Time Goes, Buy: Signet Jewelers Ltd. (SIG), Blue Nile, Inc. (NILE), Zale Corporation (ZLC)

The old saying goes, “when the tide goes out, we can see who has their bathing suit on.”  Zales was as naked as the day she was born.  The company, with help from its Board, vendors and employees, managed to miraculously survive.  Zales not only had to survive the economic chaos of 2008, but also serious legacy issues, which had depleted its capital.

What made a turnaround possible was that the company had not yet lost credibility with the consumer.  Zales, “The Diamond Store”, was still there.  In 2010, a new team was brought in to turn the company around.  The first step was to bring enough capital to stabilize the situation.  This was accomplished and with extraordinary help from vendors, the inventory problems were corrected.

The next steps were to tackle SG&A, non-productive stores and leases, and reducing staff.  As a result of the loan they secured at a very high rate, interest too, became an issue.

PUTTING ZALES BACK ON THE ROAD TO PROFITS AND GROWTH

Management has in less than three years achieved all of the following:

1). Re-sorted inventory mix is at a current level of around 85% of core inventory.

2). Maintained gross margins are at a healthy 50%.

3). Continued to develop its website to a growing part of the business, as well as, being a premier site in the industry.

4). Continued to close unproductive stores while maintaining growing sales in aggregate.

5). Completed 9 consecutive quarters of same store growth.

6). Aggressively developed three private label brands, most prominently and profitably, Vera Wang LOVE.  A partnership with Shaquille O’Neal has just been signed for a menswear collection.

7). Lowered effective interest rate from 8% to 4% by renegotiating lending agreements.  Strengthened its relationship with vendors to increase ability to buy on memo. This eases its financial burden and helps keep inventory fresh and properly assorted.

8). The company has been running a solid positive EBIDTA on a trailing 4 quarter basis since 2nd quarter of fiscal 2011.  Pretax losses have also continued to decline.

The company needs to stay on current course, continue to innovate with its private label businesses (Vera Wang and others), cut costs, and invest in its web presence, social networking and management controls.  Lastly, the sale of Pagoda should be possible.  It would both help rebuild the balance sheet and help management focus on its main objectives.

Zales can be a real winner.  AS TIME GOES, BUY.

The article As Time Goes, Buy originally appeared on Fool.com and is written by Alan Ginsberg.

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