The Chatter Increases About Zale (With updates)

The troubling signs are growing for Zale Corp., including the talk of problems with payments, cancelled orders, and this article yesterday in Debtwire:

Restructuring professionals have set their sights on Zale Corp as the jewellery retailer’s prospects for the holiday season look grim, five financial advisors making unsolicited pitches to the company told Debtwire. …

Many of Zale’s operational problems mimic that of bankrupt Finlay Fine Jewelry, which recently entered the sector graveyard along with Whitehall Jewelers, said the vendor and a lender. Zale’s is similarly facing lower loan valuations on the back of declining appraisal values and credit card receivables, a combination that helped trip Finlay into bankruptcy, said the lender, which invested in both companies. “Zale’s is suffering from a double whammy: aged inventory and the retrenchment of the credit card user,” the lender said.

It’s quite a change in circumstances considering how confident management was just four weeks ago (although many of its employees were, and are, pretty worried). But many sources knowledgeable about Zale complain that management got too ambitious – raising margins, changing its marketing and product mix, and moving away from its standard “value” message, ironically at a time when consumers are pre-disposed to value-shopping. I agree with current management that Zale needed to change, but some think they have lost track of their company’s place in the market and the time period they are operating in.

Spokesman David Sternblitz says the company has made “tweaks” in its strategy given its calamitous November sales, but, as it’s a public company, declined to talk about current sales trends. He said the company “feels it has sufficient liquidity” and inventory to get through the season. And he stressed the company has not “retained anyone in association with restructuring.” (See update.)

Regarding the ongoing rumors of Berkshire-Hathaway purchasing Zale, they seem to be fueled by Beryl Raff’s maintaining a residence in Texas. (Raff, a former Zale chairwoman, currently heads Helzberg, a division of B-H.) In addition, B-H cobbled together a bunch of sometimes-troubled jewelry manufacturers for Richline; why not do it with jewelry retailers? But Berkshire Hathaway tends to go for well-managed chains that can run on their own, and Zale would be a pretty substantial purchase — although its price could be getting lower all the time. But I’m still guessing it’s a long-shot.

UPDATE: This post was written Monday. Thursday morning, this appeared in Bloomberg:  “Zale Works with Rotschild on Restructuring Options.”

UPDATE TWO (Friday night): Zale has denied the Bloomberg story, but now has another problem: it’s  lost its credit card provider.

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JCK News Director