Signet Out Performs, While Zale Stumbles

 

Now, the company has delayed disclosure of its FY 2009 results again; this time indefinitely, pending the review of the company’s treatment of “prepaid advertising expenses”. Whether this means the review is now larger in scope wasn’t clear from Zale’s statement. The company currently spends more than $90 million annually on advertising production, commission, fees, and media. That’s more than $600 million in total advertising expenses that could be under review since 2000.

It’s interesting to note that the company has had five CFO’s (including interim CFO’s) during the time of the review and three controllers. That’s in addition to four Chairman and four CEO’s. Rodney Carter unexpectedly left Zale in early 2009. Carter joined Zale in October 2006 when Mark Lenz was put on administrative leave after the discovery that vendor payments had been shifted from July to August to increase net cash flow for 2005. 

 

During the same time, Zale was the subject of a far-reaching SEC investigation about its accounting practice for a number of things including extended-service agreements, leases, payroll accrual, executive compensation, severance, earnings forecasts, stock trading, and the timing of certain vendor payments. The SEC ultimately concluded its probe without recommending any enforcement action.

 

Zale replaced Carter with Mathew Appel on June 15, 2009 and Cindy Gordon who had been the company’s controller since 2003 subsequently resigned. Ms Gordon was appointed interim CFO in Carter’s absence until a new CFO could be found. Jim Sullivan was appointed controller. Sullivan joined Zale in 2007 after serving as an assistant controller for Affiliated Computer Services, Inc for about 6 months. He was responsible for financial reporting and compliance at Zale since 2007.

Now, Zale not only has an inexperienced jewelry management team that is stumbling through the turnaround process, but a new financial team too. Whether this is good or bad remains to be seen? On the one hand, fresh-eyes may help eliminate any doubts investors may have about the company’s accounting practices. On the other, it may only make any turn around more difficult because of the steep experience curve the new leaders face.

 

In the meantime, Signet continues to pick up market share that Zale’s beleaguered management team consistently leaves on the table. Great at implementation, Signet’s strongest points are its “excellence in execution” as illustrated by its better than average sales results, mark down discipline, and real expense reduction. Still, it would be interesting to know how well Signet would perform if Zale’s management was a lot better. The fact is Signet really doesn’t have any heavy weight national competition. 

 

Today, they stand alone, way ahead of the pack, which certainly must have former Chairman Jim McAdam doing a Scottish Fling, kilt and all, while Financial Director, Walker Boyd, plays the “bag pipes”.