521 Fifth Avenue
New York, New York 10175
Telephone: (212) 808-2060
Fax: (212) 557-3848
Incorporated: 1911 as Seligman & Latz
Sales: $654.5 million (1995)
Stock Exchanges: NASDAQ
SICs: 5944 Jewelry Stores; 6719 Holding Companies, Not Elsewhere Classified
Finlay Enterprises, Inc. is one of the leading jewelry retailers in the United States, with sales of $654.5 million in 1995. Unlike competitors such as Zale Corp., Finlay operates few self-standing retail locations. Instead, the company operates fine jewelry departments in leased spaces in stores owned by 26 major and independent host store groups. The largest share of Finlay's 827 U.S. departments are located in stores in The May Department Stores group, including stores such as Filene's, Kaufmann's, and Lord & Taylor, which acts as host to 343 Finlay departments. Another top Finlay host is Federated Department Stores, Inc., which owns stores such as Rich's, Sterns, and Burdines, and which hosts 153 Finlay departments. Independent store groups featuring Finlay Fine Jewelry departments include Belk, Carson Pirie Scott, Liberty House, Dillard's, Steinbach, and others, bringing Finlay into 43 states and Washington, D.C. Finlay is the largest operator of leased jewelry departments in the United States.
Business Organization and Relationships
The practice of leasing jewelry departments is widespread in the department store industry, a relationship that provides benefits to both lessor and lessee. Jewelry is a specialized industry with costs and factors that lie outside of the typical department store's core base of clothing and home furnishings. Department stores are able to avoid the high costs associated with retail jewelry, such as slow, typically one-year inventory turns and expensive inventory maintenance. Lessees such as Finlay provide management expertise, marketing, merchandising, purchasing, employee hiring, training and payroll, inventory control, and security, as well as specialized relationships within the fragmented jewelry industry, while providing department store customers with the attraction of a fine jewelry department.
Finlay and other jewelry department lessees benefited from this relationship by avoiding the high investment costs of establishing and maintaining company-owned retail locations. By avoiding stand-alone formats, new Finlay departments were generally profitable within one year of opening. Finlay departments also enjoyed the enhanced reputation and customer traffic of a department store, and marketing could be tied in with the host's storewide promotions. Finlay also benefited from a reduced credit risk, as department stores generally assumed the risk of extending and collecting the credit for Finlay sales. Net sales usually were remitted to Finlay on a monthly basis, whether or not the host store had collected on the sale.
Finlay's leases ranged from one to five years and provided for rents based on the level of sales; rents typically ranged from 10 to 15 percent of sales. Finlay enjoyed long-term relationships with most of its host stores; 19 of its 26 store groups leased Finlay departments for more than five years, representing nearly 80 percent of Finlay annual sales, and 13 had relationships with Finlay lasting longer than ten years, representing nearly 65 percent of Finlay's revenue. Part of Finlay's growth was tied into the expansion of its host store groups. In the period from 1990 to 1995, for example, Finlay added 121 departments through the opening of new stores in its host groups' chains. Consolidation trends in the department store industry also aided Finlay's growth. As department stores featuring jewelry departments of Finlay's competitors were absorbed by industry giants such as May and Federated, Finlay's relationships with these groups often allowed the Finlay department to take over as lessee.
These lease relationships, however, exposed Finlay to certain risks. The closing of a department store meant the loss of Finlay's leased location and a corresponding loss of revenue. Consolidation--such as Federated's acquisition of R.H. Macy & Co. in 1994, which operated its own department stores--could lead to the termination of Finlay's leases. Finlay also faced the risk that a department store group would decide to assume operation of their own jewelry departments. Finally, Finlay remained exposed to losses presented by the bankruptcy of its host chains.
In addition to its domestic leased jewelry department business, Finlay operated France's largest leased jewelry operations since its 1994 acquisition of Société Nouvelle d'Achat de Bijouterie (Sonab), which included 104 locations in such leading French stores as Galeries Lafayette and Nouvelles Galeries. In 1994, Finlay also began test operations of a chain of company-owned outlet stores, called New York Jewelry operations, which had grown to seven locations by 1996.
A Giant Without a Name
Founded in 1911 as Seligman & Latz, the company's original focus was the operation of beauty salons, also under a lease arrangement with department and specialty stores. Jewelry sales were soon added to the company's portfolio, and by 1942, the company opened its first leased Finlay Fine Jewelry department. By 1960, Seligman & Latz operated in more than 50 locations, generating nearly $170 million in revenues.
Yet the company remained essentially nameless with the general public, which tended to identify the company's beauty salons and jewelry departments with the stores in which they operated. For much of its history, the company's emphasis was on its beauty salons and products, which later included the Adrien Arpel line of cosmetics, skin care, and related products. Toward the mid-1970s, with annual revenues shrinking to $160 million, the company's focus began to shift. Jewelry sales began to represent the fastest growing share of revenues.
In 1978, jewelry provided less than $75 million of Seligman & Latz's $208 million in revenues. Four years later, Seligman & Latz's revenues swelled to $304 million; much of this growth was provided by the company's Finlay division, which had doubled in size, to $145 million in sales. The beauty division, meanwhile, had grown more slowly during this period, from $133 million in 1978 to $159 million in 1982. Together, the two divisions operated in more than 100 leading department store and specialty groups in ten countries, with Macy's providing the largest--13.8 percent--of the company's revenues, closely followed by Associated Dry Goods, May, and Gimbel Bros. Profits, however, had been shrinking. Net income, which had neared $5 million in the mid-1970s, slipped to barely more than $1.5 million by 1980.
Despite its low profile, in stark contrast to its luxury goods-oriented business (for example, the company's annual reports during the time offered little more than a reproduction of the company's SEC filing), Seligman & Latz began to attract the attention of investors. The company seemed ripe for a takeover, in fitting with the flurry of corporate takeovers that marked the 1980s.
Leveraged Buyouts and an Initial PublicOffering in the 1980s
In February 1984, Seligman & Latz reached agreement with City Stores Company and its subsidiary, Diversified Investments, Inc., which would merge the two companies under the Seligman & Latz name. The company faced a difficult year, stemming from a conversion to a new inventory system that forced Seligman & Latz to stop shipments for a full year, an increase in shrinkage from theft, and the loss of several key managers. At the same time, Seligman & Latz had fallen behind the industry in sales per square foot. Underfinanced, the company was having difficulty maintaining inventory in an industry where broad selection played a key role in sales. The company's problems were further exacerbated by a general slump in the jewelry industry and its slow recovery from the recession of the early 1980s. When Seligman & Latz, despite revenue gains to $342 million, posted a loss of $2.2 million for the year, City Stores balked on the merger agreement.
Yet the company had already attracted the attention of another group of investors. As early as 1982, Harold Geneen, former chairman of ITT, had presented David Cornstein with Seligman & Latz's annual report and asked Cornstein how he would run the company. Cornstein, whose involvement in the leased jewelry business reached back more than 20 years, and whose Tru-Run Inc., a jewelry and watch repair company, had outlets in 80 stores, identified many of Seligman & Latz's key problems.
Geneen and Cornstein began to seek financing and in 1985 structured a leveraged buyout (LBO) of Seligman & Latz for $42 million, including $1 million of Geneen's private funds. A chief investor in the LBO was Transcontinental Services Group N.V., with financing arranged through Manufacturer's Hanover Trust, Phoenix Mutual Life Insurance, and Banker's Life and Casualty. The new owners took Seligman & Latz private.
Under President and CEO Cornstein, the company was restructured as a holding company, SL Holdings, which now included Tru-Run Inc. The new management posted rapid improvements in the Finlay division, doubling store sales to $1,000 per square foot and boosting Finlay's annual revenues to $265 million in 1987 and to $315 million in 1988. The number of Finlay outlets also grew, from 460 in 1985 to 525 in 1988. Meanwhile, the beauty division, which had grown to nearly 1,000 locations, continued posting $5 million annual losses.
In 1988, Cornstein and Geneen engineered a buyout of the company's jewelry division, in a deal worth $217 million, with financing arranged through Westinghouse Credit Corp. As part of the restructuring, Seligman & Latz's beauty division, including Adrien Arpel, was sold to Regis Corp. in Minneapolis for $17 million. The company, now specialized in jewelry, was renamed Finlay Enterprises, Inc.
By the start of the 1990s, Cornstein and Geneen began to make plans to take Finlay public, in part to help ease the debt load carried over from the buyout. In 1991, Finlay attempted an initial public offering (IPO) of five million shares, including one million shares of stock held by company principals, to raise up to $125 million. But the recession of the period and steep sales drops across the industry, coupled with Cornstein's and Geneen's sale of their own stock, scared off investors. The company was forced to back down from the IPO. Shortly afterward, Geneen retired from the company.
In an effort to recapitalize the company after Westinghouse exited the financial services market, Cornstein approached Thomas H. Lee, whose Boston investment company had funded the growth of Snapple. In 1993, Lee organized a buyout of Finlay, taking 28 percent of the company, and, with Desai Capital Management Inc.'s 32 percent share, gaining control of Finlay Enterprises.
The new owners moved to expand the company, acquiring Sonab in 1994 from Galeries Lafayette and launching the first test location of New York Jewelry Outlet. The following year, Lee and Desai took Finlay public, selling 2.62 million shares for a net of $30 million. By then, Finlay operated nearly 800 locations, including its French stores, for 1994 revenues of $552 million. With its strong French base, the company began to look toward a deeper penetration of the European market. In March 1996, Finlay signed an agreement to lease seven departments in the 89-store, United Kingdom-based Debenhams department store chain. Expansion into other countries was expected to follow. Finlay's future plans also called for expanding its New York Jewelry Outlet chain to as many as 60 stores. With its long-term lease relationships with leading department store chains, strengthening promotions, and rising revenues, Finlay was likely to maintain its glittering position in the U.S. jewelry industry and make a name for itself as well.
Principal Subsidiaries: Finlay Fine Jewelry Corporation; Société Nouvelle d'Achat de Bijouterie (France).
Furman, Phyllis "Glittering Jeweler Re-emerges in Big IPO," Crain's New York Business, September 16, 1991, p. 3.
------, "No-Name Jeweler Now Pursuing the Spotlight," Crain's New York Business, June 12, 1995, p. 1.
Grant, Peter, "Geneen and Friend Shine with Gold," Crain's New York Business, December 19, 1988, p. 1.
Metz, Robert, "A Low-Keyed Concessionaire?," New York Times, March 26, 1981, p. D6.
Springsteel, Ian, "Diamonds in the Rough," CFO: The Magazine for Senior Financial Executives, September 1995, p. 29.
Trachtenberg, Jeffrey A., "Good as Gold?," Forbes, May 20, 1985, p. 62.
Source: International Directory of Company Histories, Vol. 16. St. James Press, 1997.