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Lulu Cheng

ZLC AT A GLANCE

P/E ► -0.857   EV/EBITDA ► -2.89   ROA ► -13.5% AVG ROE ► -39% AVG Debt to Equity ► 2.29 AVG Current Ratio ► 2.29 AVG Interest Coverage Ratio ► -22.3 VERY LOW

 

 

 

 

 

 

Zales Corporation (ZLC) is a mid-tier retailer of fine jewelry, with over 2,250 retail locations throughout the U.S., Canada, and Puerto Rico in 2007. 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. Although the company has grown by an average of around 8% per year over the last 10 years, the majority of this growth has come from acquisitions and new store sales. Sales from existing stores have averaged only 0.6% growth over the last seven years ^[1], and these sales have been largely driven by promotions (discounting). As a result, the company's operating margins fell by 45% from 2003-2007. 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.

Business Financials

ZLC has two main business segments: Fine Jewelry and Kiosk Jewelry ^[2]. The Fine Jewelry segment is has six brands, largely focused on the middle-income consumer: Zales (national flagship), Peoples Jewelers and Mappins Jewelers (Canadian brands), Zales Outlet, Gordon’s Jewelers, and Bailey Banks & Biddle Fine Jewelers (targeting the more affluent customer) ^[3]. The brands in this division have added an online presence through their e-commerce sites (zales.com, gordonsjewelers.com, and baileybanksandbiddle.com) ^[4]. Sales from zales.com accounted for around two percent of total revenues in 2007 ^[5].

The Kiosk Jewelry segment operates under the brand names Piercing Pagoda, Plumb Gold, and Silver and Gold Connection. These kiosks are located in malls and specialize in gold and silver items that are “fashion forward. Not surprisingly, this segment targets young, trendy customers at the entry-level price point^[6].

ZLC Annual Report^[7]

ZLC Annual Report^[8]

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^[9]. 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^[10]. 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

Given the fragmented nature of the retail jewelry business, Zale competes with a variety of independent regional and local companies, national chains (the UK-based Signet, Tiffany), department stores (JC Penney, Sears), mass merchandisers (Wal-Mart), TV shopping networks (QVC, Inc.), and online retailers (Blue Nile)^[11].

Market Share

ZLC has a four percent market share in the combined U.S. and Canadian markets^[23]. It also has the largest market share of any specialty jewelry retailer in Canada ^[24]. The following graph shows 2005 domestic market share of jewelry retailers by sales.

National Jeweler/Signet^[25]

References

1. ↑ ZLC 2007 10K, Item 7, pg.23
2. ↑ ZLC 2007 10K, Item 1, pg.1
3. ↑ ZLC 2007 10K, Item 1, pg.1-3
4. ↑ ZLC 2007 10K, Item 1, pg.1
5. ↑ ZLC 2007 10K, Item 1, pg.2
6. ↑ ZLC 2007 10K, Item 1, pg.3
7. ↑ ZLC 2007 10K, Item 6, pg.19
8. ↑ ZLC 2007 10K, Item 1, pg.1-3
9. ↑ ZLC 2007 10K, Item 1, pg.4
10. ↑ ZLC 2007 10K, Item 1, pg.7
11. ↑ ZLC 2007 10K, Item 1, pg.4
12. ↑ ZLC 2007 10K, Item 6, pg.19
13. ↑ ZLC 2007 10K, Item 6, pg.19
14. ↑ ZLC 2007 10K, Item 7, pg.25
15. ↑ Signet Group Pro forma translated results, Financial Statements: Five Year History in US Dollars
16. ↑ Signet Group Pro forma translated results, Financial Statements: Five Year History in US Dollars
17. ↑ TIF 2007 10K, Item 6, pg.28
18. ↑ TIF 2007 10K, Item 6, pg.28
19. ↑ LMDIB 2007 10K, Item 5, pg.II-4
20. ↑ LMDIB 2007 10K, Item 5, pg.II-4
21. ↑ NILE 2007 10K, Item 6, pg.23
22. ↑ NILE 2007 10K, Item 6, pg.23
23. ↑ ZLC 2007 10K, Item 1, pg.4
24. ↑ ZLC 2007 10K, Item 1, pg.2
25. ↑ National Jeweler Network