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| Zale Corp., which includes Zales retail stores, saw a 9 percent decrease in same-store sales in November and December. |
Analysts see a different future—and likely a new owner—on the horizon for Zale Corp., an 84-year-old fixture in the U.S. jewelry industry that has struggled to reinvent itself in recent years.
Jeff Taraschi, president of Interactive Group Ltd., and industry analyst Ken Gassman both say a merger or acquisition with a non-U.S. company appears to be the most likely lifeboat for struggling Zale Corp., whose sales took another battering over the holidays.
Taraschi points out that large international companies have been buying "incredibly" over the past few years in the United States, where the weak dollar has attracted foreign investors.
Last year's $20 million purchase of Middletown, Ohio-based Rogers Ltd. by the Mumbai, India-based Diamond Trading Co. sightholder Gitanjali Gems—which also bought Samuels Jewelers in 2006—is just one example. Taraschi speculates that Zale, with $2.4 billion in sales in its fiscal year 2007, might be next.
"They've been trying for a few years to reorient that business model," Taraschi says of Zale. "They've not found the formula to bring the business back."
Gassman says that three scenarios are likely for Zale: continuing on as is; having discontented shareholders force a leveraged buy-out that takes the company private; or, being purchased by an "upstream diamond supplier" from another country, most likely India, which could give Zale direct access to the jewelry-manufacturing powerhouse.
Gassman says the third scenario is the most probable, and he says the first is the most unlikely.
The problem with Zale continuing on as is, Gassman says, is Zale's board of directors, which has ousted top management before they have even had time to address the problems of the 2,000-plus store chain.
"It's like trying to turn an aircraft carrier around in the bathtub," Gassman says. "You just can't do it."
When asked about the likelihood of Zale being acquired by a foreign company, Zale Corp. Vice President and Treasurer David Sternblitz says the company's main goal now is improving its business.
"At the end of the day, any option looks better when our performance is stronger," he says.
Zale saw same-store sales slip 9 percent and total revenues decline 10.1 percent in November and December.
Amid the holiday rush (or lack thereof), another leadership reshuffling took place: Zale Corp. President and Chief Executive Officer Betsy Burton stepped down and was replaced by Neal Goldberg, an industry outsider who most recently served as president of The Children's Place retail chain and is a veteran of Macy's, Victoria's Secret and Gap Inc.
Goldberg was not immediately available for an interview, but at the time of his hire, Zale Board Chairman John Lowe Jr. lauded the chain's new chief as a strong addition to the Zale team.
"We are delighted that he has agreed to join Zale to continue the focus on driving shareholder value," Lowe said in a statement.
One shareholder with a keen interest in the company's value going forward is investor Richard Breeden, who was invited, along with his business partner, James Cotter, to join the Zale board in mid January.
The former chairman of the U.S. Securities and Exchange Commission (SEC), Breeden began buying Zale stock in September through his company, the Greenwich, Conn.-based Breeden Capital Management LLC.
At press time, Breeden's stake in the company stood at 18.1 percent. When asked about his interest in Zale, Breeden deferred all questions to SEC filings.
The original filing announcing Breeden's investment in Zale, dated Sept. 7 under the section entitled "Purpose of Transaction," states: "Representatives of the reporting persons (Breeden Capital Management LLC), have had conversations with the company's management. The reporting persons intend to continue to pursue ongoing discussions with the company's management and potentially with members of the company's board of directors."
The filing says the discussions focused on the company's financial performance, operations and a strategic plan.
Depending on Zale's financial performance and direction, Breeden "may in the future acquire additional securities...dispose of some or all securities...or take any other actions with respect to their investment in the company permitted by law."
Sternblitz says Zale has a good relationship with Breeden, who shares the company's goal of boosting shareholder value.
"We've had a very positive, productive dialogue with him," Sternblitz says.
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| Zale Corp. is targeting a total of 60 retail units for closure by mid April, including 30 Piercing Pagoda kiosks. |
In addition to the leadership shift and shareholder activity, the chain announced in mid January it would be closing a total of 60 locations by mid April, including 30 stores from the Zales Jewelers and Gordon's Jewelers brands and 30 Piercing Pagoda kiosks. The stores tapped for closing are at the end of their leases.
Though the company was not specific about which stores were closing and where, Sternblitz stated, "we are not exiting any geographic markets."
Taraschi says that the trend of consolidation, which is happening in a number of U.S. industries, will continue among retail jewelers.
He predicts more manufacturing companies from countries such as China, India and Thailand will be entering the U.S. market and will seek to buy retail chains to sell directly to consumers.
"These international manufacturers have money to buy companies," he says.
Chain of command
Over the past 14 years, Zale Corp. has changed chief executive officers five times.
Bob DiNicola: April 1994-August 1999
Beryl Raff: September 1999-March 2001
Bob DiNicola: March 2001-July 2002
Mary Forte: August 2002-January 2006
Betsy Burton: February 2006-December 2007
Neal Goldberg: December 2007-present
Source: nationaljewelernetwork
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