Is Zale the Right Play on Jewelry?

The jewelry sector looked sweet last week as Tiffany  (NYSE: TIF  ) blew estimates out of the water and raised guidance for its full-year earnings, but the fever didn't carry over to lower-market jeweler Zale (NYSE: ZLC  ) , which reported its fiscal 2014 first-quarter earnings the same day. Zale performed all right compared to analyst estimates, but its sales and earnings growth looked paltry in comparison to the premium market brand, and even direct competitor Signet. Both competitors posted well into the black on the bottom line, while Zale came out with a net loss. Still, there's something to be said for the company, as it holds a valuable brand name with its namesake store and continues to achieve healthy same-store sales growth. Is Zale a sleeper turnaround story?

Earnings recap
Zale's namesake stores as well as its Peoples brand led the charge this past quarter as the branded stores posted same-store sales gains of 7.5% and 8.5%, respectively. At a constant exchange rate, overall same-store sales grew 5.4%. Theo Killion, CEO of Zale, was quick to point out that this marks the 12th quarter in a row that the company posted positive comps -- nothing to sneeze at considering the consumer spending environment (or lack thereof). Mall kiosk staple Piercing Pagoda saw sales decrease 2% year over year.

Top-line sales grew just 1.4% to $363 million, which was actually a hair ahead of analyst estimates.

On the bottom end of the income statement, things went negative, as the company posted a loss of $0.83 per share. The number comes in $0.05 better than the prior year and, again, slightly ahead of analyst estimates.

Top-down looking good, but bottom-up?
The jeweler sector in general is looking great, with huge numbers coming out of Tiffany and varying degrees of growth from the rest, but is Zale the best place for your investment?

On a valuation level, Zale is in the middle compared to Tiffany (20.8 times) and Signet (13.9 times). While this isn't particularly compelling on its own, it could prove appealing if Zale is able to leverage its same-store sales growth and control costs. Unfortunately, the company doesn't have the best-looking balance sheet, with less than $14 million in cash and more than $500 million in debt. Liquidity isn't a concern here, but the considerable debt load could keep the market from awarding Zale multiple enhancement or capital appreciation, even with the comparable sales gains.

Zale could prove to be an intriguing play given the store-level gains, but there are some concerns that keep this from being a truly attractive play on the jewelry sector. Even at a richer valuation, Tiffany offers investors a better forecast.

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