Summary
Zale loses more than a markleting executive and a controller. Here's more.
Analysis
A recent SEC filing revealed that Zale was continuing to bleed executive talent according to the Dallas Morning News. That report indicated Steve Larkin was terminated just “11 months after he was promoted to the top marketing and e-commerce spot.” Also, Cindy Gordon, corporate SVP and controller since 1994, resigned effective June 30. Most recently, Ms Gordon held the title of Interim CFO, while the company conducted an executive search to replace Rodney Carter after his abrupt departure in February.
While there’s a natural executive churn in any big retail company, Zale is particularly note worthy since it has been losing talent and reshuffling its executive suite for almost a decade. Frankly, there have been so many changes; it’s hard to keep up. But, a cursory count shows the company has had three Chairmen, five CEO’s, and four CFO’s since about 2000. In the interim, the company has also lost hundreds of buyers, merchandisers, store operations staff, and store managers, all while losing its first place sales position in the US to its largest rival, Signet Jewelers. Now, Zale is not only continuing to lose market share, but is losing money too.
Candidly, there is no turn around insight. At least that’s how the market sees it. Trading as low as $0.89 per share, the stock has rebounded out of penny stock territory, less because of results, but because of speculation. In contrast, institutional investors looking for solid growth lost confidence in Zale a long time ago, favoring newly listed Signet Jewelers instead.
Zale’s FY2009 ends in July and its results will only be a surprise as far as they will settle the question about how much money the company will lose, a lot or a lot more. That despite its highly publicized cost-cutting plan, including a new tranche of store closing that were identified in the third quarter as money losers according to management. Still, there’s little hope for a turnaround in 2010 either.
Regardless of Zale’s efforts to cut costs, any turnaround for FY 2110 is predicated on a substantial improvement in sales performance this Christmas, which isn’t likely for the jewelry industry in general and even less likely for Zale. Effectively, the company will be up against its own price war discounting last year that drove margins down to about 43%. This year they hope higher margins and lower costs will drive more gross profit to the bottom line, but that isn’t the most likely scenario.
Most likely the company will face even stronger price competition this year as thousands of jewelers literally fight for their very survival, all while Zale is trying to raise margins. In short, Zale has to convince value conscious buyers to pay more for last year’s identical product or trade down to lower quality products this year. That’s not a winning strategy in the best of times, but a nearly impossible one in an economy where demand for discretionary items is tilting between stagnation and a deeper recession.
Add that Finlay Enterprises will likely liquidate during the second half, which may only be the beginning of an avalanche of jewelry companies that will have to run deep discounts sales as a part of a liquidation to pay off creditors and you have a retail environment that will be particularly hostile to Zale. There are other impediments to Zale’s success too. For instance, reduced marketing spend, poorer assortments, less capital investment, and continued store associate turnover. All mean less sales and more execution problems for Zale.
Simply put, Zale management has backed itself into a dismal corner, in part because of the recession, but, primarily because of the accumulation of bad decisions. Realistically, the earliest prospective investors could expect a turnaround is in FY 2011, That’s Christmas 2010 according to Zale’s fiscal calendar. Then, Zale could have a stable sales base if it manages to hold its prices this fall and into the following spring. But that’s about the only advantage the company will have as it faces even stronger competition and changes in consumer behavior in the up coming year with essentially the same turnaround plan as it did at the onset of the recession.
Unfortunately for Zale, doing jewelry retailing just a little bit better, something they haven’t achieved to date, won’t likely be enough, but that about the best that can be hoped for given the company’s paucity of both human and financial resources.
