Summary
Richard Breeden of Breeden Capital Management has increased his holdings of Zale Corp claiming that the company is undervalued. An activist investor, Mr Breeden has stated, that he may initiate a major transaction in the company in the future.
Analysis
Richard Breeden of Breeden Capital Management, claiming that the jewelry retailer, Zale Corp is undervalued, has increased his holdings in Zale Corp to 15.85%, an increase of 339,449 shares. On September 30, 2007 Breeden Capital Management held 3,784,639 shares in Zale Corp making him its 5th largest investor. This number has now been increased by 339,449 shares. Shapiro Capital Management, the 3rd largest investor in Zale Corp, increased its shares from 4,506,325 shares on September 30, 2007 to about 7.04 million shares. The newly appointed Chief Executive of Zale Corp, Neal Goldberg, filed to purchase 250,000 shares on December 20, 2007. All purchases were made on the open market.
Mr. Breeden purchased the shares at $16.21 on the open market. I am a little surprised he paid $16.21 for the shares, as the share price hit a low of $13.56 on this recent trend. When purchasing large amounts of shares, purchases are usually made slowly, in increments, and with patience. Breeden Capital Management paid a good and low price, but could have paid less for the shares. Regardless, Mr Breeden feels he has made a good investment, and if that is true, worrying about a small amount in share price will not make a difference.
I agree with Mr Breeden of Breeden Capital Management, and with Shapiro Capital Management, that Zale is undervalued at this time. Zale presents a good long-term investment. It may be a volatile investment, but gold, jewelry, and retail are all volatile markets.
It is a positive event when insiders and Institutions purchase shares, as it shows that they have long-term confidence in the company and the share price. It is difficult to sell large quantities of shares when share prices are not performing, thus Mr Breeden has confidence that Zale Corp is a long-term hold and a good investment.
Interestingly, despite the recent purchases by Mr Breeden, and others, short selling interest in Zale actually increased from 7,241,880 on May 15, 2007 to 12,917,711 on December 31, 2007. This increase in short shares shows a lack of confidence in both the company, and in the markets by shareholders. It is also unusual as the price of Zale Corp decreased during this time period. Usually short selling will decrease as the share prices decrease, and short selling will increase as share prices increase, as shareholders buy into weakness and sell into strength. The likely reason for this unusual twist of direction is lack of confidence in Zale Corp by its shareholders.
Mr Breeden is an activist investor, and has stated that he may in the future "try to initiate a major transaction in the company". Mr Breeden is well qualified to do so. The former SEC Chairman, Mr Breeden was appointed as Corporate Chairman of Worldcom to oversee the largest corporate bankruptcy in the nations history. He has worked in similar fashion for Fannie Mae. Mr Breeden specializes in restoring companies in crisis.
Zale Corp has recently been streamlining its business. Zale has hired a new Chief Executive, Neal Goldberg, and sold unprofitable brands in an attempt to increase mall-based sales. Mr Goldberg presents an opportunity for Mr Breeden to take an active role in Zale. Mr Goldberg, the former president of Children's Place, is experienced in retail, but does not have the experience of Mr Breeden. Mr Goldberg will be wise to work with Mr Breeden to improve the fortunes of Zale Corp.
The present climate favors anything gold, and Zale Corp is a retailer that sells gold and diamond jewelry in shopping malls around the nation. As gold comes into the public eye as a positive investment and fashion trend, people will begin to purchase gold jewelry regardless of the increases in price. This scenario will take a few years to develop, making Zale Corp a good long-term investment. Mr Breeden has timed his purchase well, trying to buy into Zale shares previous to greater public awareness of gold as an investment, and the fashion statement that will result.
There are also hurdles that Mr Breeden will have to overcome. A weakening economy and retail climate, consumer debt, tighter credit, and a growing housing crisis that will effect sales of consumer and household goods. Mr Breeden will also have to contend with rising prices of imported jewelry. However, reports from India show that these increases in prices within India have not yet effected jewelry or gold exports to the USA which are increasing in demand, due to economic uncertainty in the USA.
Mr Breeden has made a good investment in a volatile market. His purchase will build shareholder confidence, and his experience will be useful in the present atmosphere of change at Zale Corp. Mr Breeden has timed his purchase well in relation to both the markets and awakening consumer awareness of the gold and diamond jewelry as a fashion item.
