British physicist Michael Lavington says that when he was growing up, he never expected to head a business -- much less this country's third-largest jewelry chain, Kay Jewelers Inc.
But while studying theoretical physics at Cambridge University, Lavington joined a team of New Jersey-based scientists searching for the "34th fundamental part of matter." "One day, I decided that I really didn't care if we found it or not. . . . It was like a priest discovering he was not devoted to God."
Lavington decided to complete his Cambridge studies because he was so close to earning his PhD. Then he joined a London accounting firm and a short time later became a troubleshooter for the British company that acquired Alexandria-based Kay in 1972.
"It was such a fascinating business, with so many opportunities, that I decided I would really like to come down and run it," Lavington recollects.
"Jewelry is like magic," he adds, "it's a glamorous type of business."
By most accounts, Lavington has his own magic touch, having turned the financially troubled retailer into one of the best performers in the jewelry business, with 275 Kay stores and 15 Black, Starr & Frost units in 34 states.
"In our opinion, Kay's is the best of the chain jewelry stores in the country," says Fred E. Wintzer of Shearson Lehman/American Express. He adds that Kay is outperforming the nation's largest chain, Zale Corp., and the second-largest, Gordon Jewelry.
"It has a lead on the rest of the industry," Wintzer says. "It is generating growth on a 15 to 20 percent basis; none of the other stores are doing that."
"I think it's a good company," agrees Charles T. Akre Jr., an analyst with Johnston Lemon & Co. Inc. who recently recommended Kay's stock as a good buy. With Kay's stock currently trading at around $12 a share, Akre says, "Kay shares have the characteristics of both an undervalued growth company and an asset-value investment."
Kay stores are selling nearly $190 million worth of cuff links and other jewelry a year, and the chain earned $16 million in profits last year. Those results represent a dramatic turnaround for the Alexandria chain acquired by the British firm Ralli International 12 years ago.
At the time, Kay -- once the nation's biggest jewelry chain -- faced tremendous cash-flow problems, including an operating loss of about $1.4 million in 1972.
Ralli, an international commodities trading firm, was willing to buy Kay, however, because the jewelry chain was a publicly traded firm whose stock was sold over the American Stock Exchange. The acquisition would be a relatively cheap and easy way for Ralli to become listed on a U.S. stock exchange. Under the transaction, Ralli ultimately acquired all of Kay's stock and took the Kay company name.
Today, Kay Corp. stands for both the jewelry-store operations and the commodity-trading business, which now operates under the name Balfour, Maclaine International Ltd.
Coffee is the most important product the company trades, making Balfour Maclaine one of the largest coffee importers in the United States. The company also trades tea, rice and edible oils and oil seeds worldwide.
Balfour Maclaine continues to account for the bulk of Kay's business, contributing 72 percent of Kay Corp.'s total revenue of $689 million. However, the jewelry-store operation is now the more profitable of the two divisions, with operating profits equal to 8.4 percent of its sales. Balfour Maclaine's profits, by comparison, equal 2 percent of its revenue.
When Ralli first took over Kay, it wasn't terribly interested in the jewelry-store operation, admits Kay's Chief Financial Officer John Belknap. "But then we decided it was a very good opportunity because the market was very fragmented," with no one company -- or even a group of companies -- holding a large share of the market.
In 1982, Zale, the nation's largest chain, accounted for 6.2 percent of all jewelry and watch sales in the United States. Gordon's accounted for 3 percent, while Kay accounted for 1.3 percent.
Because of this fragmentation, company executives concluded it was possible for Kay to compete against the big national chains -- as well as the much smaller independents, such as Melart Jewelers Inc. -- and make a relatively healthy profit.
What's more, Belknap notes, "it was a business with high margins, because of the slow turnover in inventory. We decided we could use these margins to run a tighter and more aggressive business."
That's when Lavington decided to take over the jewelry division. Shortly after his arrival in Alexandria in 1974, Kay embarked on an aggressive expansion campaign into new territory, including California, Texas and Arizona. Lavington says his mission was to make Kay "a truly national chain" by selling jewelry to middle-class consumers.
Kay also wanted to attract business from more affluent customers, so, in the late 1970s, it reactivated the name of Black, Starr & Frost, which it had acquired when it bought another jewelry operation in 1973. Black, Starr & Frost had been one of the nation's oldest jewelers, but had had no stores in operation since the early 1960s, when the chain's previous owner had lost its store on New York's Fifth Avenue.
The difference between Kay and Black, Starr & Frost is quite simple, Lavington says. While Kay's average sale is around $200, the cheapest thing you can buy at Black, Starr & Frost costs $200. Lavington adds that the more expensive chain's average sale is around $1,000.
Between 1979 and 1982, about 126 new Kay stores and more than a dozen Black, Starr & Frost stores were opened. But the rapid expansion took a toll on the company, with profits dropping from $15 million in 1980 to $10.8 million the following year.
As a result, Kay decided to curtail its expansion program drastically and to open stores only in areas where the company already had branches. "Before we open a Kay store , we must feel confident that the store can do $1 million in sales by the third year," Lavington says, noting that is the point when the company "starts making good money."
Kay also has slowed the growth of the Black, Starr & Frost chain, which now numbers 15 stores. With their marble walls, ornate ceilings and chandeliers, these stores cost three times more to build than the Kay stores and are not expected to break even for some time.
Although Kay is a publicly traded company, executives there have concluded that the firm is not public enough. The reason: The jewelry-store operations are so overshadowed by Kay's much more speculative and risky commodity-trading business that many investors are shying away from buying Kay stock.
As a result, Kay Corp. is considering spinning off its Kay Stores into a separate company and offering 20 percent of the new firm's stock to the public. The plan would be similar to the recent divestiture and stock offering of Crown Books Corp. and Trak Auto Corp. by Dart Drug Corp. (now renamed Dart Corp.).
Kay Corp. would hold the remaining 80 percent of the Kay Store chain as well as all of the Black, Starr & Frost chain. Black, Starr would not be included in the new company because it is still unprofitable, and could diminish investor interest.
"We had hoped to make this public offering last spring, except for the disappearance of the new issues market," Belknap says. "We still expect to do it early next year, if the market cooperates."
Yet Kay also continues to hold discussions with an undisclosed foreign firm that approached it last summer about a possible merger with Kay's international trading division.
Either way, Belknap may achieve his goal of creating a separate identity for Kay Jewelers, because a merger probably would mean that only the jewelry-store operations would remain with Kay Corp.
That would please Belknap, who thinks the jewelry chain has not received sufficient attention from investors. "Kay Jewelers tends to get lost," he complains.