Whitehall Jewellers, Inc.

155 North Wacker Drive
Chicago, Illinois 60606
U.S.A.
Telephone: (312) 782-6800
Fax: (312) 782-8299
Web site: http://www.whitehalljewellers.com

Wholly Owned Subsidiary of WJ Holding Corporation
Incorporated: 1895
Employees: 2,880
Sales: $319.63 million (2006)
NAIC: 448310 Jewelry Stores

Whitehall Jewellers, Inc., is a leading American specialty retailer of fine jewelry, primarily gold and diamonds, which owns and operates 386 stores in 38 states across the country. Under the names of Whitehall Company Jewellers, Lundstrom Jewelers, and Marks Brothers Jewelers, the company runs stores in upscale city and suburban shopping malls. Whitehall reported a string of consecutive sales records and earnings in the 1990s. Much of its success was due to its ability to take advantage of the highly seasonal aspect of jewelry sales. The company's rapid growth continued until the economy began to slow in 2000. A couple of years later, an accounting scandal was uncovered that resulted in the firing of its CFO and cost Whitehall millions of dollars in legal fees and restitution as its stock price plummeted. A new strategy of focusing on the higher end of the market failed to pull the company out of the red, and Whitehall was bought out by an affiliate of Prentice Capital Management and Holtzman Opportunity Fund in 2006.

EARLY HISTORY

Marks Brothers Jewelers began its long history in 1895, when a retail jewelry store opened in the center of downtown Chicago. In 1903 Hugo Marks acquired the store from his uncle Ben Roth and began running it with his brother Al as Marks Bros. Jewelers.

Émigrés from Eastern Europe, the brothers welcomed the growing middle and upper classes of the city that were inclined to spend their money on high-quality, elegant diamonds, watches, rings, earrings, and fashionable hat pins. Within a very short time, Marks Brothers Jewelers had garnered a reputation as one of the most reliable and trustworthy jewelers in the city of Chicago, with some of the finest diamonds in the entire Midwest.

During the early years of the 20th century, and through the end of World War I, Marks Brothers Jewelers developed its reputation as a first-rate jeweler. At that time, Chicago was a city that provided ample opportunity to satisfy the ambition of entrepreneurs yearning for success. The railroads had made Chicago hog-butcher to the world, and families such as Kraft and Hormel made their fortunes from the stockyards on the south side of the growing metropolis. The families that managed this new wealth spent their money on items that indicated their status in society, such as diamond-studded tie pins and gold brooches, to highlight the dresses of women attending gala winter balls. The prosperity of the city was also shared by the growing middle class, who also frequented Marks Brothers Jewelers and purchased items for special occasions, such as diamond engagement rings. By 1919, the company had not only established and solidified its reputation as a jeweler, but had also laid a firm financial foundation for its continuation into the future.

The "Roaring Twenties," as they were called in the United States, had a particularly load roar in Chicago. The Volstead Act, which prohibited the production, sale, and consumption of alcoholic beverages, was a godsend to gangsters who illegally distributed beer, wine, and hard liquor to customers in "speakeasies" (private membership clubs). The ownership of these clubs and the territories they were located in generated bitter and violent battles between the gangsters for the large amounts of cash involved. In addition, many individuals in Chicago were making large sums of money speculating on the stock market, and there seemed no end to the growing wealth in the city. Many of these individuals who had made large sums of money legally and illegally bought their diamonds at Marks Brothers Jewelers.

Although the stock market crash of October 1929 sent the entire U.S. economy into a downward spiral, Marks Brothers Jewelers was able to survive this difficult period. Sales dropped dramatically, of course, and the company was forced to lay off many of its employees, but the brothers were able to gather together their family in order to run and operate the store themselves. As the Great Depression continued throughout the decade of the 1930s, sales at the company remained stagnant. Yet a glimmer of more profitable times was just around the corner.

WORLD WAR II AND THE POSTWAR PERIOD

Even before the beginning of World War II, the country's economy began to improve. President Franklin Delano Roosevelt implemented a comprehensive national program to place the United States on a wartime production schedule, with the manufacture of materials for troops that would be sent overseas to fight the Axis Powers of Germany and Japan. The resurgence of American manufacturing and production stimulated the economy and lifted the country out of the throes of the Depression. As a result, employment rose and people were paid comfortable wages. No longer worried about putting food on the table, people were able to spend more money on luxury items, such as marriage bands and diamond rings. Gradually, with the revitalization of the economy, specialty retailers like Marks Brothers Jewelers benefited from the increase in consumer purchasing power.

Marks Brothers Jewelers rode the wave of postwar American economic prosperity. Employment was high, wages were increasing, and America was the undisputed economic leader of the free world. All of these developments meant that many more American citizens were doing better than they had ever done before, and were able to pursue leisure activities and buy luxury items like no time in the past. This meant higher sales for Marks Brothers Jewelers, especially as more and more young couples decided that expensive diamond rings and gold wedding bands were necessities for their weddings.

Marks Bros. had five stores by 1946, making it the largest chain in downtown Chicago. The business passed to three children of Hugo Marks in 1948, and they were responsible for extending the franchise as far as Rodeo Drive in Beverly Hills.

Throughout the 1950s and 1960s, Marks Brothers Jewelers prospered, albeit unobtrusively. Still managed and run by family members, the company was run as a relatively small but highly regarded operation, with a modest-sized, long-term staff that was knowledgeable about diamonds and fine jewelry. A loyal customer base that grew steadily over the two decades was also a significant factor.

The company began to open a few stores in shopping malls as the phenomenon grew in the 1960s. By the time the decade had come to an end, Marks Brothers Jewelers had increased its revenues dramatically since the end of World War II.

COMPANY PERSPECTIVES

Whitehall Jewellers combines a unique formula of upscale quality merchandise at a wonderful price with superior customer service to create the ultimate jewelry shopping experience.

GROWTH AND EXPANSION

The jewelry specialty retail business changed significantly during the 1970s, as companies which had traditionally operated as one-store retailers began to expand their business by establishing new stores in different parts of one city or by expanding into different cities altogether. Thus although a well-known company might have its flagship store in downtown New York, it would begin to open stores in Chicago and Los Angeles, for example, and also take advantage of the enormous demographic changes that led to the creation of the suburban "mall." This latter development changed the jewelry retail business forever, since many companies decided at this time to rent mall space in order to attract the growing and affluent middle class that was moving to the suburbs.

Marks Brothers Jewelers did expand its operations during the 1970s, and gradually opened nine additional stores in various sections of downtown Chicago. However, there was no serious consideration of expanding company operations farther than the city limits. This attitude changed in 1979 with the arrival of a new and younger management team. Hugh Patinkin became chairman, president, and CEO, while his brother Matthew Patinkin assumed the position of executive vice-president of store operations, and John Desjardins was brought on board to act as executive vice-president of finance and administration. By this time, the company had a dozen stores: the Whitehall Co. Jewellers brand had been added. The company's first Lundstrom Jewelers store opened in Florida soon after.

Throughout the 1980s, the new management team implemented a comprehensive strategy to expand and improve company operations. Rejecting the trend toward developing high-volume superstores that sold diamonds and jewelry, such as Service Merchandise, Marks Brothers Jewelers remained faithful to its own brand of a unique, small store concept. What this meant was that the size of a Marks Brothers store averaged around 800 square feet, but could be as small as 400 square feet, while the average size of most jewelry stores averaged 1,500 square feet. In addition, management at Marks Brothers decided to locate new company stores in center court locations in malls. The center court location provided the company with a high profile, and the small store concept helped keep rent and operating costs to a minimum. By the beginning of 1990, the new management team had opened 100 new stores in malls across the country.

The impressive expansion achievement of Marks Brothers was not done through an acquisition strategy but by a detailed and careful analysis that resulted in choosing prime mall locations one by one. Most of these new stores were opened under the names of either Whitehall Company Jewellers or Lundstrom Jewelers. The modus operandi of the management team was to first open a Whitehall Company Jewellers store, and later open a Lundstrom Jewelers store, an upscale rendition of the Whitehall store in regard to its merchandise, in the same mall. In this way management minimized competition, and customers were not usually aware of the fact that the parent company, Marks Brothers, operated the two stores.

In 1995, the company continued its aggressive growth strategy by opening 14 additional stores, and in 1996 there were 19 new store openings. Most of these stores were located in two new locations, San Diego, California, and Orange County, California. The success of these stores, especially in an extremely competitive environment where upscale merchandise and elegant surroundings were of utmost importance, was largely based on the knowledge and effectiveness of a highly trained sales force.

KEY DATES

1895:

Original jewelry store opens in Chicago.

1903:

Hugo Marks of Eastern Europe acquires the store from his uncle, runs it with his brother Al.

1948:

Hugo Marks's children take over the shop, begin opening branches.

1979:

Fourth generation of family management arrives with Hugh and Matthew Patinkin; company has nine stores.

1990:

New management has opened 100 new stores in malls across the country.

1996:

Marks Brothers Jewelers goes public, raises $52 million in initial public offering.

1998:

Jewel Box chain of 36 stores in the Southeast acquired.

1999:

Marks Brothers renamed Whitehall Jewellers Inc., has more than 250 stores.

2001:

Shares move from NASDAQ to the New York Stock Exchange.

2002:

Accounting scandal emerges.

2005:

Hugh Patinkin dies suddenly and is succeeded as CEO by Robert Baumgardner.

2006:

Prentice Capital Management and Holtzman Opportunity Fund acquire Whitehall.

PUBLIC IN 1996

To make certain these stores were a success, management decided to clean house and rid the company of nearly 10 percent of its sales force that was not meeting company standards. With all the pieces in place, the company was ready to take the next major step in its expansion strategy, namely, make the change from a private to a public company. In May 1996, Marks Brothers Jewelers went public with a stock offering that garnered over $52 million to fuel its continued expansion.

By the end of fiscal 1997, the company was operating 188 stores in 24 states, all under the names of Whitehall Company Jewellers, Lundstrom Jewelers, and the Marks Brothers Jewelers Company. Traditionally having sold its wares to more affluent customers, management also decided to upgrade merchandise in all of its stores. Diamond jewelry comprised most of each store's inventory at approximately 60 percent, while gold represented about 20 percent and gemstones about 15 percent of the inventory respectively. The company's focus on selling more diamond jewelry was related to its goal of attracting an aging baby-boomer market that would grow dramatically during the next 10 years. The company had discovered that some of the top items sold to this demographic group included a $7,000 pear-shaped diamond ring, a $3,000 trillion-cut diamond ring, and a $6,000 diamond solitaire ring. Even more exciting for the company was the discovery that items selling at over $1,500 accounted for approximately 25 percent of sales at its Lundstrom and Whitehall stores, while items selling at over $3,000 accounted for 12 percent of sales.

Marks Brothers Jewelers had grown so rapidly in such a short period of time that it was then the fourth largest mall jeweler in the country, and the sixth largest jewelry retailer overall. Zales, Sterling Jewelry, and Service Merchandise were the company's prime competitors in the malls, while Helzberg Diamond rounded out the general competition. Only two of these companies, Zales and Sterling, continued to expand their operations. Zales, which operated more than 1,000 stores, had initiated a major marketing effort to capture new customers and intended to open nearly 200 new stores in the near future, and Sterling, having just gone through a period of consolidation, was also concentrating on opening new stores in malls throughout the United States. Service Merchandise was closing 60 of its stores, and Helzberg Diamond only opened 10 new stores during fiscal 1997.

With a growing trend toward consolidation in the industry, and the lack of new competitors on the horizon, Marks Brothers Jewelers was well situated to take advantage of the growing market demand from aging and affluent baby boomers for luxury items such as diamonds, jewelry, and gemstones. The family business that once regarded growth with suspicion was positioned to become one of the most prominent jewelry retailers in America. The company's expansion continued in 1998 with the $22 million purchase the Jewel Box chain, which had three dozen stores in the Southeast.

Marks Brothers Jewelers Inc. was renamed Whitehall Jewellers Inc. in early 1999. Its ticker symbol also changed, from MBJI to WHJI. By this time, it had 264 stores in 30 states. The company's share price more than tripled over the course of the year as a buoyant economy spurred impulsive consumer spending. Revenues rose 32 percent to $315.4 million in the fiscal year ended January 2000.

As consumer spending began to slow in 2000, Whitehall's share price fell to pre-boom level. Nevertheless one investment banker called this a "solid bargain" due to the company's history of profitability.

Actually, a major slowdown was around the corner. The 2001 calendar year saw Whitehall drastically scaling back growth plans and closing stores. However, in November of the year, its shares migrated from the NASDAQ to the New York Stock Exchange.

CRISIS AND NEW OWNERSHIP

Though National Jeweler proclaimed Whitehall had appeared to have "weathered the storm" by mid-2002, in fact, the worst was yet to come. By the end of calendar 2003, Whitehall would be under investigation by both the SEC and federal prosecutors. The crisis began with a $30 million lawsuit filed by Capital Factors Inc., a unit of Union Planters Corporation, against Whitehall and 13 other companies (including rival gem giant Friedman's Inc.) over charges it was defrauded by jewelry wholesaler Cosmopolitan Gem Corporation.

Whitehall fired a couple of executives including its chief financial officer—never a reassuring sign for investors. It also restated financials for a couple of years due to inventory valuation adjustments. A number of shareholders groups sued the company and several of its officers alleging misrepresentation of the company's finances.

One lawsuit and the federal investigations were resolved in September 2004. Former CFO Jon Browne pleaded guilty to bank and wire-fraud conspiracy charges, while Whitehall agreed to pay $15 million in restitution to defrauded parties and $350,000 in penalties to the government (it also spent at least $22 million more on related expenses). Whitehall also agreed to include more outside directors on its board. The class action suit by shareholders remained to be settled.

While these suits were playing out in the courts, Whitehall changed its strategic course. The company had launched an e-commerce site around September 2002. It was also seeking to compete in the more lucrative, more upscale parts of the market. This cut into margins as old merchandise was marked down and resulted in revenues slipping 3 percent to $334 million in fiscal 2004.

Hugh Patinkin died in March 2005 of an apparent heart attack. He was succeeded as CEO by Lucinda M. Baier, who had formerly been involved with the credit card business at Sears, Roebuck and Co. A few months later, the company hired Beryl Raff for the top spot but she resigned the post even before the announcement made the trade papers to return to the jewelry division of J.C. Penney Co. Inc. The shock of her resignation chopped more than two-thirds off of the company's already record low share price in one day, noted National Jeweler. The stock was delisted from the NASDAQ during the year.

Robert L. Baumgardner, formerly head of Tiffany & Co.'s Little Switzerland unit, was next to take up the mantle of CEO in November 2005. One of his top priorities was scrambling for capital. The company had also announced plans to close 77 unprofitable stores.

Two investment groups wrested for control of Whitehall. In March 2006, the team of Prentice Capital Management LP and Holtzman Opportunity Fund L.P. won the bidding over Newcastle Partners, L.P. Whitehall then became a subsidiary of WJ Holding Corporation, ending its ten years as a public company. Whitehall then had roughly 300 stores and about 2,880 employees. Revenues for the fiscal year ended January 31, 2006, were $319.6 million; the company posted a staggering net loss of $84 million (in addition to the $19 million it had lost in the previous two years).

                                           Thomas Derdak

                              Updated, Frederick C. Ingram

PRINCIPAL SUBSIDIARIES

WH Inc. of Illinois; Whitehalljewellers.com LLC.

PRINCIPAL COMPETITORS

Friedman's Inc.; Helzberg Diamonds; J.C. Penney Co. Inc.; Sterling Jewelers Inc.; Zale Corporation.

FURTHER READING

Andrews, Gregg, "Whitehall Jewellers Appears to Have Weathered the Storm," National Jeweler, May 16, 2002, p. S18.

Asare, Sophia, and Rob Bates, "Whitehall Agrees to Buyout Offer," Jewelers Circular Keystone, March 2006, p. 39.

Baeb, Eddie, "Slow Sales Squelch Whitehall Expansion: Jeweler Says Impulse Buying Dips," Crain's Chicago Business, August 7, 2000, p. 26.

―――――――, "Sparkle Gone, Whitehall Cuts Growth Plans: Jewelry Chain Aims to Buy When Economy Rebounds," Crain's Chicago Business, June 18, 2001, p. 34.

Bray, Chad, "Whitehall to Avoid Prosecution," Wall Street Journal, September 29, 2004, p. B3.

Countryman, Andrew, "Chicago-Based Whitehall Jewellers Fires Chief Financial Officer," Chicago Tribune, December 12, 2003.

―――――――, "Jewelry Giant Whitehall to Settle Probe for $13 Million," Chicago Tribune, September 29, 2004.

Donahue, Peggy Jo, "Teaching a New Generation of Consumers the Value of Quality," Jewelers Circular Keystone, March 1997, p. 62.

Elliot, Stuart, "Marks Brothers Jewelers," New York Times, June 4, 1997, p. C8(N).

Frischknecht, Donna, "Marks Brothers Jewelers: On Your Mark, Get Set, Grow," Supersellers, January 1997, p. 21.

Gallun, Alby, "Whitehall Jewellers to Move HQ to 125 S. Wacker Dr.," Chicago Business, July 12, 2006.

Gomelsky, Victoria, "Friedman's and Whitehall Embroiled in SEC Investigations," National Jeweler, January 1, 2004, p. 1.

Guy, Sandra, "Whitehall Jewellers Names New CEO: Troubled Company Announces Rejected Takeover Offer," Chicago Sun-Times, November 3, 2005, p. 67.

―――――――, "Whitehall Jewellers Shifting Focus to Upscale Customers," Chicago Sun-Times, August 27, 2004, p. 72.

―――――――, "Whitehall Jewellers Turns to Former Sears Exec," Chicago Sun-Times, December 2, 2004, p. 65.

―――――――, "Whitehall's Product Change Proves Costly in 2004," Chicago Sun-Times, April 15, 2005, p. 67.

―――――――, "Whitehall to Split Its Stock," Chicago Sun-Times, December 15, 1999.

"Jewelry Execs Say Securities Plaintiffs' Claims Fail," Corporate Officers and Directors Liability Reporter, August 23, 2004.

Jones, Sandra, "Fund Sees Jewel in Whitehall; SEC Probe, CEO's Death Lead to Changes in Jewelry Firm's Board," Crain's Chicago Business, July 25, 2005, p. 3.

Law, Glenn, "Raff Resigns from Whitehall, Returns to Penney," National Jeweler, October 16, 2005.

"Majority of Securities Claims Against Jewelry Execs Survive Dismissal," Securities Litigation & Regulation Reporter, February 23, 2005.

"N.D. Ill. Consolidates Securities Suits Against Jeweler, Execs," Securities Litigation & Regulation Reporter, August 11, 2004.

Podmolik, Mary Ellen, "Marks Buys 36 Jewel Box Stores," Chicago Sun-Times, June 23, 1998, p. 43.

"Quality Diamonds," Jewelers Circular Keystone, June 1997, p. 402.

Shabelman, David, "Whitehall, Newcastle Duck and Weave," TheDeal.com , January 13, 2006.

Shor, Russell, "Auction Houses vs. Luxury Retailers: Myth & Reality," Jewelers Circular Keystone, January 1997, p. 134.

Shuster, William George, and Stacy King, "Jewelers As Store Designers," Jewelers Circular Keystone, November 1996, p. 86.

Thompson, Michael, "Time Is Money," Jewelers Circular Keystone, October 1997, p. 111.

"Whitehall Jewellers Expansion," Wall Street Journal, June 18, 1999.

"Whitehall Jewellers Fires Its Chief Financial Officer," New York Times, December 12, 2003, p. 4.

"Whitehall Jewellers, Inc.: Executive Is Said to Violate Policy and Placed on Leave," Wall Street Journal, November 24, 2003.

"Whitehall Names New CEO, Plans to Close 77 Stores," National Jeweler, November 2, 2005.

Zacks, Mitchell, "Market Overreacts, Makes Whitehall a Solid Bargain," Chicago Sun-Times, September 3, 2000, p. 49.