We last mentioned Harry Winston in our July post, Perspective on Consumer Trends Around the World from Estee Lauder and Harry Winston. As indicated in that post, we did slightly reduce our HWD stake for reallocation into relatively unloved names - including more Seaspan (SSW) and Global Ship Lease (GSL). However, we still hold the majority of our original position in Harry Winston and see incremental upside based on normalized earnings power.
What is normalized earnings power? Fair question with many moving parts that create a range of possible outcomes. The good news is that July quarter results -- EPS of $0.18 excluding a $0.04 foreign exchange benefit -- provided a hint of the company's earnings potential. Now, the Street is ratcheting forecasts upward. Assuming fundamentals keep moving in the right direction, earnings power should become more evident over the next year.
Just how are fundamentals? Another important question. Here are top-line and operating earnings highlights directly from the press release:
Moreover, several key points from Q&A on the conference call stood out to us, which we share here to not only relay the Harry Winston story, but also for excellent perspective on trends in the global luxury market and economy. Thanks to SeekingAlpha.com, we have the following:
On sharply higher merchandise inventory for the retail operation:
- Bob Gannicott, Chairman/CEO: “It's up for very good reasons. We have a very significant pipeline of high jewelry sales at the moment. It's very significant. It's probably more significant than we've had since I've been with the company. And that inventory has been purchased to support largely this pipeline.”
- Irene Nattel, RBC: “How very interesting. Thank you.”
On higher rough diamond prices for the mining operation:
- Des Kilalea, Royal Bank of Canada: “…I think Bob you said last time that you thought prices were about 5% or 10% below peak… Where would you put prices now versus the end of 3Q08?”
- Bob Gannicott: “We've gone past the peak, by a measurable margin. The only thing is … it's sort of become somewhat uneven. Thankfully, our production is very focused in value from white goods, typical Canadian production. Obviously, the appearance of large volumes of production from Zimbabwe has held back the price increases and in fact probably depressed prices somewhat in smaller, cheaper, off-color goods. So, for our average production, we have gone past the peak that was achieved before the recession.”
AND, finally, on demand for "significant pieces" -
- Frederic de Narp, President and CEO, Harry Winston Inc.: “First of all, I think the wealthy people of the world are growing. In 2009, taking statistics of Merrill Lynch or Capgemini, the ultra-high net worth in the world grew by 19.6% and the high net worth has grown by more than 17% in '09... So there are more wealthy people around the world.
- Second, it is true that in this volatile world we note that people would rather spend a million dollars on a necklace for the person they love as an investment. Said investment is a glamorous investment, something that they can enjoy instead of some other investments that they don't really know. Also because unique stones and unique pieces have proven to be extremely profitable and the price has been growing tremendously during the last five years.
- And last, it's a moment where people do not hesitate to celebrate the meaningful moments of their life, investing in some authentic, true value, craftsmanship pieces, and this is what Harry Winston stands for. So we have an offer and we have a brand position and we do with that correspond exactly, precisely to this quest for authentic, unique pieces that people want. So we see it growing exponentially and growing for the next quarters, and growing as a trend…”
The results and commentary illustrate ongoing global shifts in purchasing power and the importance of owning businesses with international exposure. They also reveal the benefit of owning a business that holds a 40% interest in a highly coveted asset -- some of the highest quality diamond deposits in the world. From the company's July presentation:
Harry Winston is not without risk -- the Diavik Diamond Mine is located in a remote part of Canada and is the company's only mining asset -- yet we continue to sleep well owning a piece of the business.
Disclosure: long HWD, SSW, GSL.
© 2010 Jeffrey Walkenhorst
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