As usual, a lot is going on at Zale Corp. lately—and, as usual, the company seems likely to muddle through, although there are both positive and troubling signs for the future:

– The most significant development could be the decision of
two key figures from Golden Gate Capital, who are also Zale board members, to leave Golden Gate and start their own firm. At press time, Zale said it didn’t know if they would remain
on its board.

Golden Gate, and in particular those two board members, is widely assumed to be calling the shots at Zale ever since Golden Gate invested $150 million in the company last year. And yet Golden Gate’s intentions were always a bit of mystery. It saddled Zale with some heavy fees and interest as well as tough covenants. And while it eventually eliminated the worst covenant, that was only after removing cash from the business it was ostensibly trying to save. It also never made significant management or other changes; the deal was set up, most think, so that Golden Gate came out ahead no matter what happens to the company.

– That said, the markets (both stock and jewelry) are taking
a far better view of Zale now, after its holiday sale rose
8.5 percent, which outperformed most predictions (though that gain came after two years of double-digit declines.) Zale
advertised heavily during the season, and it was almost as if the company was staking everything it had on last holiday. It seems to have won that gamble. But at least one analyst tells me he thinks Zale’s balance sheet may ultimately be in a little worse shape than last year, given all the costs of the Golden Gate deal. However an upbeat “source,” presumably from Zale itself, told the New York Post today that Zale is in better shape after this holiday and has “no need for any kind of debt or equity financing.”

– Still, ultimately, most feel that for Zale to thrive, and not just survive, it will need access to a lot more money than it has now. Which brings us back to the much-talked-about plan to sell Piercing Pagoda. While Peter J. Solomon has been shopping it around, the only known interested party is Apollo Capital, which will likely run it in conjunction with the costume jewelry chain it owns, Claire’s. The Post today said that the deal had “hit a snag” and was possibly “dead.” My understanding is that the sale is still on the table, although not a done deal. Piercing Pagoda was the subject of what is described as “benign neglect” from all the different Zale regimes over the years; so while the division shrank, it also was never substantially tinkered with from a
strategy point of view, and it stands as one of the company’s few bright spots. Selling it is something of a catch 22 for Zale—it would net Zale $150 million or so, but weaken the company overall. Still, perhaps it’s best that Zale concentrate on its core business. (One issue that has never really been addressed: Why does Zale have two national chains—Zale’s and Gordon’s—that don’t have distinct identities? But that is another story…)

– As for the man who once supposedly called the shots, former
director and self-proclaimed savior Richard Breeden, he has been selling quite a bit of his stock—more than 300,000 shares last week and 500,000 more this week. (It is all being sold, we should note, at a substantial loss, considering what he bought them at.) He remains a significant shareholder, controlling over 8 million shares, and it’s possible he is just selling because he needs the cash, or because he fears his shares may be diluted down the line.
But it certainly appears he is extricating himself, after resigning from the board last year. And, it’s safe to say, the Breeden chapter is one most would prefer to be closed.

Rob Bates

JCK News Director