Summary
Zale's new chairman may be planning to change his chief executive. Here's the rationale.
Analysis
Zale is scheduled to ‘present’ at the Johnson Rice & Company’s Annual Consumer Conference on October 29th. This will be the 3rd presentation the company will have made in the last two months. Earlier, Zale presented at the Goldman Sachs Global Conference and C.L. King Best Ideas Conference in September. In the interim there have been a lot of changes at Zale. For instance, three hedge funds have purchased large blocks of Zale’s shares, Bailey, Banks, and Biddle was sold, and Zale appointed a new Chairman of the Board.
Just what Zale plans to accomplish with this presentation isn’t clear. It is scheduled to announce its first quarter sales about a week later which limits any discussion about current performance or changes in 4th quarter expectations. Moreover, it is doubtful the presentation will include very much information about the key changes in ownership, brands, and internal management that have taken place in the last 6 weeks; since President and CEO won’t present. Instead, Rodney Carter, the company’s new EVP and CFO will make the presentation.
One thing that is surprising about the presentation is that President and CEO Burton won’t be the featured speaker. In fact, Carter has taken the lead role in the last two presentations which is a departure from Ms. Burton’s usual visibility at investor relations events. Granted it isn’t unusual for the CFO to be the company’s spokesperson to the financial community, but numbers aside, it is the chief executive that current and potential investors what to hear from. But they may have to wait.
With hedge funds owing about 18% of the equity and the appointment of a new chairman, the pressure on the board to make changes is intense. Less visibility alone isn’t enough evidence to suggest that the board could be planning to change its chief executive, but when viewed in combination with the company’s most recent changes and two years of declining performance, it’s certainly a real possibility.
The new chairman John Lowe has said he believes it’s in the best interest of shareholders that Zale remains independent. But even if activists shareholders like Breeden Capital, Citadel LP, and SAC agree, current management’s long list of missteps, including sales shortfalls, declining margins, increased problem inventory, and higher employee turnover can’t give them much comfort. That comfort level isn’t likely to improve either.
Whether Zale will achieve its 1st quarter sales plan won’t be known with certainty until it announces its results on November 8th. But Zale stock has declined precipitously during the last several days. Some could point to the markets overall decline as an explanation, but Zale has under performed both the Dow and S & P 500, in addition to, decreasing more than other listed jewelry company’s like Tiffany and Blue Nile. That may mean traders expect Zale management to disappoint again. If so, its 2nd quarter guidance may be in jeopardy.
With Zale earning most of its annual profit in its 2nd fiscal quarter, disappointing results would probably mean the company would lose any hope of achieving its modest 2008 profit plan; regardless of incremental costs savings from the sale of BB & B. Such a realization could prompt the board to act now, rather than wait until January. That would give the new Chairman a three month jump on getting a new CEO in place in time to have a material effect on the 2009 fiscal year.
