Zale-Management's Last Chance?

Still, the real question is what’s the number? Simply put, if Zale accountants and its previous auditors couldn’t get something as straight forth as capitalizing prepaid advertising costs and other prepaid expenses correct, what else is lingering on previous income statements that needs a relook.

My experience is that retail companies that play fast and loose with FASB for items like capitalized and non-capitalized expenses, also walk the same narrow line when it comes to markdowns, reverse markups, inventory valuation, and “push-down” accounting to name just a few suspicious areas of concern. Managing accountants in these companies push the envelope of practical standards, frequently operating in that area between night and day, black and white called the twilight zone.   Of course, accounting isn’t an exact science and most companies push the numbers a little harder from time to time. The question is do the results materially misstate the financial quality of the company.

The truth is Zale has a history of pushing accounting standards to their outer limits. The company was investigated in 2005 for any number of alleged irregularities (See my article Signet Out Performs, While Zale Stumbles). The SEC ultimately concluded its probe without recommending any enforcement action, but that doesn’t mean there weren’t irregularities. Since then, Zale’s senior accounting management was subject to the company’s culture of executive change including five CFO’s (including the interim ones) and two auditors. Clearly, each change had an explanation, but like loose accounting standards, it’s frequently not the single decision that creates a material event, but the effects of an accumulation of problematic decisions that push the companies reporting over the limits.

Whether another SEC investigation is warranted is uncertain. For now, wait and see, probably rules the day. The company has to publish its year-end numbers within 90 days of the close of its fiscal year or risk delisting.   Again, Zale management pushes the envelope, saying it will report its FY 2009 numbers on October 29, 2009. 

Meanwhile, the company will be ending its first fiscal quarter on October 31, meaning investors and regulators won’t have had any reporting for six months.

Frankly, Zale's year-end numbers will likely startle all but the company's most strident investors.  About the only thing that will save management will be unexpected good results for the company's first quarter, which won't be reported until   just before Thanksgiving.   Otherwise, look for changes at the top.