Summary
Zale Inc's recent poor performance and increased debt is more than management. Zale has not adjusted to the weakening economy or the present consumer retail environment. Recent poor share performance is traced to the recent retrenchment in the share performance of gold producers, weakening consumer goods markets, and the high costs of working with a gold product.
Analysis
Zale Inc, suffering from increasing losses and a poor holiday outlook, has replaced its CEO Betsy Burton with a new CEO Neal Goldberg. Mr Goldberg has retail experience but does not have experience in the jewelry or gold and diamond markets. Although he does not have jewelry or precious metals experience, he may still present some fresh ideas to Zale Inc, to counter the weak retail climate at present.
The replacement of the CEO is an obvious attempt by Zale to prevent panic among large shareholders in the face of recent declines in the share price. Zale has also recently sold its Bailey Banks & Biddle chain, which was not performing. It was not necessarily a bad decision in the present climate to remove a financial deficit, but it was a move that could frighten shareholders.
Zale needs to present a new image. Zale had developed an image of being a retail chain mall jewelry store, not the best image for a jewelry chain that has recently chosen to emphasize diamond jewelry. Zale needs to develop an image for reasonably priced "quality" merchandise. It needs to gain the confidence of the consumer, especially as it is very simple to walk into a Macy's or Lord & Taylor in most shopping centers to purchase jewelry at a discount.
Zale also needs to develop an internet presence. I still envision Zale as a retail chain store. In the present climate it is essential to have a quality and substantial presence as an internet retailer, if Zale wants to compete with the growing number of retailers, such as Walmart, who are entering the lucrative jewelry markets in an attempt to take advantage of the present gold boom.
The retail climate at the moment is poor. Fuel costs are rising, consumer debt is at record highs, banks and financial institutions are having severe difficulty, and there is a growing mortgage and housing crisis. Retail sales are slow, perhaps the slowest in 10 years. The difficulty with the present scenario is that it appears we have just entered the economic downturn. All of these economic issues will directly impact Zale as a retailer. Especially if banks tighten credit.
Zale is a midlevel jewelry chain store. It is not considered to be a top name when speaking of quality jewelers. It caters to middle income shopping mall customers seeking to purchase reasonably priced diamond jewelry. These customers will be slow to catch on to the jewelry and gold bandwagon. Higher prices, without customer awareness of the fashion or investment value of the product, will at first decrease sales. As gold and jewelry items heat up on the consumer market, Zale will follow, but only after the majors as Tiffanys have already made their move.
Zale is a gold related company dependent on the price of gold. Its share price is following a similar pattern to that of gold mining companies, who are the producers of the gold and diamonds Zale uses to make its jewelry. Although the price of gold has held steady around $800 per ounce, gold manufacturer shares have retrenched.
The reason the shares of gold producers, related to the Zale product, have retrenched is the inflationary costs involved in producing gold and gemstones. Production of gold is energy intensive, and energy costs, especially for mining companies are very high. Inflation related expenses for production of gold have increased 15%. Qualified mining executives are very difficult to find, and are very expensive to hire as a result.
Gold mining shares, the shares of the producers of the material Zale uses for its jewelry, traditionally follow behind the price of gold itself. However, as gold continues its rise in price, production of the gold will become more profitable, and more efficient. Gold shares will historically increase in price as gold prices continue to rise, and will eventually begin to move faster than gold, and surpass gold in performance.
The demand, supply, and price of Zale jewelry is directly tied to the price of the gold and diamonds used in production of its jewelry. Zale is facing the same high production costs faced by gold producers.
Zale has difficulties right now with its retail business, it has marketing, sales, and financial difficulties that it must improve. It must develop a viable internet business. Zale must also overcome difficulty in the economic and consumer retail environment, that is effecting both consumer and household related goods, and that appears to be worsening.
On the positive side Zale is a gold related company. Zale may be sluggish right now, and in a similar retrenchment to its gold producers, but as the consumer becomes aware of the benefits of owning gold, and becomes aware of gold and diamonds as a fashion statement, demand for reasonably priced jewelry will increase, and so will profits at Zale.
