At a recent Cowen and Company analyst presentation, Zale (NYSE:ZLC) CEO Betsy Burton and CFO Rodney Carter provided updates on the company's ongoing turnaround efforts. It's not out of the woods yet, but the company seems to be pointed in the right direction.
Zale, which sells jewelry under the Zale, Piercing Pagoda, and Bailey Banks & Biddle brand names, among others, has performed terribly over the past three years. Under its old management, Zale committed the ultimate retailing sin: neglecting its core audience in an attempt to go upscale. The result? Alienated customers and lackluster operations. In 2006, Zale lost its industry leadership position to Signet (NYSE:SIG), which operates Kay Jewelers -- then had to fend off Signet's hostile acquisition bid.
Under a new management team, Zale has refocused on its core customers and begun to regain some of its luster. In the analyst presentation, management noted that Zale posted positive overall same-store sales comparisons over the holidays for the first time in the past three years. Diamond fashion was up 35%, and inventory in-stock performance reached a healthy 98% (meaning its stores have the merchandise customers are seeking).
Online traffic, where the company competes with Blue Nile (NASDAQ:NILE), was also up 23%. However, the company isn't exactly sparkling yet. Zale aggressively priced items to drive sales, which hurt its margins. A lack of branding and pricing coordination also saw some of its brands cannibalize each other.
Going forward, management outlined three major initiatives: regaining market share through disciplined store growth, improving gross margins through direct sourcing and other procuring efficiencies, and increasing investment in its employees. Surprisingly, according to management, having a good store manager can make a whopping $300,000 difference in a store's sales. Management also targeted 50 basis points of operating margin improvement per year, with a total goal of 200 basis points in improvement.
After years of ill-advised marketing initiatives -- including its attempt to invade Tiffany's (NYSE:TIF) turf -- and a lack of focus on execution, its nice to have management that's getting back to basics. Zale is reconciling with its core customers and improving its cost structure, brand positioning, and personnel. The company still has a great brand, plus impressive real estate and infrastructure, so it's certainly possible the firm could regain its polish.
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Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates comments, concerns, and complaints. The Motley Fool has a disclosure policy.
