Signet Jewelers Ltd. (SIG), Tiffany & Co. (TIF): After Triple Digit Returns in 2013, Can Zale Corporation (ZLC) Keep Delivering for Investors?

Signet Jewelers Ltd. (NYSE:SIG) is a more direct competitive threat to Zale, with its comparably sized Kay Jewelers chain that markets to the same middle class customer base. Signet has been targeting Zale’s outlet business. This initiative gained traction through Signet’s 2012 acquisition of the Ultra jewelry chain, primarily found in the nation’s outlet malls.

Signet Jewelers Ltd. (NYSE:SIG) also has the ability to upgrade customers to its Jared upscale brand, which focuses on the bridal segment, with free-standing locations and more personalized customer service.

In FY 2014, Signet Jewelers Ltd. (NYSE:SIG) has continued to grow, with rising comparable-store sales and a strong 36% gain in its online segment. The company’s operating margin has slipped slightly versus the prior-year period, but it remained above 13% thanks to a solid financing business, accounting for roughly 57% of sales.  Signet’s strong profitability is also allowing it to build inventory and expand its retail network, with management targeting 75 to 85 new stores in the current fiscal year.

Meanwhile, Tiffany & Co. (NYSE:TIF)’s name may be synonymous with high-priced fine jewelry and its trademark blue box, but it is also finding success in the value-priced arena through its Rubedo and designer product lines. Like Signet, Tiffany & Co. (NYSE:TIF) is enjoying rising comparable-store sales in FY 2014 as well as a strong double-digit operating margin that is a function of internally designing and manufacturing a majority of its products. The company’s consistent profitability is also allowing it to selectively expand, with management forecasting 14 new stores globally in the current fiscal year.

The bottom line
Zale has finally maneuvered its way to positive annual operating income and financial stability, although its operating margin significantly trails that of its main competitors. A higher future market valuation is likely contingent upon the company’s ability to further increase its razor-thin operating margin, which would allow it to pay down its heavy debt load, currently tipping the scales at over $400 million.

Zale’s new private-label credit card agreement with Alliance Data Systems should help it achieve that goal, as it gains more high-margin financing income. Until the proof shows up in the numbers, though, investors might want to trade in this work in process for one of its growing competitors.

The article After Triple Digit Returns in 2013, Can Zale Keep Delivering for Investors? originally appeared on Fool.com and is written by Robert Hanley.

Robert Hanley owns shares of Zale’s. The Motley Fool has no position in any of the stocks mentioned.

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