There is a lot of speculation over what is happening with Zale. Here are some of my thoughts:

As one vendor mentioned to me recently, the fact that Zale didn’t go Chapter 11 in January, when it had the most amount of cash, would seem to lean against a bankruptcy filing in the near future (despite what Internet polls say). And, as we’ve discussed, major shareholder Richard Breeden likely doesn’t want a filing, as that would wipe him out. Company spokespeople have also said that the company isn’t in danger of a filing.

Some knowledgeable people I spoke to predicted Zale should be okay until the summer, provided it keeps the banks on board. (They noted that only top managers know the real numbers; Wednesday’s results should make things clearer.) However, next holiday may be a problem, if vendors keep requiring COD to ship.

Ultimately, the company needs sales to keep it going, and canceling Mother’s Day and Valentine’s Day advertising doesn’t help.  Most of the speculation I’ve heard is that parts of the company will be sold, specifically the Canadian division and Piercing Pagoda, which are considered the most attractive parts.

One thing impacting the company’s current cash situation: the presumably Breeden-engineered $300 million stock buy back, after Zale sold Bailey, Banks and Biddle for $200 million. The buyback was a bust, and the extra $100 million – not to mention the entire proceeds from the Bailey sale – would certainly be very helpful to Zale now.

This whole episode is turning into a real black mark in Breeden’s career of “activist investing.” When he started to buy large amounts of Zale stock, many hedge funds followed his lead. We’ll see if they still do that in the future, given Zale’s performance since he got involved.

One more thing: the $600,000 severance payment to former CEO Neal Goldberg definitely seems a little low, considering that other executives below CEO level actually received more than that not so long ago. While I don’t really object – indeed, in an ideal world, all employees would earn comparable severance –  it is perhaps another indication of Zale’s problems.

Rob Bates

JCK News Director