Sparkle for Your Portfolio?

I admit it. I enjoy jewelry shopping like I enjoy digging for stocks that might be diamonds in the rough. While the thought of accompanying my wife on a clothing or shoe-shopping excursion fills me with the type of dread usually reserved only for dentists, looking at rows of sparkling sapphires, pearls, and emeralds is actually fun. Of course, since I am still paying for an engagement ring I purchased about four years ago, I find shopping much easier than buying these days.

Luckily for Zale Corp. (NYSE: ZLC), the nation's largest specialty jewelry retailer, others have been more willing to pull the trigger. In the fourth quarter (ended July 31), the company sold $455.6 million of shiny merchandise, a 3% improvement over last year. Earnings of $0.13, or $6.9 million, were in line with estimates and 30% ahead of the $0.10 earned last year before charges.

Backing out one-time items from last year, fiscal 2004 full-year earnings jumped 29.2% to $1.99 from $1.54, on revenues that rose 4.2% to $2.3 billion. Same-store sales increased 3.9% for the year. Going forward, management is forecasting the addition of 85 new stores and 50 kiosks, which combined with a 2%-3% rise in comps will help grow revenues in the mid-single digits. After a 30-basis-point rise in the recently completed year, operating margins are expected to expand another 40 points, delivering a 12%-14% improvement in the bottom line.

Zale's efforts to cut costs by sourcing merchandise directly from manufacturers has helped improve gross margins to 52.9%, ahead of troubled rival Friedman's (OTC: FRDM.PK) 47.7% and Signet Group's (Nasdaq: SIGY) Kay Jeweler's 17.7%, but still trailing Tiffany's (NYSE: TIF) 57.7%.

With $2.3 billion in sales from more than 2,200 stores, Zale enjoys about a 10% plurality of the highly fragmented domestic jewelry market. Despite fierce competition from Tiffany's at the high end, Wal-Mart (NYSE: WMT) at the low end (honestly, who doesn't Wal-Mart compete with?) and new online competitors such as Blue Nile (Nasdaq: NILE), the company has still grown steadily the last few years.

Zale is a respectable company, with decent cash flow and reasonable valuations, but it's no hidden gem. All things considered, I would rather browse than purchase at this point.

Sparkle for Your Portfolio
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Fool contributor Nathan Slaughter enjoys hunting for gems in the Crater of Diamonds state park in Arkansas, but hasn't found one yet. He owns none of the companies mentioned.