from the JCK Show Jewelry Industry Fund and the Industry Image Task Force, a group of 24 industry organizations founded in 1998 by the Jewelry Information Center to change industry practices that create negative publicity.

Jeweler Profits Grew 7% in ’98

Jewelers posted strong profitability growth in 1998, with the greatest gain, 13.7%, occurring among designer, artist, or custom stores.

According to Jewelers of America’s 1999 Cost of Doing Business Survey, which is based on financial results from 470 jewelers, profitability grew 7.1% among all jewelry stores, 6.2% among independent high-end stores, and 8.4% among independent midrange stores. Profit gains were slimmer among chain jewelry stores, which posted profitability growth of just 4.8%.

Median gross sales growth, by comparison, hit 9.1% among all jewelry stores, 11.6% among independent high-end stores, 6.7% among independent midrange stores, 9.3% among chains, and 9.2% among designer, artist, or custom stores.

Significantly, for midrange and designer, artist, and custom stores, the percent increase in profits was greater than the percent increase in revenues—a reflection of sound management practices. By comparison, at chain and independent high-end stores, the percent increase in profits was only about half the percent increase in revenues (see bar chart on p. 74).

“These results demonstrate that effective managerial techniques allow jewelers to take full advantage of strong economic growth,” says JA president Matthew Runci.

JA recommends that jewelers use the detailed performance results in the survey as a basis for evaluating and managing their own store’s performance. To provide relevant benchmarks, key financial performance measures are broken out by type of store. The average jeweler participating in the survey had $570,685 in sales in ’98 and employed four people in a 1,600-sq.-ft. store.

The challenge of squeezing out profits in a more competitive environment is also evident in JA’s data on gross margins, which declined to 48% in ’98, continuing a decade of nearly continuous downward movement (see chart at left).

Copies are available for sale ($19.95 for JA members and $125 for non-members) through JA at (800) 223-0673.

Jewelers to Increase Web Presence

JA’s 1999 Cost of Doing Business Survey also measures jewelers’ acceptance of the World Wide Web. Of the 470 jewelers surveyed, 27.1% said they have a Web site, 12.5% said they plan to get on the Web soon, and 18.5% said they use the Web but do not have a Web site. Though jewelers’ e-commerce initiatives were not covered in the survey, JA says the topic might be included next year.

Jewelers also are using catalogs as an alternative channel for sales. In fact, 6% of the gross revenues posted by the participating jewelers came from catalogs, and 15.2% of jewelers surveyed said their store has a catalog.

Setting Sensible Store Hours

Is there a regular ebb and flow to your store’s customer traffic and buying patterns? If so, you should try to match your staff’s schedules to those patterns to boost sales and keep costs in line.

Kate Peterson, co-owner of Performance Concepts, a jewelry consulting and sales training firm, recommends that “jewelers track by day and time when customers are there, and then base scheduling around that. Instead, most independents are of the profound misconception that if they’re open from 10 a.m. to 6 p.m. Monday through Saturday, everyone will do their shopping then.”

Though store traffic and buying trends vary widely from market to market, the more general buying data in JCK’s recent consumer jewelry study may serve as a helpful point of comparison. Among the 200 jewelry consumers surveyed exclusively for JCK, weekend jewelry purchases were nearly double those of a typical weekday. More specifically, 39.3% of purchases occurred on Saturdays and Sundays (an average of 19.7% per day), and 60.7% of purchases occurred Monday through Friday (an average of 12.1% per day).

There were also significant fluctuations in buying activity by time of day. JCK’s survey shows that 15% of purchases occurred before noon, 14% of purchases occurred between noon and 2 p.m., 37% of purchases occurred between 2 p.m. and 5 p.m., and 34% of purchases occurred after 5 p.m. Again, while there are huge variations from market to market, and mall locations must be taken into consideration, the data may serve as a useful reference point.

Six Ratios You Should Know

If you want to borrow money, these are the six financial ratios you should understand. The ratios given here are from RMA of Philadelphia, which publishes lending risk information on every type of business. The figures are based on pooled data from jewelers who borrow from banks nationwide.

Liquidity ratios

1. The current ratio divides total assets by total liabilities. It’s a rough indication of a firm’s ability to service its obligations, and it measures the extent to which fairly liquid assets exceed current debt. The higher the current ratio, the greater the “cushion” between obligations and a firm’s ability to pay them. The median RMA current ratio for jewelers with revenues between $1 million and $3 million is 2.1, meaning that assets are 2.1 times the value of liabilities. For jewelers with $3 million to $5 million in revenues, RMA’s median ratio is 1.8.

2. The quick ratio is calculated by dividing cash plus accounts receivable by total liabilities. This ratio demonstrates how much money would be available from the business if it discontinued operations. RMA shows a median of 0.70 for $1 million to $3 million jewelers, meaning they would have 70 cents on the dollar available to pay off current debts. The ratio is 1.0 for jewelers with sales of $3 million to $5 million.

Inventory ratios

3. Inventory turn is calculated by dividing the cost of merchandise sold by the average cost of inventory over the year. If a jeweler’s inventory turn is 1x, that means that on average each item sells once a year. Jewelry clients of Scull and Co. achieve a 1.4x inventory turn. According to Jewelers of America’s 1999 Cost of Doing Business Survey, the median inventory turn for all types of jewelry retailers is 1.1x. Median turn for high-end independents is 1.3x; chains achieve a 1.4x turn; and designer, artist, and custom design jewelers achieve a 1.8x turn.

RMA’s median turn for $1 million to $3 million stores is 2.5, but Scull’s Joe Romano cautions that this reflects turn among jewelers borrowing to buy more inventory because they don’t have enough in stock. He warns that a ratio over 2.0 puts a jeweler in danger of not having enough jewelry to sell.

Inventory turn is typically a difficult ratio for bankers to comprehend, because 60% to 75% of a typical jeweler’s balance sheet is tied up in inventory. The jeweler’s “ability to control that asset single-handedly will make or break them from a liquidity point of view,” warns Romano.

4. Gross margin return on inventory (GMROI) is calculated by dividing gross profit on merchandise by the average cost of inventory. If the result is 1, that means for every dollar invested in inventory you earned a dollar profit. Romano cautions that jewelers should not have a target for GMROI because “it’s the jeweler’s responsibility to get as much out of a market as they can at a point in time.” Market conditions vary from community to community.

Safety or solvency ratios

5. The debt-to-equity ratio is calculated by dividing what the company owes by the stockholders’ equity. The median debt-to-equity ratio for jewelers tracked by RMA is 1.1 for stores with revenues between $1 million and $3 million, and 1.6 for $3 million to $5 million stores. For Scull clients, Romano says this “typically comes out at 2x, but that doesn’t mean that a higher or lower number reflects a problem.” A low debt-to-equity ratio generally suggests a company is well-capitalized and has greater flexibility to borrow in the future. A high debt-to-equity ratio, however, may simply indicate that a company has borrowed for a major business expansion. Still, a highly leveraged company typically has a more limited debt capacity.

6. The debt-to-service ratio is used by a banker to determine whether a borrower has the ability to repay the loan. It’s calculated by taking the net income plus interest expense and depreciation expense (for fixed assets) and dividing this sum by the current portion of the long-term debt.

Among the jewelers tracked by RMA, the debt-to-service ratio is 2.3x. Romano says this ratio is the determining factor in borrowing money and clearly demonstrates why, in addition to complying with tax law, jewelers need to put income on the books. “You have to have money on the books to be eligible to borrow money.”