Zale (NYSE: ZLC ) was the top performer in its peer group for a considerable amount of time, having enjoyed stock appreciation of 264% over the past three years. During this same time frame, Signet Jewelers (NYSE: SIG ) appreciated 83.7%, Tiffany (NYSE: TIF ) appreciated 48.2%, and Blue Nile (NASDAQ: NILE ) suffered stock depreciation of 20%.
However, investors have soured on Zale during the past month. The company has grossly underperformed its peers during this time frame. While Tiffany, Blue Nile, and Signet Jewelers have seen stock appreciations of 12.1%, 3.6%, and 0.4%, respectively, Zale has lost 21.3% of its value.
Now it must be determined whether or not Zale is likely to be offering a bargain to investors, or if you should stay away.
Three years ago, Zale set out on a mission to rebuild its core merchandise, refine its marketing message, and invest in jewelry consultants. Apparently, this strategy was effective, as the company has now reported 12 consecutive quarters of comps growth.
In the most recent quarter, comps improved 4.4% year over year. On a constant-currency basis, comps jumped 5.4%. When you look at the comps breakdown for brands, it's clear where the company's strengths and weaknesses lie.
The company's namesake brand saw comps improve 8.3%. Zales Outlet comps increased 4.1%. The Peoples brand was also impressive, delivering comps growth of 3.1%. On the other hand, Gordon's, Mappins, and Piercing Pagoda saw comps declines of 4%, 2.4%, and 1.8%, respectively.
Zale is expecting to close a net of 60 to 65 stores in fiscal year 2014, most of them being Gordon's and Mappins locations. This is a logical move, and it's likely to aid the bottom line. Zale believes in Piercing Pagoda, primarily due to recent talent investments. Overall, Zale aims for a more compelling shopping experience for customers, one in which salespeople are more engaged with customers.
Zale's management feels as though they can drive future top-line growth with positive comps at Zales and Peoples, and that a sourcing initiative and lower commodity costs will lead to gross-margin improvements.
While Zale has potential, it isn't as impressive as its peers, yet it's trading at a high premium.
Peers offer differentiation
Zale is currently trading at 52 times earnings. Blue Nile is trading at a similar multiple, but as you will soon see, Blue Nile has shown much stronger top-line growth over the past several years. This isn't to say Blue Nile is the ideal investment in jewelry, but being an online-only jeweler makes it unique.
Tiffany, which is trading at 27 times earnings, is widely known as the premier high-end jeweler. Therefore, its differentiation comes in the form of dominating the high-end market. Then there's Signet Jewelers, which is trading at just 17 times earnings. Signet Jewelers has been performing well, partially due to a sticky marketing campaign (e.g., "He Went to Jared" and "Every Kiss Begins with K"). Zale is just... Zale.
You can look at top- and bottom-line performances for a company while comparing the business to peers, but while the bottom line is critical, it can sometimes be skewed by share buybacks. Therefore, let's take a look at how these companies are really performing in regard to top-line growth versus selling, general, and administrative expenses.
If a company's top line is consistently outpacing SG&A expenses, then it often indicates a healthy company. The opposite trend might indicate that a company's stock appreciation isn't as justifiable, or sustainable, as it may seem.
Let's begin with Zale:
It's a tight race, and the strategies that Zale implemented in 2010 appear to have been effective. However, there isn't much separation between these two trends, and Zale still lags its peers.
Blue Nile has shown significant top-line growth over the past several years, but at a steep cost:
Signet Jewelers paints the opposite picture. While growth hasn't been as fast, it appears to be more sustainable:
The same can be said for Tiffany:
If Tiffany and Signet Jewelers are showing more sustainable growth than their peers while trading at more appealing multiples, then it would make sense to consider them over their peers. Additionally, Tiffany and Signet currently yield 1.7% and 0.8%, whereas Zale and Blue Nile don't offer any dividend.
Zale has shown improvements, and it has potential, but it's likely to be a much riskier investment. Despite Tiffany and Signet being the top options in their peer group, with Tiffany likely the best, keep in mind that they're all highly discretionary.
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