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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About ZalesThe 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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