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 :
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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.
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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.
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·
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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