In anticipation of 1Q 2012 results to be announced by Zale Corporation in November, Rough&Polished contacted this leading specialty retailer of Fine Jewelry in the United States to find out more about their market position, turnaround strategy, expansion of their Internet business, sales expectations for the upcoming holiday season, new exclusive line of diamond fashion jewelry and industry outlook.
Now and again Zale Corporation is called America’s jewelry barometer in view of its enormous retail network. What is it now and what's the ‘weather forecast’ for its development in the short term?
Matt Appel, Chief Administrative Officer of Zale Corporation:
We are a leading specialty retailer of Fine Jewelry. We trade as ZLC on the New York Stock Exchange. As of July 31, 2011, the end of our most recent fiscal year, we had just slightly over 1,800 stores, a little over 1,600 of which are in the US, which include 666 kiosks in our Piercing Pagoda business, and we had 213 stores in Canada.
Our US brands include Zales, Zales Outlet, Gordon's and Piercing Pagoda. In Canada we trade as Peoples and Mappins. We also have a very robust e-Com business that supports five of the six brands that we trade under. We're principally a US business divided up about 80-20 in terms of the revenue breakdown by brand of our business. We establish and maintain that leadership position by being the leader in Canadian-sourced diamonds, which resonate, as you would expect, quite well in this geography.
And on the kiosk side, Piercing Pagoda, we have a number one position with the opening price point customer. This business has been a consistent, high-margin performer for us and we believe that there are real and significant opportunities to grow the footprint of this business over the next few years.
Zale Corporation incurred a net loss of US$190 million in 2009. Since then you embarked on a multi-year turnaround strategy. Was it a success and to what extent?
Let me take a minute and talk about the three year turnaround story that we're now in the second year of. In year one the key was to establish a financial foundation to stabilize the business and get Zale Corporation back in the game.
Year two, which just began on August 1, is designed to leverage the accomplishments of year one. We will further improve the capital structure of the business as the business improvement continues; continue to fine-tune the assortment and make it that much more productive; advance the training and field initiatives; build on the marketing strengths that we brought back last year and leverage those to a greater extent; to bring different financing options into the marketplace; to extend our sales footprint etc. On August 31 we announced an alternative financing program, that we were introducing this program throughout the United States, and this program is designed to give our customers an additional affordable option to finance purchases.
And importantly, we achieved that milestone while maintaining our reported margins at above 50%. And that is very meaningful in light of the commodity cost volatility that everyone in our segment has experienced over the last eight to nine months.
How are you going to expand your online sales?
We're an industry leader in our segment with five Web stores out of our six brands, our growth - our double-digit growth - has been consistently above industry average. We carry an expanded assortment of 50,000 SKUs or more online. So this is a business that's performed well for us over the last years few years, one in which we continue to invest in and that we feel very good about as we move forward in terms of our market position.
eCom and social networking play a very significant role in our business going forward. Since Last Mother's Day we ran a program that was highly successful where we asked mothers to vote on the products through Facebook that they wanted to see their significant others to purchase for them. We had over 20,000 votes.
But we understand clearly through history and through observing the retail environment in general the place for social networking and we're very focused on it. eCommerce is a business where I think we have had a leadership position for some time, we're going to continue to step on the peddle there to drive that business hard and maintain our number one position in terms of Fine Jewelry.
Can you share with us what were your sales of diamond jewellery in 2011 compared to 2010?
Revenues for the quarter ended July 31, 2011 were $377 million, an increase of $32 million, or 9.4%, compared to $345 million in the same period last year. Comparable store sales during the quarter ended July 31, 2011 increased 9.8%, compared to a decrease of 2.1% during the same period last year.
Every single brand was positive for the third quarter in a row and comparable store sales, as I said, over 10% for the last three quarters of the year. The way to think about this business in terms of the turnaround and the recovery - revenues up over $125 million; gross margin up over $65 million; margin for the year at 50.5%
What is your outlook for jewelry sales during the holiday season of 2011? Could you give a brief evaluation of the U.S. jewelry market for the end of this year?
Well, I expect to have a lovely holiday. We're not going to predict financial performance for Holiday. We will have, however, substantial cross channel marketing support for the new product in both online, TV and print and we're going to support it in an appropriate and significant way.
Do you think there's an alternative for a diamond engagement ring due to cost price and cost pressure?
I don't think there's any alternative for a diamond engagement ring, I'm hoping there won't be but I don't think there's any.
In our Pagoda business we see a lot of this kind of pressure because of price points. But in terms of the high ticket items, while they are a material element of the pricing structure that I was talking about, if anybody is trading they may be trading to maybe a smaller piece because we've just gotten - we and everyone else have gotten out of their price range. But, no, alternative metals in engagement or bridal just don't accompany a diamond in quite the way that we think is appropriate.
What are your expectations and plans for 2012?
The industry growth dynamics are quite favorable. With the exception of perhaps more significant headwinds than any of us are expecting in terms of the economy in front of us here. We feel very good about both the long-term growth characteristics of this industry and the US and in Canada where every indication is that they will grow at a CAGR of 4% and 8% respectively.
Luxury has met, continued to resonate and it's a large over $60 billion market combined in both the US and Canada. And specialty jewelers like Zale remain remain the dominant channel for consumers in this space.
And so we think the characteristics over the next few years are quite favorable and we're feeling bullish based on our accomplishments to date about our ability to capture and recapture our fair share of that business as we execute year two, year three and beyond of our turnaround program and our return of Zale Corporation to the business that we expect it to be and you expect it to be.
Roxane Barry, Director of Investor Relations at Zale Corporation, told Rough&Polished: “We have plans to close approximately 20 fine jewelry stores and five kiosks in fiscal year 2012. We will selectively open new stores when the opportunity is compelling, with net openings more likely in fiscal year 2013.”
Your Piercing Pagoda kiosks were once a breakthrough in sales technique attracting buyers to Zale. Do you work on something as piercing the market nowadays?
Let me talk about the product announcements that we've made over the last month and really share with you the excitement that we all have about the collections that we're adding.
First and foremost, what we've done is add the premier brand in terms of bridal and wedding to Zale - Vera Wang. I don't think there's anyone including most men who don't understand what Vera means to this category. Instantly recognizable, clearly synonymous, and a line of products encompassing more than 50 SKUs where we're going to offer engagement rings, wedding bands and solitaire bridal jewelry.
The assortment will be available in approximately 500 stores, 450 of which are in the US and 50 in Canada beginning in the middle of October. Prices start at an affordable $649 and go as far as over $15,000 for the top-of-the-line. A fully integrated marketing plan begins this month in terms of print, will continue throughout the Christmas holiday season as well as beyond.
The second edition that we're very proud to talk about is the Jessica Simpson line of diamond fashion jewelry.
Roxane Barry, Director of Investor Relations, told Rough&Polished that Jessica Simpson is an established designer brand with millions of fans, so it was natural to partner with her on a fashion jewelry collection. She also noted that "the collection starts at an affordable opening price point of $79." "We are obviously excited about this new collaboration," Zale's Director of Investor Relations said.
We're going to launch this in 400 stores and possibly more in the middle of October. This product is aimed at a lower price point customer because it's diamond fashion and not bridal or wedding.
And we're very excited to add both of these key lines to Zale for this holiday season. We're anxious to talk about the results we achieve following completion of the Holiday selling period.
Olga Patseva, Editor in Chief of the American Bureau, Rough&Polished
