Zale Struggles to Right Ship

When Zale Corp. announced its latest financial results in September, chief executive officer Theo Killion didn’t try to spin things. “We are making progress, but we still have a long way to go,” he said. “We look forward to delivering better results.”

Overall, the company lost $94 million in fiscal year 2010—a loss, but better than the $190 million loss in fiscal year 2009. Same-store sales for the fourth quarter were down 2.1 percent, though, again, this was a big improvement over the same quarter in 2009, when same-store sales plunged 21 percent. “Obviously, we are not pleased with where we are on a comp store basis, and we have to start getting back in the game from a revenue standpoint,” Killion said.

In addition to releasing the figures, Zale announced a slew of measures to illustrate its turnaround:

? Killion, who was appointed interim CEO in January following Neal Goldberg’s departure, was named permanent CEO in September. The former Tommy Hilfiger exec has no jewelry background and has never run a retail operation—he was initially drafted to head up Zale’s human resources department—yet vendors have high regard for his leadership skills. (He no ­longer holds the title of president, raising the possibility that someone might else fill that post.)

? Golden Gate Capital, which had lent Zale $150 million in May, eliminated a covenant requiring Zale to maintain negative $10 million of EBITDA on Jan. 30, 2011. But that removal didn’t come cheap: In return, Zale paid GGC some $25 million—$11.5 million went to the company’s debt to GGC, $1.25 million for a prepayment penalty, and a $12.5 million amendment fee. “That provision was like a Sword of Damacles hanging over Zale’s head,” says an industry financial expert. “Golden Gate made out very nicely getting rid of it.”

? Executives now talk up the company’s back-to-basics merchandising, a dramatic reversal from Goldberg’s fashion-oriented approach. Killion says the company has done particularly well with its “core” bridal, men’s, diamond band, and silver business. 

? The retailer may finally have settled its credit card issues. Citibank—which had been threatening to terminate its arrangement with Zale for most of the summer—inked a five-year deal to provide private-label plastic for Zales, Zales Outlet, and Gordon’s brands in the United States, effective Oct. 1. 

? There have been big personnel changes: John Legg was named senior vice president, supply chain. Kenneth B. Gilman, ex-CFO of Limited Brands, joined the board, replacing Richard Breeden and James Cotter.

? Adweek reported that Zale’s advertising budget plunged from about $50 million over the last two years to only $3 million in the first six months of 2010. (Zale declined comment on those reports.) But in August, the chain switched agencies, moving to GSD&M Idea City, and is vowing to resume holiday TV advertising. “We will be spending a little more money,” said Killion, “but getting significantly more weight.”

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