Zale Corp. returns to ‘roots, orderly growth,’ say new executives

Zale Corp., North America’s largest retail chain jeweler, has “returned to its core roots as a specialty jeweler.” That was the announcement by the company’s new top executives at a New York meeting of major financial analysts and investors on July 18, as they laid out their strategy for fiscal 2003 and beyond.

In the new fiscal year (beginning Aug. 1), they said, Zale will focus on its core bridal business; “realistic, orderly growth”; tight inventory and expense controls; exclusive new products for its major retail divisions; and building its Piercing Pagoda mall kiosk business. After 18 months of repositioning, the execs said, the $2 billion company has a strong cash flow and balance sheet (including an 11.5% debt-to-capital ratio, making it “virtually debt-free”), creating opportunities for Zale in the fragmented U.S. jewelry industry.

The two-hour private meeting came a week after Zale had downgraded its original earnings prediction for the FY2002’s fourth quarter (ending July 31). It said comparable store sales growth would be between 1% and 2%, and that per-share earnings (including the impact of severance paid to departing executives) would be between 10 cents and 13 cents. Those figures were much below Wall Street expectations, and led to a 15% slide in Zale stock (to $29.50) the day after the announcement, reportedly its biggest drop in 20 years. Zale chairman Robert J. DiNicola apologized to investors and analysts at the July 18 meeting, saying Zale’s earlier estimates were based on strong May and Mother’s Day sales, before a slump in June and July.

Getting on track. DiNicola was joined at the session by Mary Forte, Zale’s new president and chief executive officer; and Zale’s new executive vice president and chief operating officer Sue E. Gove, long-time chief financial officer for the company.

As the 21st century began, Zale Corp “went off track,” Zale officials said, “chasing volume at all costs,” putting too much emphasis on promotions and clearances and blurring the distinctiveness of its retail groups. Forte and Gove, said DiNicola, confronted the Zale Corp. Board, with “the difficulties” this strategy was creating for the business. That eventually led to the resignation of former Zale chairman and CEO Beryl Raff.

In the past 18 months, Zale has returned to an orderly growth plan, improved its product categories and the mix within each; brought inventory, purchasing, and expenses in line; differentiated its retail brands; maximized the benefits of credit outsourcing; and stabilized its management team.

Forte and Gove “got the business under control, rebuilt the [management] team, [five of Zale’s six divisions got new presidents in past year], got people enthused, and did a fabulous job in getting business back on track,” said DiNicola. If they hadn’t, he added, “in view of the aftereffects of Sept. 11 [on retail business], things would be very different now for the company.”

Cautious. Forte and Gove told the analysts and investors that Zale “remains cautious” about growth in FY2003 due to “uncertainty in the external environment.” They said Zale expects a 10% to 12% gain in earnings, instead of the once-projected 20%. Expansion also has been scaled back to 30 new stores and 30 new kiosks.

Bridal merchandise is Zale Corp.’s core business, they said, now accounting for 40% to 45% of total sales, “and up from 18 months ago.” Strengthening that business in FY2003, they noted, will be a “more completive 12-month interest-free credit offering” for customers—”very important [in view of] our business shift to bridal and the higher average check bridal commands,” said Forte. Also new this fall will be branded diamond products exclusive to Zale’s retail groups. Proprietary products, now in the low teens of total Zale Corp. business, are expected to grow to 20%.

New products. New branding initiatives include:

* the Zales Jewelers diamond anniversary band, diamond three-stone ring and pendant, extensions of the successful Zales diamond solitaire and now forming the Zales diamond collection;

* the new Gordon’s diamond solitaire for Gordon’s Jewelers, an exclusive, round-cut diamond with 73 facets in a sunburst pattern;

* the Peoples’ Diamond, for Peoples Jewellers of Canada, whose diamonds will be mined, cut and polished in Canada;

* a princess-cut Linz diamond for Bailey Banks and Biddle, in addition to their Lineage diamond collection, plus an array of new designers, some exclusive to the high-end chain;

* the new Lilla diamond anniversary band for Zales Outlets, an addition to its exclusive Lilla solitaire, plus several new upscale watch lines to take advantage of their diverse customer base.

Three-stone rings and jewelry will be the focus of a major marketing effort this fall, said Forte, complementing DeBeers’ own three-ring jewelry campaign.

Pagoda building. Meanwhile, after spending the past year improving the operations and organization of Piercing Pagoda, which Zale Corp. purchased in 2000, Zale is positioning the 900-outlet mall kiosk chain in 2003 to be “one of our growth vehicles,” said Forte. It will market Piercing Pagoda as the authority in ear piercing—the core of its business, as bridal is to the other brands. Other plans include increased factory-direct sourcing to reduce costs, raise margins, and allow the group to be more competitive. Piercing Pagoda also will introduce regional assortments and a new store design.

Zale Corp. is North America’s largest specialty retailer of fine jewelry, operating more than 2,300 retail locations throughout the United States, Canada, and Puerto Rico as well as online. Company divisions include Zales Jewelers, Zales Outlet, Zale Direct at www.zales.com, Gordon’s Jewelers, Bailey Banks & Biddle Fine Jewelers, Peoples Jewellers, Mappins Jewellers, and Piercing Pagoda.