Summary
Zales is taking a cautious holiday outlook. Caution is warranted due to a combination of lower earnings, product positioning, and recent declines in share prices.
Analysis
This article concerns quarterly losses at Zales Corp., and the declines in the share price that resulted. This article concerns Zales shares which had fallen 3.3% to close at $19.28 at the time this article was published. Zales share prices are following a normal market segment pattern, but may react slowly do to a cautious outlook by Zales, positioning of Zales in the market, and recent financial difficulties.
Analysts are cautioning that midlevel jewelers like Zales are at risk of losing customers to higher prices in gasoline. In fact it is more than higher gasoline prices, but higher credit card debt, and reduced credit availability due to declining housing prices that is hurting midlevel consumers and retailers. Consumers have less money to spend, and are running out of credit. Other retailers such as Wal-Mart and JC Penny are reporting similar sales figures, and the Zales figures are in line with general retail figures for the period.
Zales is a retailer of midlevel gold and diamond jewelery through 2,200 retail shopping outlets. The share price at Zales is in line with the recent minor pullback of gold, which is the commodity of which the jewelry sold by Zales is made. Taking a longer term outlook, demand for gold, diamonds, and jewelry is at record levels, especially gold and diamond products imported from India, which has reported a 35% increase in exports of gold and diamond jewelry, especially to the USA. Regardless of the increases in market demand for gold jewlery, Zales may follow the market later than other high-end jewelers. The reason is lack of midlevel consumer credit, and lack of awareness of the demand for gold products among the midlevel consumer.
Increases in gold demand have not yet been realized by the midlevel Zales customer who is likely to shop at your local shopping center. High-end and specialty jewelry stores are beginning to take advantage of increasing demand for gold and gold jewelry, but the midlevel consumer, just sees higher prices. What usually happens resembles a ladder formation. The increase in demand for gold, and gold products. is first noticed in the high-end market, and by insiders and investors, who have pushed demand for gold products to record levels. However, this demand for gold products will not be realized by the midlevel consumer who is likely to shop at Zales, until it reaches the mania stage. When demand for gold reaches the mania stage the Zales consumer will again find gold and diamond jewelry attractive as a fashion item, whether or not they realize the investment potential.
The Zales product also suffers from poor image. Zales is not seen as a high-end jewelry retailer, rather being seen as a shopping center chain store. Thus sales of Zales product may trail the high-end jewelers until demand for gold reaches the mania stage, and the general public is buying gold jewelry, even at the high prices they will pay for it, as it will certainly be a fashion statement, as well as an investment.
From a business perspective Zales is hurting with sales revenue dropping 1% to $432 million dollars. Same-store sales fell 0.4 percent. Revenue from warranty sales fell $6.1 million dollars. The company reduced its profit outlook for the November-January quarter by 27 cents per share.
Executives blamed the weaker outlook on the sale of its Bailey, Banks & Biddle chain to Finlay Enterprises for $200 million. At first glance this may seem negative for Zales share prices, but it is actually relieving a financial burden and giving Zales much needed cash for its business. This reminds me of a similar situation with DRD Gold, a large South African company that was in deep trouble. When DRD sold off its ownership of Empire Gold, it also sold off the debt Empire Gold was incurring. This sale generated cash which in effect increased DRD's share price from .60 cents to $9.00 including a stock split. Thus the sale of Bailey Banks & Biddle may actually serve to increase revenue, decrease future debt, and increase share prices of Zales.
Share prices of Zales are following a similar pattern to many midlevel gold related companies. The sale of Banks Bailey & Biddle will generate cash and relieve a financial problem for Zales. Increasing revenue usually helps to increase share prices. Zales may react late to record demand for gold and diamond jewelry, because its customer is a midlevel customer facing higher prices of gasoline and other essentials, including increased consumer credit and other types of debt. This midlevel customer has yet to realize gold and diamond jewelry as a fashion or investment trend, but will as we enter the mania stage for gold.
