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.