Zale Corp. forms new retail jewelry division and accepts more resignations as profits fall

Zale Corp. has created a new retail jewelry division, incorporating its signature Zales Jewelers chain, effective Feb. 17, and is rethinking its strategic repositioning of its Zales. It also said Friday that the president of Zales has resigned and that its second-quarter profits, was down 11.5 percent.

John A. Zimmermann has assumed the newly created position of president, Zale North America. The new retail jewelry division includes Zales in the United States and Canada’s Mappins Jewellers, and Peoples Jewellers (Canada’s largest), both owned by Zale Corp.

Zimmermann, formerly president of Zale Canada, has the responsibility for merchandising and store operations of Zales, Peoples and Mappins. He has 25 years of retail experience, the last five with Zale Corp.

Paul Leonard, a long-time Zale veteran and former president of Zales Jewelers since January 2005, has resigned, apparently at the request of Zale Corp.’s board. He formerly was president of its Piercing Pagoda division since 2003. His departure follows that of Mary Forte, who resigned Jan. 31 as Zale Corp. chief executive officer and president. Also resigning at the board’s request was another Zale veteran Charleen Wuellner, senior vice president, corporate services, and earlier president of Gordon’s Jewelers and Zale Outlet.

All the resignations came following a year of disappointing financial results. Forte and Leonard had been repositioning Zales to target higher-income consumers and to obtain product directly from overseas suppliers. However, said Betsy Burton, interim CEO said, the strategy wasn’t successful.

“Our earnings performance did not reach our expectations for the second quarter due primarily to a sales shortfall at Zales Jewelers,” Burton said. “That was largely due, Zale officials have previously said, to problems created by the strategic repositioning.

“Upon review of Zales’ business, we concluded that the new strategy negatively impacted our brand positioning, because it deemphasized the value component and key diamond categories of the brand’s assortment.”

Burton noted that Zimmerman has “consistently improved performance at our Canadian brands. We look forward to leveraging John’s talents in addressing the challenges at the Zales brand.”

Zale Corp. also announced its official second quarter results (ended Jan. 31). It said it had net earnings of $87.8 million, compared to $99.2 million for the same period the previous quarter. This quarter’s results were also affected by a write-down of inventory; severance and benefit payments totaling $8.5 million, primarily due to the departure of Forte costs related to closing 29 Bailey Banks & Biddle sites; and a tax benefit of $11.5 million, related to qualifying earnings from the company’s Canadian subsidiary, repatriated under the American Jobs Creation Act.

Excluding these items, the company had second quarter earnings of $97 million, though that’s still below last year’s $99 million.

Total revenues for the second quarter, including the results of the closed 29 Bailey Banks & Biddle stores were $994 million. That is 2.3 percent more than last year’s $972 million. Excluding store closures, total revenues were $979 million, compared to $952 million for the same period last year, an increase of 2.8 percent. Comparable store sales, excluding store closures, rose 1.4 percent for the quarter.

Year-to-date total revenues, including the store closures, increased 1.9 percent to $1.421 billion, compared to $1.395 billion. Excluding store closures, year-to-date total revenues increased 2.3 percent to $1.406 billion. Year-to-date comp store sales, again excluding store closures, only increased 0.6 percent.

Burton noted that, “Even with the challenges at Zales and Piercing Pagoda [its mall kiosk chain], the strength of our other brands helped drive a 1.4 percent increase in comparable store sales for the quarter. We had a 100-basis points improvement in gross margins, due to continued adoption of direct sourcing and supply chain management, excluding the impact of the Bailey Banks & Biddle closures.

“So in our critical quarter, we delivered strong cash flow, which enabled us to complete a $100 million share repurchase. The net effect was earnings per share growth for the quarter above last year before the store closures, repatriation and management change items.”

The company said it expects flat to slightly positive comp-store sales and diluted earnings per share for its third fiscal quarter.

Zale Corp. is North America’s largest specialty retailer of fine jewelry, with about 2,350 retail locations throughout the United States, Canada and Puerto Rico, and online (www.zales.com and www.baileybanksandbiddle.com). Its brands include Zales Jewelers, Zales Outlet, Gordon’s Jewelers, Bailey Banks & Biddle, Peoples Jewellers, Mappins Jewellers and Piercing Pagoda.