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Zales

Zales Rebuilding Underway, But the Numbers Are Slow to Come

 

(December 10, '06, 8:14 Ken Gassman found at IDEX ) Zale Corporation President and Chief Executive Officer Betsy Burton and her team – veterans and newcomers – have their work cut out for them. As the third CEO in six years, her job is to take a consistently underperforming company lacking a coherent strategy and remold it into a sleek, efficient, competitive jeweler.    

Zale Rebuilding-Dec 2006 :

Zale Diamond

 

Zale Diamond

 

When results of Zale’s first quarter financials were released recently, there was a glimmer of hope. The company’s reported gross margin was up, but further analysis showed that the comparison wasn’t “apples to apples.” Further, direct-sourced goods – purchased from manufacturers, eliminating costly middlemen and wholesalers – rose as a percentage of total sales, but even that didn’t have nearly the impact on margins that was expected.

 

Other numbers were disappointing: sales in the October quarter rose by only 1.1 percent, and the company eked out a barely positive 0.4 percent same-store sales gain. Only Zales Outlet and Peoples Jewellers ( Canada ) posted meaningful increases in same-store sales. The company’s attempt to smooth cash flow and fix purchase costs through the use of forward contracts related to hedging gold and silver needs backfired, and cost the company more than $5 million after taxes. Inventory levels rose by nearly 18 percent; this is a bet that Christmas demand will be solid. Finally, management announced with great glee that it is rolling out “lifetime” Extended Service Agreements (ESA) across all of its brands. That’s a great marketing idea, but management admitted that it hadn’t defined “lifetime” in accounting terms; others who use ESAs know that they can be an accounting nightmare, unless there is a finite life span.

The following are highlights from Zale’s fiscal quarter ended October 2006.

 

·        Reported revenues were up 1.1 percent to $432.5 million. If revenues from the 30-plus closed Bailey Banks stores are removed from last year’s results, corporate revenues from continuing operations would have advanced by about 3 percent.

 

·        Zale lost significant market share in the October quarter. With specialty jewelers’ sales up an estimated 9.9 percent, Zale’s sales rose by a meager 1.1 percent.

 

·        Clearance sales at the Zales Jewelers mass market brand hurt total corporate revenue growth for Zale’s. Earlier this year, management announced that it was disposing of $80 million of obsolete merchandise in an effort to generate cash to bring in fresh, new merchandise. As a result of these clearance sales, the number of transactions rose, but the average ticket was down about 4 percent. This year, the average ticket was $407; last year, the average ticket was $424. Roughly 20 percent of the Zales Jewelers brand revenues were clearance sales versus only about 5 percent last year. The good news is that the company moved through about 25 percent of its $80 million of clearance goods in the October quarter. All of the clearance merchandise should be gone by late 2007.

 

·        Zale’s Jewelers brand stores reported strong sales of diamond fashion, “Journey” diamond goods, diamond circles, alternative metals, three-stone jewelry, and Past, Present, and Future jewelry. All Zales Jewelers’ stores have been reset, with a larger diamond assortment. About $120 million of new merchandise has been brought into the Zales Jewelers stores to help update its merchandise assortment, including about $47 million of bridal goods and $45 million of diamond fashion merchandise.

 

·        Peoples / Mappins (Canada) reported that diamond circles and fashion diamond goods were up double digit levels in the October quarter.

 

·        Gordon’s Jewelers sales were below plan. Among hot products in this brand were composite styling, the new “Love” collection, and champagne diamond merchandise.

 

·        In the guild Bailey Banks & Biddle brand stores, solitaire demand softened. However, designer jewelry sales were up strongly. Luxury watch demand was up double digit. A new palladium solitaire line has just arrived, offering lower opening price points than platinum, but with a similar look. Diamond fashion goods which have been added to BBB’s mix appear to have potential for strong sales.

 

About Zales 

The Zales® story began in 1924 in Wichita Falls, Texas, where Morris (M.B.) Zale, William Zale, and Ben Lipshy applied their vision of providing customers with quality merchandise at the lowest possible price to the opening of the first Zales® Jewelers.

Their idea to offer a higher priced product to everyone was implemented through a revolutionary credit plan of "a penny down and a dollar a week."

Although this marketing strategy proved to be successful, it was also the friendly customer service and dedicated employees that led to the jeweler's expansion, reaching 12 stores in Oklahoma and Texas by 1941.

Zales has grown from a single store selling jewelry alongside appliances and cameras to a major international jewelry corporation. Over the course of five generations, Zales expanded from a family jeweler located in just a few downtown locations to the largest fine jeweler in retail shopping malls across North America. 

Having surpassed 750 stores in the United States and Puerto Rico, Zales Jewelers has grown upon the strength of its traditions and its commitment to excellence.

Zales Jewelers’ focus has always been on providing a wide range of choices for mainstream jewelry customers who seek excellent value in fine jewelry.

For this reason, Zales designs and provides much of its jewelry to meet its customers' tastes and expectations for quality and style. Zales Jewelers also carries brand-name jewelry, including watches, allowing the jeweler to offer its customers a wide variety of merchandise at a range of price points.

As the best-known name in retail jewelry, Zales Jewelers has a broad selection of classic and contemporary styles. Zales stores sell more diamond jewelry than any other jeweler in North America.

In addition to diamond fashion jewelry, Zales offers gold, cultured pearls and an extensive wedding jewelry selection. In fact, it is the extensive bridal collection that represents the largest part of the chain’s business.

Although predominantly known as the leading jeweler in regional malls, Zales Jewelers also offers a fine selection of merchandise on the Internet at www.zales.com. 

Throughout its history, Zales Jewelers has driven change and set standards in the jewelry industry. With its commitment to simplified credit options and convenient shopping through Zales.com, Zales Jewelers continues to be the leader in fine jewelry retailing.

Visit our online store locator to find the Zales Jewelers store closest to you.

·        Zales Outlet stores posted strong same-store sales gains, with diamond fashion and bridal up 20 percent. “Journey” jewelry was strong. Diamond solitaires were in demand, especially with large diamonds. This brand’s average ticket of $422 set a quarterly record for Zales Outlet.

 

·        Piercing Pagoda’s sales were above plan, with CZ very popular. CZ now represents nearly 30 percent of Piercing Pagoda’s sales. Gold earrings and body jewelry are hot among Piercing Pagoda’s younger, less affluent customers. However, demand for Italian charms has dropped markedly over the past year, putting pressure on sales comparisons. 

 

·        Zale’s internet sales effort – primarily the Zales Jewelers brand – rang up sales of $4.8 million in the quarter. The average ticket was $240, far below the Zales Jewelers’ average ticket of $407 for its stores.

·        Zale Corporation posted a reported gross margin of 52.0 percent versus 51.2 percent, though last year’s gross margin was dragged down by clearance sales in the Bailey Banks division. However, this year, the Zales division’s clearance sales hurt. On the positive side of the ledger, direct sourcing helped by about 30 basis points, the sale of Extended Service Agreements helped by 20 basis points, and fewer discounted tickets helped by 40 basis points. Management has clearly made a conscious effort to reduce store-level discounting in an effort to build retail price integrity.

 

·        Zale’s direct purchasing efforts – it has two programs, including direct importing of finished goods and assembly of loose diamonds – represented 34 percent of total purchases in the quarter, up from 26 percent last year. These purchases generated 27 percent of corporate sales this year. 

 

·        Zale’s total inventory rose to $1.19 billion, up 17.8 percent due to two factors: 1) the addition of $120 million of merchandise in the Zales Jewelers brand stores; and 2) inventories which were $50 million below plan last year, when the company was plagued by out-of-stocks due to late ordering and delayed receipt of goods. If these two unusual items are eliminated, inventories would have been up a very modest 1.1 percent in the quarter, year-over-year.

 

·        Zale’s reported operating expense ratio was unfavorable at 61.7 percent this year versus 60.1 percent last year. However, last year had an unusual impairment charge related to the Bailey Banks division. On an apples-to-apples basis, the company’s operating cost ratio would have been 61.7 percent versus 58.1 percent, a much more unfavorable comparison. In addition, this year higher payroll costs hurt (Zale is adjusting its pay scale to be more competitive); its weak same-store sales de-leveraged operating costs; and, occupancy costs rose.

 

·        Zale has begun to use forward hedge contracts in an effort to smooth cash flow and fix its gold and silver purchase costs. Unfortunately, this hurt financials in the October quarter by more than $5 million after taxes (roughly 20 percent of the quarter’s loss is attributable to hedging losses). Based on GAAP accounting, the company should get this loss back at some point, but most analysts are taking a wait-and-see attitude.

 

·        Management declined to go into specifics about its holiday marketing plans, saying only that it will use more television, and will buy “better quality time slots with high visibility.”

 

·        After some testing, Zale management has rolled out “lifetime” Extended Service Agreements across all of its brands. The good news is that the sale of an ESA helps boost the average ticket by about 35 percent. The bad news is that it can be an accounting nightmare, especially since management has not yet defined “lifetime” for accounting purposes related to the amortization of the revenue and costs of these ESAs.

·        Management continues to call for a 3-4 percent same-store sales gain for the upcoming holiday selling season.

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