Lord & Taylor's bling bind

NEW YORK (Fortune) -- Lord & Taylor is getting a black eye from bling.

Starting Thursday, Fortunoff, the 87-year-old jewelry chain, will begin liquidating its merchandise, just as it was supposed to start selling through Lord & Taylor.

Meanwhile, Lord & Taylor had already planned to cut ties with its former fine jewelry retailer, Finlay Enterprises. One year ago, Lord & Taylor parent NRDC Equity Partners, run by real estate hot shot Richard Baker, acquired jewelry chain Fortunoff with a bold plan to replace the department store's previous fine jewelry retailer, Finlay Enterprises.

The bet was that Fortunoff would draw more customers into Lord & Taylor's 47 stores. But Fortunoff filed for bankruptcy protection earlier this month following a continued drop-off in sales, just as Finlay Enteprises, which had born all overhead costs and gave a percentage of its fine jewelry sales to Lord & Taylor, was leaving the building.

Now, with Fortunoff in liquidation, Lord & Taylor is in a bling bind. With no Fortunoff and no Finlay (which spent the Christmas shopping season unloading merchandise up to 80% off), the department store needs to sign up another company to run its fine jewelry deparptment, or face the prospect of having a large swath of valuable ground floor real estate empty of merchandise.

Lord & Taylor's fine jewelry business accounts for somewhere between 3% and 5% of its $1.3 billion in overall sales. That may not sound like much, but in today's penny-pinching economy, every bit of business matters.

The agreement with Finlay, which was scheduled to expire in January, was extended temporarily to allow Lord & Taylor to sort through this mess. A person familiar with the situation says the retailer is close to signing a partnership with a new fine jewelry provider to fill the gap. Resigning Finlay is not an option, this person says. (To the uninitiated, fine jewelry is the real stuff -- gold, diamonds, rubies -- vs. costume jewelry, which is fake.) A spokes woman for Lord &Taylor declined to comment.

It's unclear which company Lord & Taylor is talking to, since other than Finlay, there are few players remaining in the leased jewelry space. Most of the large department stores, including Macy's and Saks, now operate their jewelry business in-house.

Jewelry retailers have been especially hard hit during the current recession. Whitehall Jewelers filed for Ch. 11 bankruptcy protection this summer, and Zales recently said it would close an additional 115 stores. Fortunoff, which came to symbolize a certain level of refinement for upwardly mobile, yet bargain conscious consumers in the New York metropolitan area, appeared to have found a savior when NRDC rescued it last year.

But Fortunoff's antiquated systems and years of mismanagement finally caught up with it. In good times, though, jewelry tends to be a high margin business, which is one reason why Lord & Taylor is looking to stick with it. Fine jewelry, especially, lends department stores an air of elegance that has been lost somewhat as these stores have downscaled other areas -- all the more reason for Lord & Taylor to solve its bling problem.