Aggressive Promotional Strategy Put Zale `Off Track’

A strategy to boost last year’s holiday sales with aggressive promotions of fashion- and lower-priced jewelry put Zale Corp. “dramatically off track” in its important second quarter, says Robert J. DiNicola, chairman and chief executive officer.

Following its best year ever in fiscal 2000, the first half of fiscal 2001 saw sharp drops in comparable-store sales and net income, as well as the Feb. 19 resignation of chairman and CEO Beryl Raff. DiNicola’s hand-picked successor had held the position for only six months. Zale, the world’s largest jewelry retailer, will spend the rest of fiscal 2001 (ending July 31) “bringing our business back in balance,” says DiNicola, who returned Feb. 21 and initiated a strategic review of the company’s operations.

DiNicola made his comments during a March 7 conference call between Zale’s executive management team and financial analysts. The team was reviewing Zale’s second quarter data and the results of the strategic review. Zale saw a 15% drop in net earnings for the second quarter (ending Jan. 31), to $71.5 million. That includes a non-recurring charge to write-down $25.2 million of promotional inventory plus a special charge for Raff’s severance package. (Excluding those two, net income would have been $92.7 million.) Even so, financial analysts say the lower earnings still exceeded Wall Street estimates. Net sales were $855.3 million, up from $736 last year. Comp store sales-a leading indicator of financial health-fell 2.3% for the quarter (compared to a 14% gain last year), and 7.4% for the year, though early March. Turnover for the quarter was 1.36, down from 1.42 a year ago. Zale expects second-half fiscal 2000 earnings and same-store sales to decline (compared to fiscal 2000) “in the mid-to-high single digits.”

Changes based on the strategic review include realigning the duties of Zales’ top executives to give more access to DiNicola and better control over operations, merchandise, and finance; writing-down millions of dollars of inventory, much of its lower-grade diamond merchandise; revamping Zale’s marketing and advertising initiatives; and tighter cost controls (a planned third distribution center won’t be built, Zale’s overstaffed e-commerce division will be reduced, and promised new Web sites will be put on hold). The aim, says DiNicola, is to return focus to Zale’s core business in diamond and bridal merchandise. While the long-term outlook is good for Zale’s stores-DiNicola predicts a 15% growth rate in same store sales by mid-2002-“the near-term exceptions have been tempered to account for [the jolts from] the slowdown in consumer spending, repositioning of inventory [within Zale’s different divisions] and realignment of fiscally prudent market plans.”

More details on Zale’s plans to get “back on track” will be presented in an upcoming e-Monday and in JCK magazine. Zale Corp., headquartered in Irving, Texas, operates approximately 2,350 stores in the United States, Canada, and Puerto Rico under the names Zales Jewelers, Zales Outlet, Zales Direct (www.zales.com), Gordon’s Jewelers, Bailey Banks & Biddle Fine Jewelers, and Piercing Pagoda. In Canada, Zales operates as Peoples Jewellers and Mappins Jewellers.