The year 2006—both fiscal and calendar—was rough on Zale Corp. Shrinking market share and disappointing holiday and quarterly results for its flagship Zales Jewelers forced out several top executives. An upscale repositioning of Zales failed. Unofficial feelers on a possible merger with London-based Signet Group (parent of Sterling Inc., Zales’ biggest U.S. competitor, which operates Kay Jewelers) collapsed when word leaked to the press. Zale Corp.’s accounting practices were studied by the U.S. Securities and Exchange Commission (ending in September without action or penalty). Class-action lawsuits were filed by some customers against Zales, and Sterling dislodged Zale as the biggest U.S. jeweler (in sales).

Who to call to stop such retail misfortune? Happily for Zale’s board of directors, that person sat with them. They named fellow director Mary E. “Betsy” Burton, a board member since 1993, as interim chief executive officer in February 2006, after president and CEO Mary Forte resigned. Burton, 55, is well qualified to rescue Zale. Her résumé includes turning around several troubled corporations. The board told her to assess the situation and act quickly to ensure a successful 2006 holiday season.

In July, the board made the appointment permanent, and Burton—who earlier insisted she didn’t want the job—accepted, becoming the third consecutive woman in it. Her influence was immediately evident.

• Burton formed a new executive team, which includes Rodney Carter (former CFO of Petco Inc.), chief financial officer; John Zimmerman (head of Zale Canada), named president of a new division called Zale North America (incorporating Zales, Peoples Jewellers, and Mappins Jewellers); and Gilbert Hollander (president of Zale’s Piercing Pagoda), named president of corporate sourcing.

• Zales Jewelers returned to basics, i.e., targeting middle-class consumers; extensive, competitively priced assortments, especially diamond fashion and solitaires; and its Diamond Store identity. It invested $120 million in new inventory for expanded assortments at all Zales stores. Holiday inventory was ordered early and began arriving in September.

• Zale boosted investment in recruitment, payroll, and training; relaxed dress codes at its Irving, Texas, headquarters; and began “town meetings” with corporate staffers to keep them informed.

• Direct sourcing grew from $37 million in fiscal 2005 to $84 million in ’06 and is projected to hit $125 million in ’07. Direct imports of finished goods could be even bigger.

• Zale opened 32 stores in all brands last fall, half of fiscal ’07’s total.

• Zale began clearing $80 million of discontinued merchandise. In fiscal ’07’s first quarter, it represented 20 percent of all sales, up from 5 percent in 2005. Zale expects to clear $65 million by July 31. (Burton says clearances were downplayed during the 2006 holiday, so second-quarter growth would be from new products.)

Within months of Burton’s appointment, Zale Corp. had some successes. One was a strong Mother’s Day across all brands, with low double-digit same-store gains led by Zales. However, early results for fiscal ’07 were less encouraging. Despite aggressive clearances, 18 percent more inventory, and the closing of 32 underperforming Bailey Banks & Biddle stores, the company had a net loss of $26.4 million on sales of $432.5 million (up 1.1 percent). Comp-store sales were almost flat, and average sales for its brands—except Peoples Jewellers and Zales Outlets—were below 2005 figures.

Burton said a successful second quarter—with the important holiday season—depended on such actions and preparation. She and her team were “cautiously optimistic,” she said, about the 2006 holiday and fiscal 2007, a year of transition for Zale Corp. and Zales Jewelers.

Senior editor William George Shuster recently interviewed Burton about her first year as head of North America’s largest retail jeweler. Her comments, supplemented with some of her public statements, follow.

When named Zale Corp.’s acting CEO, you said you would do it only for the interim. When appointed full-time, you took a one-year contract (with option to renew). Later, you said turning Zales around will take 12 to 18 months. Sounds like you’ll do this for a while. What changed your mind?

When you jump in feetfirst making CEO decisions, you begin to see where opportunities are, changes can be made, management people for a new team. This is a chance to make a difference. I’m competitive. I like the opportunity to turn things around and to work with this team to do it.

What’s your main objective as Zale Corp. president?

To regain market share. Zales Jewelers—which is 45 percent of our revenues—lost market share in recent years, mainly from repositioning slightly away from our core customer—Middle America. Kay Jewelers’ market share increased, so we obviously lost some to Kay. We must regain that. Other objectives are increasing direct sourcing and investing in our people, to have the best people at all levels—stores, field, and corporate.

Many independent jewelers focus on higher-end jewelry and watches to compete. The luxury market is active. Even mass merchants carry some fine jewelry. Why did Zales fail in its effort to go upscale?

We simply moved away from our core Middle America customer, from diamond fashion and solitaires to more investment in gold and silver. We changed 30 percent of our product SKUs and 15 percent of our vendors. But we learned customers want diamond fashion and a solitaire assortment in breadth and depth. So, we’ve changed the merchandise mix. Also, inventory orders [for the 2005 holiday] were late, and product arrived late in stores. But we still carry a little more upscale assortment, like 2.00 or 3.00 ct. solitaires, in stores in affluent locations to reach higher-income consumers.

What are the elements of your “back-to-basics” plan?

First and foremost, a fresh and expanded diamond assortment, with renewed emphasis on diamond fashion and solitaire engagement rings. Lessons learned at Zales in fiscal ’06 are that breadth of assortment is necessary for a successful diamond solitaire ring business, that a promotional diamond fashion business drives incremental volume and traffic, and that a diamond fashion assortment must be broad and deep to drive gift giving. So [in calendar 2006], we invested $120 million in fresh inventory and expanded Zales’ assortments. Of that, $47 million is bridal and $45 million is diamond fashion. Stores’ SKU count grew by 750, to 2,100.

We’ve returned to merchandizing by classification, and reset our stores to new plan-o-grams [a merchandising display and placement strategy] to reflect new assortments. We have a schematic for every store, with product placements for every showcase. Now, we walk into any store and see if it has a full assortment or a hole to replenish. It’s a discipline we needed. Assortments must be consistent across all volume levels of stores, which all must have product in all price points.

We’ve spent $3 million on new display elements, improved in-case signage to highlight product attributes and key price points, and put in more designated “brilliant buys.” There’s better pricing, and it’s visible. Customers know an item’s price, even before a sales associate takes it from the case.

And marketing?

We’re spending more on TV, buying spots with better visibility on top shows instead of buying frequent spots. There’s more emphasis on promotional key items during holiday gift-giving periods and key weekend events, which we back with TV exposure.

You named John Zimmerman president of Zale North America. Why create a new post and a new division?

Zale North America will leverage John’s successful record at Zale Canada, especially Peoples Jewellers, which needed turnaround when he took over five years ago. Its revenues grew 20 percent since then, with a threefold increase in operating earnings. He has a successful product assortment for Peoples’ target customer, who is similar to Zales’. Canada also led the charge for direct sourcing, under John’s direction. He has a clear vision of what to do [at Zales], is an effective manager, and quick to make needed changes.

Wal-Mart is now the biggest U.S. retailer of jewelry (in annual revenues). Sterling recently topped Zale Corp. in revenues and will spend $1 billion opening new stores over five years. Can Zales Jewelers regain market dominance?

We don’t consider Wal-Mart a key competitor. Their business model is [customer] self-service, not knowledgeable associates like ours assisting customers. Many consumers don’t want to buy diamond jewelry from people who don’t know much about it. They prefer a knowledgeable fine jeweler like Zales, instead of a mass merchant. As for Sterling, this is a fragmented industry. Market-share opportunities come from many places. We expect to be the market leader again, but won’t try to match Sterling’s billion-dollar growth plan. Ours is disciplined growth, focused on key brands and formats proven successful, not on Sterling.

Fine jewelry is now available to U.S. middle-class consumers at many sources, like the Internet, mass merchants, and warehouse clubs as well as jewelers and department stores. Does that affect your plans for Zales?

Zales has the highest recognition [among consumers]; the Zale Diamond is the most purchased. Overall, it doesn’t matter where market share comes from. We have products [for all segments]. Zales has strong growth in diamond fashion, driven by circle pendants and De Beers’ Journey products. Alternative metals are hot. There are solid sales in its Past, Present, Future collection and three-stone rings. All stores have new and expanded assortments, particularly diamond fashion and solitaires. Zales is again The Diamond Store.

And Zale Corp.’s other brands?

We don’t discuss plans for our brands, but I can give recent highlights. Gordon’s Jewelers [in fiscal ’07’s first quarter] focused on 2006 holiday training. A third of its sales force went to off-site jewelry advisor training. Composite styling remains important and its micropavé diamond Love collection keeps growing. Bailey Banks & Biddle has had double-digit growth in designer product and luxury watches, especially ladies’ sport watches. A new palladium solitaire line shows great promise, with its lower opening price point. Diamond fashion is building. Zales Outlets had strong same-store sales. Diamond fashion bridal rings drove business up 20 percent [in fiscal ’07’s first quarter]. Diamond pendant sales rose 40 percent. Growth in higher-ticket solitaires contributed to its record $422 average sale. Piercing Pagoda capitalized on cubic zirconia’s success in all categories, now almost 30 percent of total business. We expanded basics with best-selling gold earring assortments. Core businesses have had high single-digit comps in ear piercing and body jewelry. Peoples Jewellers and Mappins Jewellers [Canada] have had a nearly 25 percent increase in diamond fashion sales, which, with their first direct sourcing initiative for it, contributed to impressive growth in margin.

What about your dot-coms?

Zales.com’s revenue in fiscal 2006 grew 40 percent. In fiscal ’07’s first quarter alone [ended Oct. 31], it had nearly 5 million unique visitors and shipped over 20,000 orders, with average sales between $200 and $240. We’re very optimistic about opportunities for Zales.com. A new one is Build a Ring, which lets people customize an engagement ring online. We believe that will be huge. We relaunched BaileyBanksAndBiddle.com in November, and will launch Gordons.com in spring 2007. We believe a multichannel consumer is a more valuable customer and are rolling out initiatives to aggressively market to them. Specialty jewelers with an Internet presence are positioned to best serve customers over the next decade.

What will Zale Corp. focus on in the next 12 to 18 months, to improve?

Personnel. We’ve addressed merchandise and marketing. Now, a key goal in fiscal 2007 is investing in people, to ensure we deliver a great customer experience. We’ve invested $10 million to hire, train, and retain the best managers and sales associates, for competitive pay, and for increased coverage in select stores. We’re reviewing compensation structures, retention, and training, a 12- to 18-month project. We’ve already dramatically increased the associates who’ve had product training and been certified by the Diamond Council of America. We’ve introduced new bonus incentives and more achievable goals to reward our best people. And we’ve made a more employee-friendly work environment, in the field and at corporate.

Who do you see as Zale’s major competitor?

Kay Jewelers’ market share has increased. JC Penney is becoming a big player in jewelry. You’ve also got Wal-Mart, Target, and Costco. So, anyone who sells what I call moderate-price jewelry is a potential competitor. But independents are the greatest piece of the pie and greatest opportunity for market share.

What can jewelry retailers and suppliers learn from Zale’s experiences in 2006 and how it’s reacted?

That we’re going to take back the market and be the leader we were.