Summary
Zale's selection of its new chief marketing officer is symtomatic of management's misguided view of what's wrong with the company and what it will take to turn the company around. Here's more.
Analysis
Zale named Richard Lennox as EVP and Chief Marketing Officer to replace Steve Larkin who was abruptly terminated earlier in the spring. Lennox worked for JWT as the company’s senior account executive for DeBeers. JWT, formerly J. Walter Thompson, one New York’s largest advertising agencies was responsible for both the creative development and media placement for DeBeers while the company was involved in anti-trust litigation with the US Justice Department. JWT continued to represent DeBeers’ advertising interests after the company sold its rough diamond reserves in 2001 as well as after the anti-trust case was settled in 2005. Sources say it is not clear whether Lennox will be replaced, raising questions about future of the JWT-DeBeers relationship.
Just what involvement Lennox had in developing DeBeers’ advertising campaign’s beyond that of maintaining the JWT-client relationship and coordinating the disparate efforts of the various departments within the agency is not clear. Anyone familiar with DeBeers marketing process knows it is highly collaborative and independent of any one group or anyone individual. Nevertheless, Neil Goldberg, Zale’s CEO grabbed Lennox to replace Larkin. Apparently, Goldberg thinks Lennox can be a catalyst for product innovation at Zale as well as bring brand marketing skills to the company, but that remains to be seen.
Stepping back a little, Goldberg’s choice is consistent with his ongoing philosophy that jewelry retailing is no different from selling children’s clothes or groceries for that matter. He would probably argue that the coach of UK’s leading soccer team, Manchester United , could also lead the Pittsburgh Steelers to another Super Bowl victory. After all soccer and US football are the about the same. Both teams use balls, play on a field, and score at the end of the field between two uprights. But, he would be wrong and his results to date suggest his executive selection policy is wrong too.
Stepping back a little, Goldberg’s choice is consistent with his ongoing philosophy that jewelry retailing is no different from selling children’s clothes or groceries for that matter. He would probably argue that the coach of UK’s leading soccer team, Manchester United , could also lead the Pittsburgh Steelers to another Super Bowl victory. After all soccer and US football are the about the same. Both teams use balls, play on a field, and score at the end of the field between two uprights. But, he would be wrong and his results to date suggest his executive selection policy is wrong too.
That isn’t to detract from Richard Lennox’s advertising skills. In fact, investors
should be worried because the most likely scenario is that he will use his talent and Zale’s $96 million advertising budget to explode the company’s shortcomings coast to coast to millions more consumers, meaning lower not high sales in the future. That’s because the company doesn’t suffer from an awareness problem. Most consumers know Zale and what they know is that it has a bad image in the market as just another discount jewelry store. Lennox can’t change that, only Goldberg can , as the chief merchant of the company and the market has already seen his best shot.
should be worried because the most likely scenario is that he will use his talent and Zale’s $96 million advertising budget to explode the company’s shortcomings coast to coast to millions more consumers, meaning lower not high sales in the future. That’s because the company doesn’t suffer from an awareness problem. Most consumers know Zale and what they know is that it has a bad image in the market as just another discount jewelry store. Lennox can’t change that, only Goldberg can , as the chief merchant of the company and the market has already seen his best shot.
What’s next for Zale? A big loss for FY 2009 to be sure and another dismal first half for FY 2010 if current store assortments, inventory levels, and store staffing is the measure. Frankly, other than cosmetic items, very little has materially changed at Zale since its dismal Christmas performance last year. Then, despite all of management’s product centric talk, new assortments weren’t sufficiently compelling to keep pace with the competition, even with all of the discounting. In fact, about the only thing Zale excelled at was discounting, leading the industry in the race for the lowest margin for the season. But, that didn’t work either.
This year, the stores remain under assorted in most key diamond categories and over assorted in many, non-strategic ones. Quality remains big problem and relative to last year, selling prices will be higher if the company implements its current tactic to maintain historical margin rates in the fall. At best, Zale enters the 2009 Christmas season with about the same assortments as last year, only higher priced. At worst, it expects better performance with less inventory, poorer assortments, and higher prices too. It will take a lot more than a small menagerie of ’signature’ items to overcome those problems, no matter how well advertised, which brings us to the chaos Lennox faces as he assumes Larkin’s responsibilities only three months before Zales faces the November-December gift season.
His challenge will be to get up to speed with the company’s marketing programs for fall and manage the e-commerce business too. Just what Lennox’s experience is in Internet fine jewelry marketing isn’t clear. But, it’s estimated to be a $55 million business for Zale that will need close attention this fall. That’s assuming the company is planning on sticking with its current advertising direction for the fall. On the other hand, Goldberg may want to change direction now. If so, that puts the company in a lot of sales jeopardy from poor execution in the midst of all the change. Bu the way, poor execution and problems with implementation have been a recurring theme in Zales operational history. Another new executive in the mists of all the downsizing can only aggravate the problem this fall.
The stock market evidently agrees. Zale stock closed at $5.05 or about one-third of book value on Friday, July 24, That’s compared to Signet Jewelers, which closed at 115% of book value or $21.86 on the same day. Still, Zale stock is appealing to speculators and day traders having increased about 127% since April 2009. It may also be attractive to short sellers, having made the Applied Finance Group’s “Most Over Valued Stock List” in early July 2009.
The stock market evidently agrees. Zale stock closed at $5.05 or about one-third of book value on Friday, July 24, That’s compared to Signet Jewelers, which closed at 115% of book value or $21.86 on the same day. Still, Zale stock is appealing to speculators and day traders having increased about 127% since April 2009. It may also be attractive to short sellers, having made the Applied Finance Group’s “Most Over Valued Stock List” in early July 2009.
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
