More “What’s Up With Finlay”

At its conference call yesterday, Finlay executives spelled out their plan to improve liquidity, including reducing expenses, capital expenditures and inventory. There has also been a new deal with its bondholders, who have injected another $20 million into the company, and are allowing the company to defer some $5 ½ million in interest payments. (See 8K here.) That’s a sign bondholders aren’t ready to abandon ship.


Barry Scheckner, Finlay’s former CFO, told me that the steps they’ve taken are “excellent,” especially considering the economic climate.  He notes that accounts payable are low, so it looks like they are servicing their vendors. (I talked to one Finlay’s vendor about two weeks ago, who described himself as a “small one,” who happily noted the company is paying him on time.)


Still, there are causes for concern. While overall sales are up, same-store sales and profits are down, pretty dramatically – if on par with the rest of the industry. Standards and Poors recently downgraded its bonds, and basically view it as a company on the edge – and this is not a time you want to be on the edge. (At press time, Finlay has not returned my calls from comment.)


One interesting note: A Finlay bankruptcy—and let me stress, we are not there yet—could impact Zale. As Zale’s financial report notes (PDF):


In connection with the sale of the Bailey Banks and Biddle brand on November 9, 2007, we assigned the buyers the obligations for the store operating leases. As a condition of this assignment, we remain contingently liable for the leases for the remainder of their respective current lease terms, which generally range from fiscal 2008 through fiscal 2017. The maximum potential liability under the leases totals approximately $80 million.


Now, this would only be a problem if the leases can’t be sold and there is no buyer for BBB. On the latest conference call, Zale CEO Neal Goldberg referenced this, saying: “As with all liabilities we monitor our potential exposure regarding these leases and have the financial flexibility to meet any potential liability should the need arise.” But someone raised a more interesting possibility: Could Zale decide, since it will be out up to $80 million anyway, to just buy back Bailey’s? It could be at a bargain price …

JCK News Director