Harry Winston’s Q2 Disappoints

Harry Winston Diamond Corp. (HWD) recently reported a second-quarter net loss of $24.5 million, or 32 cents per share, on sluggish sales and foreign exchange loss. This compares with a net profit of $49.9 million, or 81 cents, in the year-ago period. Quarterly performance was also worse than the Zacks Consensus Estimate for a loss of 5 cents.

Toronto-based Harry Winston is a specialist diamond enterprise with assets in the mining and retail segments of the industry. The company supplies rough diamonds globally from production received from its Diavik diamond mine in Lac de Gras, Canada. The company has a 40% stake in this mine, which is operated by Rio Tinto Plc (RTP). Harry Winston also retails fine jewelry and watches through its wholly owned subsidiary, Harry Winston Inc., with outlets in the U.S., Europe and Asia.

The company’s quarterly sales plunged 49.1% year over year to $94.8 million on weak demand as recession-weary customers reduced discretionary spending. The mining segment saw a 56.3% drop in sales to $45.9 million due to a 36% fall in rough diamond prices coupled with a 31% reduction in volume of carats sold. Revenue in the retail segment slumped nearly 40% year over year to $48.8 million as sales across the U.S., Europe and Asia fell by 48%, 44% and 21% respectively.

Harry Winston’s gross margin slipped to 30.1%, from 60.5% in the year-ago quarter primarily on account of higher mining costs. The company posted an operating loss of $3.9 million, compared to operating profit of $73.4 million in the year-ago period as sluggish sales overwhelmed a 17.4% year-over-year fall in selling, general and administrative expenses.

The company recorded cash from operations of $20 million during the quarter, compared to $46.2 million in last year, primarily due to the significant dip in earnings performance. It deployed about $15.8 million towards capital expenditure in the quarter.

Moving forward, Harry Winston expects rough diamond prices, which improved substantially during the quarter, to maintain its upward trajectory. The company estimates about 5 million to 6 million carats to be mined during calendar year 2009, and to rise to about 7.5 million carats in calendar 2010. However, it anticipates the retail segment to continue facing economic headwinds through the rest of the fiscal year.

The Zacks Consensus Estimate, derived from 4 covering analysts, stands at a loss of 50 cents per share for the fiscal year ending January 2010. This has improved by 17 cents over the past week. However, analysts on average expect the company to post a profit of 15 cents per share in fiscal 2010, 2 cents lower than their estimate a week ago.

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