Zale (ZLC)

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Zale Corporation (NYSE: ZLC) is a mid-tier retailer of fine jewelry, operating approximately 1,900 retail locations throughout the United States, Canada and Puerto Rico, as well as online. Zale Corporation's brands include Zales Jewelers, Zales Outlet, Gordon's Jewelers, Peoples Jewellers, Mappins Jewellers and Piercing Pagoda.

Zales has a tenuous market position because it lacks the scale of mass discount retailers like Wal-Mart, and its reputation as a mid-tier jewelry seller makes it difficult for it to compete for wealthier clients that frequent high end stores like Tiffany. The company's focus on middle income and young adult customers also makes it more vulnerable to economic downturns than its higher end competitors, because these two groups tend to reduce their spending more drastically than higher income customers.

Trends and Forces

Zales is sandwiched between high end and discount retailers

Given the number of players and the commodity-like nature of the product being sold, the retail jewelry business is extremely competitive and fragmented. ZLC faces increased competition from the growth of mass merchant retailers like Wal-Mart, the largest jewelry retailer in the combined U.S. and Canadian markets^[1]. Discount retailers like Wal-Mart have aggressively pursued and captured a large portion of the price-sensitive consumer jewelry market. At the upper end, Zales must compete with stores like Tiffany, a company who has more successfully associated its brand with high-end jewelry items. Moreover, Zales must also deal with increasing competition from internet vendors like Blue Nile, which ranks just behind Tiffany and ZLC in diamond ring sales after just a decade in the business. Internet retailers are often able to sell the same product for much lower prices thanks to lower overall costs.

Fluctuations in the prices of diamonds and other commodities will impact Zales’s business

The supply and prices of diamonds in the world markets are significantly influenced by a single organization, the Diamond Trading Company^[2]. This company controls the marketing of a considerable bulk of the world’s supply of diamonds. It also sells rough diamonds to diamond cutters at prices determined solely at its own discretion.

Zales is more vulnerable to economic downturns than its high end competitors

Traditionally, discretionary purchases like fine jewelry are the first to ebb when the economy takes a downturn and consumer spending slows. Since a majority of the store brands under Zales's Fine Jewelry segment target the middle income consumer base, the company is also more vulnerable to economic downturns than higher end jewelry sellers.

Competition

The U.S. and Canadian retail jewelry industry accounted for approximately $63 billion of sales in 2008, according to publicly available data. Zale Corporation has a 3% market share in the combined U.S. and Canadian markets. The largest jewelry retailer in the combined U.S. and Canadian markets is believed to be Wal-Mart (WMT). Other significant segments of the fine jewelry industry include national chain department stores (such as J.C. Penney (JCP)), mass merchant discount stores (such as Wal-Mart (WMT)), other general merchandise stores, specialty retail jewelers (such as Signet Group (SIG)) and apparel and accessory stores. The remainder of the retail jewelry industry is comprised primarily of catalog and mail order houses, direct-selling establishments, TV shopping networks (such as QVC , Inc.) and online jewelers.

References

1. ↑ ZLC 2007 10K, Item 1, pg.4
2. ↑ ZLC 2007 10K, Item 1, pg.7
3. ↑ Wikinvest Data Central: Signet
4. ↑ Wikinvest Data Central: Tiffany
5. ↑ Wikinvest Data Centra: Blue Nile