Zale reports smaller loss, plans to rebuild management

Zale Corp. bought itself expensive time to turn its business around. Now it just needs to sell jewelry.

On Wednesday, the Irving-based jeweler reported a decent start by posting a narrower third-quarter loss and saying it plans to restore some of the organization behind each store brand that prior management eliminated.

Zale has five years to pay back Golden Gate Capital, which gave it a $150 million lifeline earlier this month. Interest payments to Golden Gate alone will be about twice the $10 million Zale paid last year. But Zale needed money to start making money again.

It used about $125 million of the Golden Gate infusion to pay down its revolving credit line. After the infusion, its debt stood at $310 million and its available borrowing capacity was $250 million.

Securing new financing was a key first step in Zale's turnaround, allowing executives to focus on "fixing the business in order to return it to profitability," said Theo Killion, interim chief executive.

Not having merchants and marketers dedicated to each brand's performance contributed to deteriorating results at Zales, Gordon's and Canadian chains Peoples and Mappins in recent years, Killion said during a call with analysts.

Historically, each chain had its own president and supporting staff running the company's multiple brands. They competed against one another to be lead performers and for resources.

But management started to dismantle that organization and systematically merge brands in 2006, Killion said. The two businesses that have performed most consistently are Piercing Pagoda and Zales.com. "The teams who manage those businesses have remained intact with a singular focus on increasing profitable results," Killion said.

Each brand's customer is different, he said.

"The Gordon's brand has about 18 percent Hispanic customers, and that has certain implications for what the merchandise assortments should be," Killion said.

In Canada, its customers are primarily urban. At Zales Outlet, the shopper is mostly a female self-purchaser with a higher average income than at its mall-based Zales Jewelers.

The old structures aren't going to be put back exactly, but each brand will have merchandising, planning and allocation and marketing people, he said.

Fifty suppliers are coming to Dallas in June for a "vendor summit" as Zale develops a plan for the all-important holiday quarter. Zale has been working with suppliers "to restore terms more in line with our historic norm," Killion said.

The event also is partly to thank them for their support, he said.

Suppliers are shipping merchandise to the company again after stopping last December when Zale couldn't pay its bills. Normal shipments didn't resume until mid-April.

That meant stores didn't have the merchandise needed over the key Valentine's Day weekend. Also, nearly all advertising was eliminated for the Zales brand as the company was preserving cash. Sales over the long weekend rose 5.5 percent, Killion said. He credited store sales staff.

Same-store sales in its third quarter, which ended April 30, declined 2.2 percent from a year ago, when that key measure fell 20 percent.

Zale reported a net loss of $12.1 million, or 38 cents a share, compared with a net loss of $19.5 million, or 61 cents a share, a year before.

Excluding a $12 million tax benefit and other items, the net loss totaled 76 cents a share. Analysts polled by Thomson Reuters expected a larger loss of 95 cents a share and sales of $354 million.

Revenue fell 5.1 percent to $360 million from $379 million last year. Zale ended the quarter with 1,901 stores and kiosks – 149 fewer than a year earlier. The company doesn't plan to shutter more stores as part of its restructuring, Killion said Wednesday. This month, Zale launched its Piercing Pagoda online store.

Investors initially reacted positively to Zale's financials, pushing the stock up 9 percent. However, retail stocks turned negative Wednesday afternoon, and Zale fell 16 cents, or 6 percent, to close at $2.52 a share.

Analysts asked when Zale might resume advertising, but management didn't say.

Merchandise focus is moving away from collections and back into the core bridal diamond business and lower priced diamond fashion jewelry, Killion said.

During last year's awful holiday season, lower-priced merchandise was taken out of the assortment, leaving Zales' core customer with average annual income of about $50,000 without much of an "opportunity to shop with us," he said.

In a report this week, Ken Gassman, president of the Jewelry Industry Research Institute, said as a result of the recession's "new normal," last year's data shows Americans are buying less expensive jewelry. But that's not all bad news for retailers that pick the right mix to put in their glass cases because profit margins are much higher in lower-priced goods, he said.

Bulgari shows off elegant jewelry from its archives

Only a few women are lucky enough to own a necklace worth 20 billion won ($17 million). And although most Seoulites may not get to own such expensive jewelry they can see it at a special exhibition organized by luxury house Bulgari.

The jewelry maker is showing some 60 pieces out of its Italian archive in celebration of its 125th anniversary at the Shilla Hotel in central Seoul. The capital is Bulgari’s first destination in Asia for the exhibit, called “Between History and Eternity: 1884-2009,” which debuted last year at Palazzo delle Esposizioni, a neoclassical exhibition hall in Rome.


This necklace and pendant earring set made of emeralds, diamonds, turquoise and amethyst once belonged to Lyn Revson, wife of Revlon founder Charles Revson. Provided by Bulgari Korea
The collection includes an emerald platinum necklace worth 20 billion won that consists of seven cushion-shaped emeralds weighing a combined 118.46 carats and 224 smaller diamonds. Many of the necklaces, earrings, necklaces and watches on display are the only pieces of their kind in the world. Some of the pieces were once owned by rich and famous personalities, others were loaned to Hollywood celebrities for red carpet events.

The exhibition will run through June 15, from 9 a.m. through 9 p.m. every day.

China Urged to Develop Jewelry Designs

RAPAPORT... Total trade volume on the Shanghai Diamond Exchange (SDE) in the first quarter of 2010 reached a record high of $559 million, with a 91.1 percent increase year on year, according to recent statistics from the Diamond Administration of China (DAC). Total imports and exports increased by 100.7 percent to $524 million, while net imports increased 127.5 percent to $261 million, most of which came from Belgium, India, Israel and South Africa. The DAC attributed the sharp increases to rising domestic demand, business from the trade shows and stricter enforcement of laws in the aftermath of a major smuggling ring bust early in 2010. Membership in SDE also increased to 253, as more trade members rushed to obtain licenses to import diamonds. The exchange is the only authorized channel for importing diamonds into China under the favorable tax policy.

A Force in Jewelry Design

Speaking in Shenzhen on May 14 at the inauguration of a new trade association called China Jewelry Culture and Creative Industry Association, CIBJO President Gaetano Cavalieri stated “China has firmly established itself as a major consumer market and manufacturing center. It now is time to assert itself as a force in jewelry design, and put its stamp on the industry, much in the same way that my colleagues in Italy have done for so long. I am confident that the new association will play a role in the injection of Chinese design and artistic perception into the international jewelry arena.”

Cavalieri recognized China’s development into a significant force in the jewelry industry, emphasizing that it now has a responsibility to others in the global jewelry sector. “It is most important to remember that we are an international market, and that what happens here in China impacts throughout the global chain of distribution, just as what happens elsewhere will have an effect on the Chinese business,” he said. “In our industry, it is extremely likely that any item of jewelry represents the combined efforts of literally thousands of people living in different parts of the world. Every single individual who was in some way responsible for the manufacture of an item of jewelry — from the miner to the refinery worker, to the diamond cutter and the jewelry designer, the manufacturer and the retailer — plays a critical role in the process.”

World Expo 2010

Shanghai World Expo 2010 opened on May 1 with 189 participating countries.
Shanghai was a commercial and shopping center in China even before the republic was founded 60 years ago but this is the first time it has hosted a world expo of such magnitude and prestige. During the six months of the expo, an estimated 70 million visitors are expected to visit Shanghai, 95 percent of them Chinese nationals, which is expected to bring a huge boost to domestic consumption, including jewelry.

More than 50,000 people a day are expected to visit the Belgian Pavilion at the Shanghai World Expo 2010 every day, a very popular site that is distributing free chocolate and hosting a diamond prize giveaway. The Diamond Exhibition Corner will display modern jewelry designs and illustrate the history of diamonds. In addition, Antwerp’s 550-year diamond heritage will be illustrated with ten of the most prestigious antique diamond jewels from the Diamond Museum of the Province of Antwerp, together with the world-famous European Community Championship (ECC) diamond tennis trophy, a tennis racket made of 3.2 pounds of gold and 1,600 diamonds with a total weight of 150 carats, all perfect “Cut in Antwerp” gems.

In the long term, the expo is not only a gesture of doors being opened wider, but also a huge economic propeller, especially for Shanghai. The city has gone through a major overhaul in preparation for hosting the expo. Since 2005, Shanghai has built eight new Metro lines and extended existing lines. By the end of April 2010, Shanghai’s Metro and light rail length increased to 260 miles, more than four times that of 2005. Hundreds of miles of roads have been built or improved. The high-speed trains, which can reach over 186 miles per hour, also connect to other major cities, enabling people to travel between different cities within the same day for business and leisure. The city has spent billions of dollars on infrastructure, which has greatly improved the business environment and reinforced Shanghai’s position as the commercial and financial center of the country. The Chinese government’s slogan for the pre-expo work was “Keeping in mind the next 60 years’ development while preparing for the six months’ Exposition.” The event is expected to leave a legacy to the nation and the city of Shanghai for decades to come.

The Marketplace

• The retail market was very busy during the May Day holiday and quieted slightly afterward, which resulted in a slight slowdown in wholesale activity. Overall, the market is very stable.
• Demand is good for 0.30-carat to 1.10-carat, D-J, VVS-SI, GIA-certified and preferably EX stones.
• Demand is stable for parcel goods in 0.20-carat to 0.30-carat, H-J, VS-SI.
• Demand is good for World Expo–themed jewelry, decorations and gold and silver bars.