Zale’s Multi-Multi-Multi-Year Turnaround Plan

Some of the main news from today’s conference call from Zale Corp.
(transcript here):

– The main message from now-permanent CEO Theo Killion: “We
are making progress, but we still have a long way to go.” 

– The company has received “excellent support” from our
vendor partners, said CFO Matt Appel, who added: “We have placed substantially
all of our orders for the holiday season,”

– Regarding marketing, Killion said: “We
will be a presence on television [this holiday] .. .[W]e feel confident that
people will know we are in business that we are promoting jewelry over the
important holiday season … We will be spending a little more money, but getting
significantly more weight.”

– The company will open approximately ten kiosks this year, and about half
of them will be open for the holiday.

– The company’s strategy is “back to basics.” The core assortment is doing
well, with good results from its bridal, men’s business, diamond band and
silver business. The company is also looking into differentiated product. It is
adding “diamond fashion” in Canada, and a “Promise Ring” collection in the
United States.

– In other good news, Piercing Pagoda was up 3.8% in the third quarter and
2.6% in the fourth quarter. The e-commerce business was up 13.3% for the year.

Some thoughts from me:

– When Golden Gate first signed its deal to provide $150 million in
financing in May, one wise observer predicted to me that so-called activist investor Richard Breeden and associate
James Cotter would resign from the board in six months. Now, nearly exactly on
schedule, they are gone, and likely sorry they ever got involved with this
company. (And I’m sure the feeling is mutual.)   And while Breeden remains the largest shareholder,
Golden Gate is clearly the new sheriff in town, and unlike Breeden, Golden Gate
will be protected in the event of a bankruptcy.

 – Speaking of Golden Gate, they
are not doing so badly here. A financial covenant based on EBITDA, which one observer described as a “sword of Damocles
hanging over Zale’s head” since they may not have been able to fulfill
it, has been eliminated, in exchange for a $25 million payment. But only $11.25
million of that is for debt, while the other $13.75 million Golden Gate
basically pockets for removing that provision. Considering there were already
heavy fees on the initial loan, that’s a pretty good deal for Golden Gate.

– Killion was formerly “president and interim CEO.” Now he is just CEO –
possibly opening things up for someone new to come on board as president.

– There are some positive signs here: The Citibank deal has been
finally signed, merchandisers have fully embraced the “back to
basics” philosophy (as opposed to the Neal Goldberg “fashion” philosophy), the company is losing less money than before, and there is now
a permanent CEO (who doesn’t really have any retail experience, but  a lot of people have high regard for his leadership skills, and at least we now know who is in charge.) One vendor told me he is “more encouraged than he was four weeks ago.” 

But most of the trade, not to mention Wall
Street, remains uncertain about this company’s prospects. Only one top executive — Gil Hollander– has past jewelry retail experience. The current management is well-regarded, and it seems like
they are fighting to keep the company alive, and are slowly and methodically
identifying what is wrong and trying to fix it. But it’s an uphill battle, and it
remains to be seen whether they can keep things going before the money – and
time – run out.

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JCK News Director