“Zale feels the love of strong holiday sales”

Zale feels the love of strong holiday sales

Posted: 12 Jan 2011 05:12 AM PST

07:12 AM CST on Wednesday, January 12, 2011

By MARIA HALKIAS / The Dallas Morning News
mhalkias@dallasnews.com

For the first time in many years, Irving-based Zale Corp. had a good Christmas.

Zale, the third-largest U.S. jewelry retailer, said Tuesday that its comparable-store sales increased 8.5 percent in the November-December period from a year ago.

A year earlier, sales fell 12 percent, vendors weren't being paid, bankruptcy or a sale were both possibilities, and CEO Neal Goldberg was ousted.

This year, a staff led by CEO Theo Killion found new financing, negotiated a credit card agreement and implemented a strategy that took its namesake Zales Jewelers back to being a diamond store.

Zale increased store training and brought in new field managers. It hired Austin-based advertising agency GSD&M to create what most analysts consider a successful television campaign.

Together, the moves paid off.

Sales increased 11.5 percent in November and 7.4 percent in December. All divisions were up. Zales Outlet and Gordon's Jewelers together posted a 7.5 percent increase. Its Canadian Peoples and Mappins chains posted a 15.6 percent increase. The Piercing Pagoda kiosk chain had a 4.2 percent rise.

"The holiday sales results represent progress as we continue to stabilize the business and return to profitability," Killion said.

"We're not celebrating," said chief financial officer Matt Appel. "We're starting to plan Christmas 2011 just like the other guys."

There are no plans for post-holiday store closures or layoffs as in past years, and "we're trying to get our credibility back," Appel said.

The status of Piercing Pagoda is the subject of much speculation.

Bloomberg News reported in mid-December that Piercing Pagoda was for sale and that private equity firm Apollo Global Management LLC is in pursuit, but neither company has commented.

"I'm impressed with these numbers. I was worried, but they're right there with the pack," said Ken Gassman, a veteran jewelry industry analyst and founder of the Jewelry Industry Research Institute.

The pack includes Signet Jewelers Ltd., Zale's chief rival, and Tiffany & Co. Both reported holiday sales Tuesday and raised earnings outlooks.

Signet, the largest jewelry chain in the U.S. and U.K., said holiday sales increased 8.1 percent from a year ago. Its Ohio-based U.S. division, made up of the Kay Jewelers and Jared chains, posted an 11.7 percent increase. Signet said its strong results will mean earnings per share that will exceed the previously forecast 39 percent to 45 percent increases from a year ago.

Tiffany raised its earnings outlook based on its 9 percent increase in holiday comparable-store sales. Total sales increased 11 percent. Tiffany expects earnings for the year in the range of $2.83 to $2.88 a share vs. its November guidance for profit of $2.72 to $2.77 a share.

The luxury shopper was back this holiday season, and pent-up demand sent shoppers to buy a few things they had forgone since the Great Recession. Jewelry was one of those items. U.S. jewelry sales increased 7.5 percent to $19.2 billion in the November-December period, Gassman said.

Full-year jewelry sales increased to $63.3 billion, up 7.7 percent from last year and setting a record from the prior peak of $62 billion in 2007.

J.C. Penney also highlighted jewelry as one of its stronger categories as it posted better-than-expected holiday sales.

At Zale, total November-December sales increased 8 percent to $533.1 million, compared with $493.7 million last year. Bridal diamonds led the store, Appel said.

Christmas represents more than 30 percent of the jewelry industry's sales and the bulk of its profit. But for Zale, the just-completed holiday was an even bigger milestone after years of management turnover and its inability to score a solid holiday. The season represents 35 percent to 40 percent of annual sales and all its profit.

"Theo is all business, and that's good. That's what this company needs," Gassman said. "I don't think he's about to be replaced."

Zale will report full fiscal second-quarter results Feb. 23.

At least one analyst, Gerson Lehrman Group analyst Nicholas White, has expressed concerns that Zale may be violating covenants with lender Golden Gate Capital. The San Francisco private equity firm recapitalized Zale in May by lending it $150 million. The loan amount was reduced to $140 million.

White said in a report this week that he believes Zale could violate terms of the loan agreement, based on measurements of Piercing Pagoda and Canadian store contributions beginning Jan. 31.

"Zale secured enough liquidity in May to get through two holiday seasons," Appel said. "We're comfortable with the terms of our term loan agreement with Golden Gate."

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