Interview with Signet CEO Michael Barnes About Zale Purchase

Fresh off Signet’s amazing announcement of its bid to purchase Zale, Signet CEO Michael Barnes very generously took some time to talk with me this morning. Highlights of our conversation follow.

The new company will own both Zale and Kay. Yet, they both are competitors that target the same consumer. How will that work?

They are complementary brands. They are in a lot of the same locations, and there are similar customer profiles. We are going to work a lot more on customer studies and try and see what is the best direction to go, which brands should go in which stores, how should we organize that. The good news is that they have been existing side by side for many, many years now. So that doesn’t change. But now that we have the ability to work with both brands, we can differentiate them better and set them up better for the future.

But we do want them to have their own identity. I have said I don’t want Kay-ize Zale, or Zale-ize Kay.

Can you elaborate on that?

Zale’s tag line is the “Diamond Store.” They tend to focus on the product. We tend to focus more on emotion with “Every kiss begins with Kay.” So it’s something we will have to look at, how we manage that differentiation.

They do have different advertising approaches. Zale’s is a little flashier. Will that continue?

We will have to look at that. I don’t know. That is something we will have to take under consideration.

How will it work when they are in the same mall?

If they are in good locations in those malls, great. If not, we will look to better our real estate in those areas.

The investor presentation mentioned some cross-pollination with brands. Will Zale brands now appear in Kay?

We will see some cross selling of brands between the divisions, just like we now do with the U.S. and U.K. divisions. We will do it where it makes sense. We won’t take every brand and put it everywhere. Some brands Zale carries might be right for Jared.

You look at Canada, we don’t have a presence. If we get our brands up there, it will be a plus for the consumer. Another jeweler called us years ago and asked if we could get Jane Seymour up there. There is a pent-up demand for some of the brands that we can deliver.

How does Gordon’s, Zale’s other brand, fit into this?

We will have to look at the situation there. They have the same situation with Gordon’s as we have with some of our regional stores. We will have to look at that and find the best way to optimize their regional stores and our regional stores.

How will the new company be structured? None of the current components of Zale will become part of Sterling, correct?

Yes. Sterling is one division, U.K. is one division. Zale North America will be one division.

Zale is staying in its Dallas headquarters. Usually when businesses merge or get acquired, a lot of functions get consolidated. Will that happen here?

They have a great organization there. We need people to run that organization. They have good people. We aim to keep them. I have been very open that I want the company to continue running under the current management with Theo [Killion] as their CEO, and together we will look at what the future looks like.

We will unburden them with all the duties of dealing with the public sector, consolidating financial statements for the SEC. We will unburden them of dealing with the legal issues.

We will synergize things, like benefits and human resources, over time. We will look at cost savings in certain areas. But especially as it relates to the customer-facing part of the business, we want them to have their own identity and not be homogenized into the Sterling group.

The press release talked a lot about how Zale is now profitable. Did that interest you in the company?

The timing was interesting. [CFO] Ron [Ristau] and I have been thinking about and analyzing all the possibilities out there. There was one point where they were just going through such a difficult time it would have been like catching a falling knife. We didn’t want to make an offer for a company that had an unsure future ahead of it.

And now they really have been stabilizing themselves. They stopped the revolving door of senior management. Theo, who I have the utmost respect for, has done a great job of leading that team in a tough situation and returning it to profitability.

The way I think about it is, they have stabilized the company. It is no longer at the ultimate risk. It’s stabilized but it’s not yet optimized. The benefit that we can bring with our team, our experience, our knowledge in the industry, our balance sheet, and our investment capability is that together we can optimize it. To me the timing is just perfect. It is not super risky. And the biggest upside is in front of us.

Did you approach them or vice versa?

We approached them. Once we did the analysis, we sat down with our board. We presented it to our board, and the board agreed we should move forward. The rest is history.

You talk about optimizing. Zale has been losing stores. Do you see that changing?

They have done a really good job rationalizing their store base and real estate. They have closed a lot of stores in the past few years. They will continue to rationalize.

But now, rather than a big rationalizing project, for them it’s just a normal course of business, just as we close underperformers every year. But we are fortunate enough that we have opened more than we have closed. They have been going in the other direction. At some point, we believe this will level off and maybe go in the opposite direction. We believe there are opportunities for some additional stores in the future once the portfolio is optimized.

Piercing Pagoda is the most unusual part of Zale. How will that fit in?

We are open to looking at it. From the diligence we’ve done, it is the largest kiosk jewelry provider in the mall. The return on investment is short. It has pretty good sales. It is not a risky venture. It is profitable. We will do a lot of analysis and see how it looks, but it seems like a nice little diversified piece of business that is profitable and might have a lot of opportunities ahead of it.

You mention that Signet and Zale hope to swap best practices. Is there anything you feel they do particularly well?

I wouldn’t call out any one thing. But as we went through the due-diligence process, we saw some things and we said, “That’s interesting how they do that. That makes a lot of sense.” And we also identified a lot of areas where we thought we could bring some value. We will be looking very thoroughly and thoughtfully at how both groups operate their stores and brands.

This will make your market share bigger. Do you think that regulators will okay this deal?

It will go through regulatory review. Jewelry is such a competitive industry. There are so many jewelers in the United States. We are very optimistic we will get through the review and not have any issues. It will take a number of months and then hopefully we will get it done, closed, and move forward.

What will Signet’s market share be after this?

If you look at the last published numbers, it was 10.4 percent of the specialty jewelry market in the United States. Zale is about 5.7 percent. Put them together it will be about 16.1. For a leader in the industry, that is not a giant market share.

We are competing with department stores, the club stores, the mass stores, TV, the Internet. This will make us more competitive in a competitive industry and give us a chance against some of these behemoths out there. And if you look at the overall jewelry market, we are in single digits.

[Signet spokesman David Bouffard later clarified the combined company’s overall share of the U.S. jewelry retail market will be 6.4 percent, and share of the speciality jewelry market will be 15 percent.]

This deal has made some people in the industry nervous because Signet is taking on a lot of debt. 

Ron Ristau: We expect to maintain our investment grade ratings. People who have looked at the deal found it to be conservatively financed. One of the main sources of the financing will be securitization of our receivables, which is very efficient and very cost-efficient. The combined company will have wonderful cash flows. We will stay well within our case limitations on debt; we have approached it prudently. People shouldn’t be concerned about that.

In the press release, you mentioned further expansion. Will that be domestic or international?

We will continue to be opportunistic. With this large transaction taking place, we will take a little time to digest. I’m not going to run out tomorrow and look for what’s next.

You have said this acquisition will allow more innovation. And yet, most people feel that having companies under the same umbrella encourages sameness.

This will allow us to spend more on innovation, R and D, product development, because we have a much bigger scale to spread the cost over. We need to do these things. We need to evolve this industry. We need to be fresher, we need to be newer.

One of the evolutions we have seen in the industry has been the advancement of brand names, like Neil Lane, Vera Wang, Jane Seymour. Twenty years ago, we didn’t have that. It was a non-branded industry. And if it continued down that path, we would have continued to lose market share to the non-specialty jewelers, like Walmart and the Internet. We need to invest in innovation, and we need to drive it.

Anything else you want the industry to know?

This is a great combination of unbelievable companies. Working together we can continue to evolve this industry and take it to new levels.

This provides opportunities for a lot of different constituents. It will help our supplier partners. It will create internal opportunities for people on both teams. Most importantly, it will create better products and more innovations for our customers. It is a win-win-win all around.

JCK News Director