Finlay Enterprises, Inc. Business Information, Profile, and History

Company Perspectives:

We attribute our continued growth and success to a strong marketing s trategy led by a talented team of merchants; customer service achieve d through enhanced product knowledge and selling standards; state of the art technology; a strong back of the house support team; and the efforts of dedicated associates throughout the organization who striv e every day to strengthen our business.

History of Finlay Enterprises, Inc.

Finlay Enterprises, Inc., is the leading operator of leased jewelry d epartments in the United States, with sales of $923.6 million in fiscal 2005. Unlike competitors such as Zale Corporation, Finlay oper ates few self-standing retail locations. Instead, the company chiefly operates fine jewelry departments in leased spaces in stores owned b y 16 major and independent host store groups. The largest share of Fi nlay's 962 U.S. departments are located in stores in The May Departme nt Stores Co. group, which acts as host to 481 Finlay departments. An other top Finlay host is Federated Department Stores, Inc., which hos ts 113 Finlay departments. Finlay expected to lose 194 of its locatio ns as a result of Federated's acquisition of May in 2005. As a result , the company pursued new growth avenues, which included the purchase of Carlyle & Co. Jewelers, a regional chain with 34 stores in th e southeastern region of the United States.

Business Organization and Relationships

The practice of leasing jewelry departments is widespread in the depa rtment store industry, a relationship that provides benefits to both lessor and lessee. Jewelry is a specialized industry with costs and f actors that lie outside of the typical department store's core base o f clothing and home furnishings. Department stores are able to avoid the high costs associated with retail jewelry, such as slow, typicall y one-year inventory turns and expensive inventory maintenance. Lesse es such as Finlay provide management expertise, marketing, merchandis ing, purchasing, employee hiring, training and payroll, inventory con trol, and security, as well as specialized relationships within the f ragmented jewelry industry, while providing department store customer s with the attraction of a fine jewelry department.

Finlay and other jewelry department lessees benefited from this relat ionship by avoiding the high investment costs of establishing and mai ntaining company-owned retail locations. By avoiding stand-alone form ats, 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 ti ed in with the host's storewide promotions. Finlay also benefited fro m a reduced credit risk, as department stores generally assumed the r isk of extending and collecting the credit for Finlay sales. Net sale s 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 per cent of sales. Finlay enjoyed long-term relationships with most of it s host stores; 19 of its 26 store groups leased Finlay departments fo r more than five years, representing nearly 80 percent of Finlay annu al sales, and 13 had relationships with Finlay lasting longer than te n 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 depar tments through the opening of new stores in its host groups' chains. Consolidation trends in the department store industry also aided Finl ay's growth. As department stores featuring jewelry departments of Fi nlay's competitors were absorbed by industry giants such as May and F ederated, 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 l ocation and a corresponding loss of revenue. Consolidation--such as F ederated'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 wou ld decide to assume operation of their own jewelry departments. Final ly, Finlay remained exposed to losses presented by the bankruptcy of its host chains.

In addition to its domestic leased jewelry department business, Finla y operated France's largest leased jewelry operations since its 1994 acquisition of Société Nouvelle d'Achat de Bijouterie ( Sonab), which included 104 locations in leading French stores such as Galeries Lafayette and Nouvelles Galeries. In 1994, Finlay also bega n test operations of a chain of company-owned outlet stores, called N ew York Jewelry operations, which had grown to seven locations by 199 6.

Company Origins: 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 wi th department and specialty stores. Jewelry sales were soon added to the company's portfolio, and by 1942, the company opened its first le ased Finlay Fine Jewelry department. By 1960, Seligman & Latz ope rated in more than 50 locations, generating nearly $170 million i n revenues.

Yet the company remained essentially nameless with the general public , which tended to identify the company's beauty salons and jewelry de partments with the stores in which they operated. For much of its his tory, the company's emphasis was on its beauty salons and products, w hich later included the Adrien Arpel line of cosmetics, skin care, an d related products. Toward the mid-1970s, with annual revenues shrink ing 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 &amp ; Latz's revenues swelled to $304 million; much of this growth wa s provided by the company's Finlay division, which had doubled in siz e, to $145 million in sales. The beauty division, meanwhile, had grown more slowly during this period, from $133 million in 1978 t o $159 million in 1982. Together, the two divisions operated in m ore than 100 leading department store and specialty groups in ten cou ntries, with Macy's providing the largest--13.8 percent--of the compa ny's revenues, closely followed by Associated Dry Goods, May, and Gim bel 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-orient ed business, Seligman & Latz began to attract the attention of in vestors. The company seemed ripe for a takeover, in fitting with the flurry of corporate takeovers that marked the 1980s.

Leveraged Buyouts and a Public Offering in the 1980s

In February 1984, Seligman & Latz reached agreement with City Sto res 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 fo r a full year, an increase in shrinkage from theft, and the loss of s everal key managers. At the same time, Seligman & Latz had fallen behind the industry in sales per square foot. Underfinanced, the com pany was having difficulty maintaining inventory in an industry in wh ich broad selection played a key role in sales. The company's problem s were further exacerbated by a general slump in the jewelry industry and its slow recovery from the recession of the early 1980s. When Se ligman & Latz, despite revenue gains to $342 million, posted a loss of $2.2 million for the year, City Stores balked on the me rger 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 rep ort and asked Cornstein how he would run the company. Cornstein, whos e involvement in the leased jewelry business reached back more than 2 0 years, and whose Tru-Run Inc., a jewelry and watch repair company, had outlets in 80 stores, identified many of Seligman & Latz's ke y problems.

Geneen and Cornstein began to seek financing and in 1985 structured a leveraged buyout (LBO) of Seligman & Latz for $42 million, i ncluding $1 million of Geneen's private funds. A chief investor i n the LBO was Transcontinental Services Group N.V., with financing ar ranged through Manufacturer's Hanover Trust, Phoenix Mutual Life Insu rance, and Banker's Life and Casualty. The new owners took Seligman & amp; 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, doublin g store sales to $1,000 per square foot and boosting Finlay's ann ual revenues to $265 million in 1987 and to $315 million in 1 988. 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 je welry division, in a deal worth $217 million, with financing arra nged through Westinghouse Credit Corporation. As part of the restruct uring, Seligman & Latz's beauty division, including Adrien Arpel, was sold to Regis Corporation in Minneapolis for $17 million. Th e company, now specialized in jewelry, was renamed Finlay Enterprises , Inc.

By the start of the 1990s, Cornstein and Geneen began to make plans t o take Finlay public, in part to help ease the debt load carried over from the buyout. In 1991, Finlay attempted an initial public offerin g (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, c oupled with Cornstein's and Geneen's sale of their own stock, scared off investors. The company was forced to back down from the IPO. Shor tly afterward, Geneen retired from the company.

In an effort to recapitalize the company after Westinghouse exited th e financial services market, Cornstein approached Thomas H. Lee, whos e 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 c ontrol of Finlay Enterprises.

The new owners moved to expand the company, acquiring Sonab in 1994 f rom Galeries Lafayette and launching the first test location of New Y ork Jewelry Outlet. The following year, Lee and Desai took Finlay pub lic, selling 2.62 million shares for a net of $30 million. By the n, 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 dep artments in the 89-store, U.K.-based Debenhams department store chain . Expansion into other countries was expected to follow. With its lon g-term lease relationships with leading department store chains, stre ngthening promotions, and rising revenues, Finlay was likely to maint ain its glittering position in the U.S. jewelry industry and make a n ame for itself as well.

Challenges in the New Millennium

Finlay entered the late 1990s and early years of the new millennium o n solid ground. In 1997, the company acquired Zale Corp.'s Diamond Pa rk Fine Jewelers business in a $65 million deal. The purchase inc luded 185 leased jewelry locations and added Dillard's, Parisian, and Marshall Field's department stores to Finlay's growing roster. In 19 98, the company consolidated its 25 processing centers and opened a n ew state-of-the-art distribution center, which was designed to improv e productivity.

In 1999, Finlay announced plans to divest its international business in order to focus on its domestic operations. The company secured its position as the leading operator of leased jewelry departments in 20 00 when it agreed to buy most of the assets of Jay B. Rudolph Inc., w hich included 57 locations in Dayton's, Hudson's, and Bloomingdale's chains.

During this time period, the department store industry remained highl y competitive and many store owners began consolidating operations an d closing locations. Finlay's lease structure left it in a vulnerable position and sure enough, the company began to feel the pinch of the se industry trends. In 2003, May announced plans to close 32 Lord &am p; Taylor locations and two Famous-Barr stores. In all, the closures would spell out a loss of approximately $20 million in sales for Finlay. In 2004, the company lost its contract with Federated-owned B urdine's, which included 48 locations. The move came as Federated dec ided to consolidate certain operations and rebrand many of its locati ons with the Macy's name.

Finlay was dealt a significant blow in 2005 when Federated announced its plans to unite with May later that year. The merged company would realign many of its stores under the Macy's name, and Macy's general ly operated its own jewelry departments. In one fell swoop, Finlay lo st 194 of its locations. "We are disappointed that our total store ba se will be reduced," claimed CEO Arthur Reiner in an October 2005 National Jeweler article. "However, our core business remains sol id and we will intensify our ongoing efforts to add new sources of gr owth to our business." Indeed, Finlay's plans for the future included expanding and strengthening its current host store business, adding new host store locations, and growing its business through strategic acquisition. The company's dedication to this strategy became evident in May 2005 when it purchased jewelry store operator Carlyle & C o. Jewelers in a $29 million deal. The purchase signaled Finlay's departure from its traditional leased operations by adding 34 stores in the southeastern United States to its arsenal. Although May's uni on with Federated dulled the company's outlook for fiscal 2006, Finla y's management believed that it had a solid business plan in place an d was confident the company would continue to shine for years to come .

Principal Subsidiaries: Finlay Fine Jewelry Corporation; Finla y Jewelry, Inc.; Finlay Merchandising & Buying, Inc.; Sonab Holdi ngs, Inc.; Sonab International, Inc.; Société Nouvelle D'Achat de Bijouterie - S.O.N.A.B. (France); eFinlay, Inc.

Principal Competitors: Helzberg Diamonds; Signet Group plc; Za le Corporation.

Chronology

• Key Dates:
• 1911: Seligman & Latz is created as an operator of beauty salons.
• 1942: The company opens its first leased Finlay Fine Jewelry d epartment.
• 1960: By now, Seligman & Latz operates in more than 50 loc ations and generates nearly $170 million in revenues.
• 1985: Harold Geneen and David Cornstein structure a leveraged buyout of Seligman & Latz for $42 million.
• 1988: Cornstein and Geneen engineer a buyout of the company's jewelry division; the division is renamed Finlay Enterprises Inc.
• 1993: Thomas H. Lee organizes a buyout of Finlay.
• 1994: Societe Nouvelle d'Achat de Bijouterie (Sonab) is acquir ed.
• 1995: Finlay goes public.
• 1997: Zale Corporation's Diamond Park Fine Jewelers business i s purchased.
• 2005: Carlyle & Co. Jewelers is acquired; the company lose s 194 locations as a result of Federated's acquisition of May.