Even though the temperature and humidity remain summer-like, Zale’s management has been focusing on the upcoming 2006 holiday season. This all-important selling period for jewelers, which begins in mid-October and runs through early January, is a “must-win” period for Zale. Based on recent comments from Zale’s new leader, Betsy Burton, she and her team are pumped up about the prospects for Zale, especially the previously lagging Zales brand stores, for the 2006 holiday sales period.

 

Zale management’s comments about the upcoming holiday selling season are as follows:

 

• Solid same-store sales gains planned – Zale management is planning for a same-store sales gain of 3-4 percent for the upcoming November-December selling period. While this would be in line with recent performance for the July quarter, when same-store sales rose by 3.5 percent, it would be the strongest holiday quarterly performance this decade, as the graph below illustrates.

 

• Zales brand same-store sales goal more aggressive – For the 2006 holiday selling season, management says it plans for the Zales brand same-store sales to be up mid-single digit, perhaps in the +5 percent range. Last year, the Zale brand posted a low-to-mid single digit same-store sales decline (the exact number was never disclosed publicly).

• New product assortments – In the Zales brand, management says breadth of the line is key to generating sales. Thus, it has developed a new product assortment for its Zales brand stores which includes the following:

• Fashion merchandise – Broad and deep selections.
• Bridal merchandise – A renewed focus on engagement and other bridal goods.
• Additional merchandise – The company is adding 750 SKUs (stock-keeping units) to its line-up.
• Liquidations – Zale management plans to liquidate poorly performing goods much more quickly in the future.
• Merchandising by class - For example, all heart jewelry will now be in one case in the store, rather than scattered around. Collections will be highlighted.

• Stores re-set – By mid-September, all Zales stores will be re-set to reflect a new product assortment.

• Target gift-givers – Zale management plans to target gift-givers more effectively in the future, with emphasis on using direct mail to reach this important consumer group. Recent research has shown that jewelry gift-giving is on the wane. If Zale can provide a boost to consumer awareness of giving jewelry as a gift, the industry will benefit.

• New advertising – Management has new creative television ads. Further, the Zales brand division will return to its roots by resurrecting the phrase “The Diamond Store” which was dropped during last year’s remerchandising efforts.

• Compensation plan altered – Zale plans to “invest in its people,” according to management. It is adjusting its compensation scale and adding bonus incentives. CEO Betsy Burton says she wants to make Zale “more employee-friendly.” However, as a percentage of revenues, Burton said that Zale’s payroll will be flat to last year.

In other news, management reported the following highlights for its July quarter:

 

• Zales brand sales above plan – Zales brand sales were strong due to diamond fashion and solitaire sales. New diamond fashion product began flowing into the stores in April, and boosted sales in May, June, and July. Circle pendants remain strong, and “Journey” jewelry is showing excellent consumer reception.

• Bailey Banks & Biddle doing well – After the closure of more than 30 BBB stores, the remaining 70 units seem to be doing well. Management reported that luxury watch sales at mid-price points were up double-digit in the July quarter. In addition, women’s watch sales were up over 30 percent, and fashion jewelry sales climbed by over 20 percent.

• Zales Outlet sales up – Colored gemstone jewelry is posting solid gains in the Zales Outlet stores. Trunk shows are helping sales, and moissanite – in only 22 stores – is providing a pronounced boost to sales.

• Peoples (Canada) showing gains – Sales in Zale’s Canadian stores – Peoples, Mappins, and the Peoples II units – are on plan.

• Piercing Pagoda sales down – Due to plummeting demand for Italian charms, Piercing Pagoda reported a sales decline in the July quarter. If Italian charms were removed from the sales calculation, revenues would have been up for this division. Alternative metals – steel, titanium – at Piercing Pagoda are strong.

• Zale.com up sharply – For the twelve months ended July (the end of Zale’s fiscal year), Zale.com sales were up nearly triple digits. By our estimate, its sales were in the $35 million range for the twelve-month period. Zale plans to launch Gordons.com in the spring of 2007.

• New store openings to accelerate – During the twelve-month period August 2006 to July 2007 (Zale’s fiscal year), we look for about 32 in-line stores to open, nearly double the 17 units opened in 2005-2006. Roughly one-third of these stores will be in Zale’s Canadian market.

• Major inventory liquidation planned – Zale management plans to liquidate roughly $130 million of merchandise – 14 percent of its inventory – over the next twelve months. At this time last year, only 9 percent of Zale’s inventory was slated for liquidation. The company will aggressively promote this liquidation inventory in the early fall, then cut back during the holiday season, and then step up its efforts in January 2007. It could take up to 15 months to complete the liquidation of this inventory. Thus, competitors will feel the hammer of Zale’s price-based promotions through at least mid-2007.

• No resistance to price increases – Like most jewelers, Zale has raised its retail prices to help cover increased costs of precious metals and gemstones. Management says it has encountered “no real consumer resistance” to those price increases.

• More “Brilliant Buys” – Zale has used the term Brilliant Buy to highlight value-priced merchandise. Management says it plans to expand the Brilliant Buy promotions to include higher price-points in an effort to boost the average ticket.

• Direct diamond sourcing – In 2007, up to one-quarter of the diamond needs of Zale’s moderate brands (Zales, Gordon’s) could come from direct sourcing; that’s roughly double the level of the current year. This move could help boost the company’s gross margin by 50 basis points or more.

 

Management provided the following table which highlights Zale’s sales plans for the next year.

 

 

Zale has about 2,350 retail locations in North America. Between 800-900 are kiosks or carts, while the balance are stores generally located in malls. For the fiscal year ended July, Zale reported revenues of over $2.4 billion, up 2.3 percent from the prior year; same-store sales were up 1.6 percent for the twelve-month period ended July 2006.