Zale Still Might Fail

On May 10, when Zale Corp. received $150 million in financing from Golden Gate Capital, execs proclaimed the 86-year-old jeweler’s turnaround.

Yet in June, the retailer’s stock sank below $2; on July 7, it hit a 52-week low of $1.35. Later that month, research firm Audit Integrity said America’s second-largest jewelry seller was at high risk “of bankruptcy or severe financial distress.” AOL’s Dailyfinance quipped, “New money may defer the point at which Zales goes under, but it won’t prevent it.” (A Zale rep did not return JCK’s calls.)

Along with Zale’s new backing comes high interest—15 percent a year, payable on a quarterly basis. “It’s not like they swapped out debt for equity,” says Michael O’Hara of Boston’s Consensus Advisors. “They swapped out debt for more debt.” Plus, its credit card woes continue; Citibank’s agreement to finance Zale’s branded plastic is turning into a significant money hole. In January, Citibank threatened to nix the deal unless it was paid some $6 million to compensate for a revenue shortfall. Eventually, Zale ponied up $5.3 million (though $1.3 million was refunded due to a “recalculation”). In June, Citi asked for—and received—another $1.25 million—and on July 18, it demanded $335,000 more. “Non-exclusive” negotiations about a new arrangement are ongoing, but the chain clearly needs a provider for its plastic, which accounts for 40 percent of its U.S. purchases.

Industry accountant Steven Mer­diger says his clients “are willing to sell them through the end of the year and then reevaluate.” Golden Gate now has two seats on Zale’s board, so Zale’s future may hinge on the financier, especially if sales and profits continue to disappoint. So far, that track record is mixed: President and interim CEO Theo Killion called Mother’s Day sales “soft.” Same-store sales dropped 2.2 percent for the quarter ending April 30, but that period also saw a narrower loss of $12.1 million, compared with $19.5 million in 2009.