In 1924, M.D. Zale opened his first store in Graham, Texas, in the midst of the oil boom in West Texas. To help finance the lavish jewelry buying of the wildcatters, Zale would allow merchandise to be sold on credit, one of the first stores to do so in the south at the time. This concept was considered advanced, but to M.D. Zale, “it was just what he had to do to survive,” says his son, Donald Zale.
Donald Zale was the last chief executive officer of the company before its 1986 leveraged buyout. At the time, the company’s market capitalization was somewhere around $600 million. Today, it’s down to a mere $200 million-and thereon hangs a tale. Since Donald Zale’s time, Zale has filed for Chapter 11 bankruptcy, been battered by the Great Recession, run through six chief executives in 10 years, sold its upscale Bailey Banks & Biddle jewelry chain, and shrunk its store count from a peak of 2,295 in 2001 to 1,890 today.
Despite it all, though, Zale has managed to survive-and there are even some signs of improvement at the nation’s largest retail jewelry chain. Zale Corporation recently reported its fiscal fourth quarter earnings with comparable store sales rising 8.3 percent, the seventh consecutive positive quarter. The company’s operating loss shrank to $7.8 million from $24.1 million in the year-ago quarter. For the full fiscal year 2012 comparable store sales have increased 6.9 percent, with operating earnings of $19 million, up from an operating loss of $27.9 million in fiscal 2011. The company’s capital structure also looks a lot better: As previously announced, on July 24, 2012, Zale secured a new $655 credit facility. This included $60.5 million of senior secured debt, as well as an amended and extended remaining $80 million. At current interest rates, the company’s overall average borrowing cost was reduced from about 8 percent to about 4 percent, resulting in projected annual pretax savings in fiscal year 2013 of approximately $17 million.
Due to stagnant discretionary spending by consumers, market conditions in the fine-jewelry retail sector have been tough since 2008, leading Zale to focus internally on efficiency and marketing strategy. In Zale’s fourth-quarter earnings conference call, chief financial officer Theophilius Killion spoke about the “omni channel” business model across social media, web stores and traditional stores to provide access to its products. ECommerce sales increased 16 percent in 2012 and over 40 percent in the past two years. Revenue from ecommerce sales is now about 5 percent of total revenue, which doesn’t adequately represent the true value of this particular customer, Killion said. “A great example of the benefit of Omni-Channel is our new Ship-to-Store option,” he said on the call. “This is important for several reasons. It provides a convenient delivery option for our guests, and it enhances the guest relationship capacity in the United States. Importantly, about 75 percent of Zale’s Ship-to-Store guests have not shopped in their traditional stores for over a year.” This traffic not only allows jewelry consultants to showcase their collections and add on to the sale, it could provide further evidence that the jewelry market is bouncing back.
Donald Zale has not worked in the company for over 25 years and has no remaining financial interest in the company; yet he stays current on the stock price, and receives annual reports. He has visited with current CEO Killion, and is optimistic about the future of the company.
The company has set the goal of being profitable by next year. This would be the first net profit since 2008, and would come after four years of losses totaling more than $423 million. Investors seem to agree: Zale’s stock hit a 52-week high today, reaching over $7. The stock has traded as low as $2 in the past year.
