IDEX Online Research: Zales Jewelers Division Set for Another Makeover
May 28, 06
The number “three” can be a good or a bad omen. Some people think the “third time is the charm,” meaning that things will finally work properly on the third try. Baseball players, on the other hand, fear the third strike.
For the third time in as many years, Zales Jewelers, which generates about 45 percent of Zale Corporation’s annual revenues, is undergoing a makeover. Will this be the “charm” time, or will it be a strike-out for Zale?
The Zales Jewelers' product line is being revamped and re-merchandised. Its stores will be re-set. A new marketing campaign is being tested, and new advertising is planned. In addition, Zale will add a significant level of diamond product, including diamond solitaires and fashion diamond jewelry. Further, because Zale hedged its gold prices when they were much lower, we expect that gold jewelry pricing will be aggressive as the company heads into the all-important 2006 holiday selling season.
Performance in Zales Jewelers, the largest of Zale Corporation’s operating divisions, has been lagging for the past three years. As a result of weak sales in the 2004 holiday selling season, Zales Jewelers president Pam Romano resigned. She had taken over this division from Mary Forte, who was named corporate CEO in August 2002. After the departure of Romano, veteran jewelry merchant Paul Leonard was tapped in early 2005 to makeover the Zales Jewelers division. Leonard had extensive experience both at Zale Corporation, Friedman’s, and with others in the industry. Poor results for the 2005 holiday selling season cost Leonard his job earlier this year. These weak results, as well as other factors, also caused the downfall of Zale CEO Mary Forte and Chief Operating Officer Sue Gove in recent months. It also caused a reshuffling of the organization structure at Zale Corporation.
Based on a recent conference call with Wall Street analysts, Zale management outlined its proposed changes in the Zales Jewelers division.
- John Zimmerman, who now runs Zale North America, is looking at every item in the Zales Jewelers line-up. He is weeding out the substandard performers and adding much new diamond product. This comes at a time when polished diamond prices are soft; in fact, Zale says its diamond and diamond jewelry costs have been about flat year-to-year. As a result, the company will be able to re-merchandise its diamond lineup without incurring any notable price increases as it adds new goods. The company does not release sales by product line, but roughly 40 percent of Zales Jewelers’ revenues are derived from bridal merchandise, mostly diamonds.
- Orders for the new merchandise have already been placed, so Zale’s in-stock position should be solid as it heads into the holiday selling season. Last year, Zale’s in-stock position was weak due to late ordering by Zale merchants as well as floods in India, which disrupted the flow of goods coming from Zale’s suppliers in that country.
- Every Zales Jewelers store will be re-set with the new merchandise lineup right after Labor Day. The focus will be on properly displaying the new diamond solitaires and diamond fashion merchandise.
- While Zale has kept its current ad agency, it has switched to a new creative team. It is currently testing a new marketing program. The goal is to increase foot traffic into its stores.
- Zales Jewelers is bringing back its slogan “The Diamond Store.” It had a strong loyal following based on this slogan; prior management discontinued its use in 2005.
- Zales Jewelers is adding back three promotions that were discontinued in 2005. The elimination of those promotions last year cost the company $22 million in revenues. Thus, they should provide a strong boost to sales this year.
- Veterans Day
- Thanksgiving weekend
- First week in December
April Quarter Results Respectable, Given Management Turnover
Despite the turmoil of top management turnover, Zale Corporation reported notable results for its quarter ended April 2006. Total sales rose by 2 percent, while same-store sales were up 2.5 percent. Total sales gains were hurt by the closing of about 30 Bailey Banks & Biddle stores. Reported net profits rose by 16 percent; however, after eliminating unusual items, profits were down 20 percent in the quarter compared to the same period a year ago, as the table below illustrates.
Drivers of Demand for Zale
During the conference call with Wall Street analysts, management also disclosed a multitude of information about the drivers of demand for each division as well as plans for the future. The following is a summary of Zale management’s comments regarding its operating divisions.
- Zales Jewelers posted positive same-store sales – The big news in the April quarter was that the mass market Zales Jewelers division posted positive same-store sales. This division had been a drag on the company for the past several quarters. Several factors drove this division’s sales in the quarter ended April, including the following:
- Good in-stock position, with better product flow.
- Aggressive advertising, driven by a larger marketing budget.
- More customers (traffic drove same-store sales, the average ticket did was not up measurably).
- Right product – Zale featured lots of diamond circles and diamond solitaires in its stores and flyers.
- All of the company’s other divisions posted a sales gain except Piercing Pagoda.
- Zale
- Bailey Banks & Biddle posted solid sales gains due to more customer party events. In addition, fashion watch demand was especially strong at Bailey Banks & Biddle, with a +20 percent run rate year-over-year. The average BBB ticket rose to $1,763, up 27 percent.
- Zales Outlet – Same-store sales were up mid-single digit, driven by an emphasis on bridal goods. Engagement ring demand was especially strong in this division.
- Piercing Pagoda – Reported same-store sales were down. However, if the impact of weak demand for Italian charms had been eliminated, same-store sales would have been up in this division. Italian charms are a fad item.
- Mother’s Day sales were very strong. Same-store sales were up in the low-double digit range, well above the company’s plan. Sales during the two weeks prior to Mother’s Day represent about 25 percent of total quarterly sales. The hot price point for Zale at Mother’s Day was $199, about $100 higher than the traditional hot price point. Sales of $199 merchandise were driven by a diamond circle pin.
- The first free-standing out-lot Bailey Banks & Biddle store will open this year. This is Zale’s attempt to compete directly with Jared (owned by competitor Sterling Jewelers). We note, however, that the average ticket at a Bailey Banks & Biddle store is about $1,700 while the average ticket at a Jared store is about $700. Jared has established a niche just above the mass market jewelers, but below the luxury jewelers.
- Zale’s management has a very encouraging view of consumer demand for the second half of 2006, including the all-important holiday selling season. While gasoline prices are high, Zale says demand for its merchandise remains strong, except at Piercing Pagoda. The lower-end customer (often a teenager) who shops at Piercing Pagoda will most likely feel the impact of high gasoline prices before Zale’s other higher income customers who typically shop in its other divisions.
- Zale hedged its gold needs before gold prices shot up. Management expects to re-price all of its gold merchandise later this summer and hold those prices through the holiday selling season. We expect Zale’s gold jewelry prices to be aggressive, since the company has a low cost basis for its gold.
- Zale management says it expects to name a Chief Executive Officer by mid-Summer. However, the company is currently finalizing its holiday sales and merchandising plans. Therefore, a new CEO will have no notable impact on results until early 2007.
- The Securities & Exchange Commission investigation has focused on four areas:
- Extended service agreements
- Leases
- Accounting for accrued payroll
- Timing of vendor payment
Management contends that this investigation is routine, and nothing unusual has been found.