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Harry Winston's 3Q Revenues -50%

14 december 2009

Harry Winston Diamond Corporation reported a 50 percent decline in revenues to $74.83 million for its third quarter of fiscal 2010, which ended on October 31, 2009, according to www.diamonds.net. The retailer recorded a loss of $214,000 for the quarter, compared with profits of $71.9 million one year ago. Harry Winston reported a net foreign exchange gain of $1.6 million for the quarter, down from a gain of $49 million for the third quarter of fiscal 2009.

Sales from the company's mining operations fell 77 percent to $20.8 million during the fiscal quarter. There was a 75 percent decrease in the volume of carats sold and a 9 percent decrease in rough diamond prices, according to the company. Rough diamond production for the third calendar quarter fell 67 percent to about 300,000, with much of this decrease attributed to the six-week shutdown of the Diavik Diamond mine that occurred from July 14 to August 24, 2009. Harry Winston's mining operations loss for the fiscal third quarter stood at $4.5 million, compared with earnings of $47 million for the comparable fiscal quarter of 2009.

Retail sales fell 7 percent to $54 million at Harry Winston's salons, but the corresponding operations loss decreased significantly to $455,000 from a loss of $4 million, as retail gross margins for the third quarter improved to 53.9 percent compared with 46.4 percent last fiscal year.

Mining

Diavik's rough diamond sales for the nine months extending through October were $124.4 million, down from $277.1 million one year ago, due to the combination of a 44 percent decrease in rough diamond prices and a 20 percent decrease in the volume of carats sold. Harry Winston noted that rough diamond prices have increased significantly since earlier in 2009, but that prices still remain lower than those achieved one year ago.

The company expects that its mining segment results will continue to fluctuate depending on its Diavik production, the number of sales events conducted at each sales location during the quarter, rough diamond prices and the volume, size and quality of distribution for the rough diamonds delivered from the mine each quarter.

Harry Winston's cost of sales for the first nine months totaled $117.6 million, resulting in a gross margin of 5.4 percent compared with $105.2 million and a gross margin of 62.1 percent one year ago.

"The rough diamond market continues to experience a robust recovery from the extreme market lows seen in the first quarter of the year and pricing has improved significantly," the company's statement explained. "The current tone in the market has encouraged diamond producers to sell down inventory, but this has not led to lower prices."

Retail

Harry Winston's salon sales in the third fiscal quarter increased by 53 percent to $20.2 million across Asia, but its European sales dropped 10 percent to $21 million. Sales at its U.S. operations fell 40 percent to $12.8 million. The company's gross margin rose to 53.9 percent from 46.4 percent due in part to higher sales margins in Asia.

Sales for the first nine months of fiscal 2010 were 28 percent lower at $154.9 million, while the cost of sales dropped 31 percent to $77.8 million during this nine-month period. Gross margin improved to 49.7 percent from 47 percent. Sales in Asia decreased 3 percent to $50.2 million and fell by 33 percent in Europe to $58 million. U.S. sales were down 38 percent to $46.6 million for the period.

"The U.S. market continues to remain subdued, with soft consumer demand," the statement noted. 

During the third fiscal quarter, the retailer introduced the Harry Winston New York Collection, a series of jewelry and timepieces inspired by the glamour and architecture of some of New York's most famous landmarks. Strict cost control measures continue to be a priority.

Overall, signs point to an encouraging trend for the retail sector and Harry Winston "remains cautiously optimistic" about Christmas season sales.

"Although significant economic challenges remain, the high-end luxury goods market is showing signs of recovery," the retailer stated.

Capital

At the close of the third quarter, Harry Winston had "unrestricted cash" and cash equivalents of $53.8 million, as well as contingency cash collateral and reserves of about $300,000. Its total cash resources were impacted by a $150 million net investment by Kinross and the company's subsequent repayment of the mining segment's $74.2 million senior secured term and revolving credit facilities on March 31. Working capital increased to $297.5 million in October from $195.1 million in January. 

During the third fiscal quarter, Harry Winston increased its accounts receivable by $4.7 million, decreased its prepaid expenses and other current assets by $12.5 million, boosted its inventory by $21 million, lowered its accounts payable and accrued liabilities by $4.2 million and decreased its income taxes payable by $2.6 million.

At the end of October, the retailer had $151.5 million outstanding on its $250 million secured five-year revolving credit facility. This amount represented a decrease of $28.1 million from the amount outstanding at the end of January.

Robert Gannicott, the company's chairman and chief executive officer (CEO), said, "We are very pleased to see a solid reversal in the negative trends that have characterized the previous quarters. Diavik production is set to increase, rough diamond prices continue to rise and retail sales have seen substantial improvement, led by the Far East, including Japan. If U.S. recovery takes hold, it will inevitably produce incremental demand for diamond products."