Zale Corp. is working to return to its roots - affordable jewelry

Diamonds really haven’t been Zale Corp.’s best friend.

Zale, based in Irving, Texas, which operates 2,300 jewelry stores in malls and outlets in the United States, Canada and Puerto Rico, is trying to get back to its roots: Selling affordable jewelry to the average American mall shopper.

Zale tried going upmarket a couple of years ago but failed. Tiffany & Co. might be able to sell flawless pink diamonds surrounded by 102 hand-set round diamonds, but Zale didn’t quite have the same polish.

Recently, three hedge funds - Citadel Investment Group, SAC Capital Advisors LLC and Breeden Partners - bought more than 18 percent of Zale’s stock and talked to management about its strategy. The investors think that the stock is undervalued and that Zale is capable of generating good cash flow, though much depends on its success in the holiday season.

“If you take it in a bigger picture, mall traffic has been declining well over a year, gas prices are up 20 percent.... People are nervous about the job market and mortgage-rates adjustments,” said KeyBanc Capital Markets analyst Jeffrey Stein.

That consumer sentiment hasn’t helped Zale’s stock, which is trading around $23, valuing the company at $1.1 billion. Shares hit a year low of $19.89 Aug. 28, well below the 52-week high of $31.72 reached last November.

Zale has too much inventory and has lost its market-leading position to British jeweler Signet Group PLC, the operator of U.S. store Kay Jewelers. It also has several store brands - Zales, Gordon’s, Zales Outlet, Peoples Jewelers and Mappins Jewelers - which complicates plotting a broad, cohesive strategy.

History also isn’t on Zale’s side. Between 2002 and 2005, its chief executive, Mary Forte, tried to introduce high-fashion silver and gold jewelry to compete with the likes of Tiffany. Consumers weren’t having it. Holiday sales suffered, and Forte, among others, was forced to quit.

Zale’s vice president and treasurer, David Sternblitz, said that Zale aims to keep only brands that meet or exceed corporate average returns. He declined to discuss any potential asset sales, but with high-end business Bailey Banks & Biddle already sold, another candidate could be the kiosk brand Piercing Pagoda, which some say doesn’t fit the company’s new portfolio revisions.

Zale executives said that an unspecified new product line will be offered in time for the holidays. The company is reissuing the popular “Journey” diamond pendant, which rival De Beers sells versions of at higher prices.
Source: journalnow