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Zale Corporation

Zale Corporation

901 West Walnut Hill Lane
Irving, Texas 75038-1003
U.S.A.
Telephone: (972) 580-4000
Fax: (972) 580-5523
Web site: http://www.zalecorp.com

Public Company
Incorporated:
1924
Employees: 13,000
Sales: $1.79 billion (2000)
Stock Exchanges: New York
Ticker Symbol: ZLC
NAIC: 448310 Jewelry Stores

Zale Corporation is the largest operator of retail jewelry stores in the United States. Zale operates more than 2,300 retail locationsstores and mall kioskslocated in all 50 states, as well as in Puerto Rico and Canada. Covering the full range of consumer markets, Zale stores operate within several distinct divisions: Zales Jewelers, with about 750 stores across the United States and in Puerto Rico, focuses on mainstream, middle-income consumers, specializes heavily in diamonds, and has extensions in the form of two other divisions, Zales Outlet and the online shopping site zales.com; Gordons Jewelers is positioned as a regional retailer for the upper-middle-income and fashion-conscious consumer, with more than 300 stores operating under the Gordons name; Bailey Banks & Biddle Fine Jewelers, with about 120 locations, is the companys upscale chain; and Peoples Jewellers, the companys Canadian arm, has about 170 stores, including Peoples Jewellers, the Canadian equivalent of Zales, and Mappins Jewelers, which aims for the upper moderate slice of the market, similar to Gordons. Piercing Pagoda, another company division, is the largest kiosk-based retailer of gold jewelry in the United States, with more than 940 locations throughout the country offering popular-priced merchandise, mainly for teens. Overall, wedding-related jewelry regularly accounts for between 35 and 40 percent of annual revenues at Zale Corporation.

Early Growth

Morris B. Zale, born in Russia but raised in Texas, opened his first jewelry store in Wichita Falls, Texas, in 1924. Two years later, Zale opened a second Texas store and was joined by childhood friend, and brother-in-law, Ben Lipshy. From the beginning, Zale stores offered credit, with payments typically spread out over 12 months, even to its low-income customers. It leased its first locations, a practice that placed pressure on the company, grown to three stores at the beginning of the 1930s, when the company was stuck with long-term leases fixed at high, pre-Depression rents. Despite the Depression, however, the company continued to expand through the decade, opening a fourth store in Amarillo in 1934, and growing to 12 locations in Texas and Oklahoma by 1941. In that year, the companys revenues had risen to $2.73 million. Zale avoided building long-term debt by paying modest salaries and dividends to himself, Lipshy, and other family members joining the company; instead, earnings were reinvested in the company.

The years of World War II limited Zales expansion of new locations but not its revenue growth. The devotion of raw materials to the war effort during this period led to a scarcity of most consumer items; jewelry, with limited strategic value, drew consumer interest. By 1944, Zales revenues had doubled, to over $5 million. In that year, Zale acquired a 13th store, Corrigans in Houston, which allowed it to move into higher-end jewelry. Two years later, revenues doubled again, passing $10 million for the year. By then, Zale had begun to operate as a big company, rather than as a collection of stores. In 1942, Zale opened a buying office in New York, which allowed the company to purchase diamonds and watches in quantity at wholesale prices. As the company grew to 19 stores in 1946, Zale set up a central design, display, and printing operation in Dallas to service its chain. The companys next step toward centralization of its operations came when it opened its own shops for building store fixtures and constructing store interiors. Company headquarters were also moved to Dallas in 1946.

The postwar boom in consumer spending brought a new period of growth to Zale, which added more than 50 stores between 1947 and 1957, the year in which the company went public. That offering, of 125,000 shares, raised $1.5 million, which, according to Fortune magazine, appear[ed] to have been the only new money put into the company since it was started. Listed on the American Stock Exchange in 1958, the company operated 102 stores, primarily under the Zale trade name. Much of this growth came through the acquisition of existing stores; stores marketing to high-end consumers generally kept their original names. Diamonds formed the largest part of company sales, with diamond rings, other diamond jewelry, and diamond watches providing about 38 percent of revenues; costume jewelry and watches added to sales, while the company also sold electric appliances, silverware, dinnerware, luggage, cameras, eyeglasses, and other items.

With sales topping $37 million in 1958, Zale moved closer to complete vertical integration of the company when it was invited to purchase its diamonds directly from the Central Selling Organization, otherwise known as the diamond syndicate. Based in London and representing a group of diamond producers including De Beers of South Africa, the diamond syndicate represented more than 80 percent of the worlds supply of rough diamonds. The syndicate controlled not only the worlds diamond output but also the choice of companies allowed to purchase its diamonds, and which diamonds a company was allowed to purchase. Zale, because of its integrated operations, including cutting, polishing, and setting operations in New York, and its ability to market the full scale of diamonds from the smallest to the largest, most expensive diamonds, became the only U.S. jewelry retailer invited to purchase directly from the syndicate.

Branching Out and Buckling Under

By the mid-1960s, Zale operated the nationsand the worldslargest retail jewelry chain. Its 403 stores produced $81 million in 1963, with a net income of nearly $5 million. Diamonds continued to represent the largest share of Zales sales, about $27 million. Operating manufacturing plants in New York, Tel Aviv, and Puerto Rico, the company also operated a wholesale division, selling to other jewelry retailers. Zale also made and sold watches under its own Baylors label, buying mechanisms from Switzerland. The company in 1962 had also bought Bailey Banks & Biddle, a high-end jewelry retailer based in Philadelphia that was founded in 1832.

By 1965, Zale found itself with a surplus of cash. Its business was tied up in its jewelry store operations, and the development of the first synthetic diamonds, at the time viewed as a potential replacement for real diamonds in the retail jewelry trade, frightened the company into diversifying its product base. The company decided to move into the broader retailing field, purchasing the Texas-based Skillern drugstore chain. This acquisition was followed by forays into budget fashion apparel, sporting goods, shoes, furniture, and a chain of airport-based tobacco and newsstand concessions. By 1974, in addition to 956 retail jewelry stores, Zale had grown to include 351 shoe stores, 83 drugstores, 146 clothing stores, 25 sporting goods stores, 13 home furnishings stores, and 13 tobacco/newsstand concessions. Together, these divisions produced revenues nearing $600 million; half of the companys revenues, however, continued to come from its jewelry operationswith one highlight coming from the 1969 purchase of the Light of Peace diamond for $1.4 millionwhich also contributed three-quarters of the companys more than $30 million in 1974 profits.

Trouble began to brew for Zale in the mid-1970s. Charges that the companys chief financial officer had been embezzling fundsthe CFO was eventually acquittedled to investigations from the Internal Revenue Service and other government agencies into alleged misappropriation of funds, including avoiding some $27 million in federal tax payments. These investigations would culminate in a $78 million tax charge brought by the 1RS against Zale in 1982, and contributed to the replacement of Ben Lipshy, president of the company since 1957 and chairman of the board since 1971, by M.B. Zales son, Donald Zale, as chairman in 1980. By then, Zales more than 1,400 stores included international operations in the United Kingdom, Switzerland, France, West Germany, Canada, and South Africa.

At the beginning of the decade, Zale abruptly began selling off its non-jewelry retail operations. Despite raising revenues, which topped $1 billion in 1980, these operations produced little of the companys profits. By then, also, the synthetic diamond scare had passedthese found industrial applications, but could not be successfully developed for retail sales, partly because of consumer insistence on purchasing real diamonds. In the space of a few weeks at the end of 1980, Zale sold off the Skillern chain to Reveo, Inc. for $60 million; its 37-store sporting goods chain went to Oshmans Sporting Goods, Inc. for $14 million; and its Butler Shoe division, with 385 stores, went to Sears for $100 million. Except for its newsstand/tobacco concessions, which would grow to 90 stores, and its O.G. Wilson catalog showroom division, the company had come back to its core jewelry business.

Jewelry sales slumped across the industry during the recession of the early 1980s. Worse, gold and diamond values, which had traditionally seen steady appreciation, began to fluctuate wildly. Zale saw revenues fall to $939 million in 1982. Profits slipped more drastically, from $33 million in 1981 to a loss of $6 million in 1982, the result, in part, of a $10.6 million charge brought on by the companys settlement with the IRS for its 1970s tax liabilities. The collapse of the oil industry in the Southwest, where the highest concentration of Zale stores were located, also hurt the companys sales. The company struggled to maintain its share of the jewelry market, while facing increasing competition from department stores. Zale, which had perennially relied on sales of wedding rings for its chief source of revenues, had fallen behind the timesparticularly with the decline in marriages since the 1970s. Meanwhile, it saw customers departing for the larger assortments of jewelry, and especially gold jewelry, available elsewhere.

Company Perspectives:

Zale Corporation advances its leadership position in the marketplace by pursuing an aggressive growth strategy in all facets of the business. Spirited by the strong foundation we have built in recent years, our commitment to excellence ensures Zale of a brilliant future.

Part of Zales troubles were blamed on the lingering influence of its old management, which had been manufacturing-oriented, rather than marketing-oriented, allowing further inroads into the jewelry market by retailers more responsive to trends in consumer demands. Breaking the hold of former management, who were still largely loyal to M.B. Zale, would take several years and eventually a relocation of the companys headquarters. Zale struggled to recover from the recession, but sales in its 1,500 stores barely budged, remaining around $1 billion.

The Peoples Takeover, Mid-to-Late 1980s

In 1986, the company posted a net loss of over $60 million, including a restructuring charge of about $80 million as it disposed of its European retail operations, and the last of its non-jewelry divisions, and a $50 million write-down of old inventory. By that time, Zale had already rejected an attempt at a takeover by Peoples Jewellers of Canada. Peoples, led by Irving Gerstein, was looking to expand beyond its Canadian base. That company already owned 15 percent of Zales stock, purchased for $70 million in 1980. When Zales problems rose in the early 1980s, Peoples attempted to sell its stock back to Zale, but Zale refused to buy.

Critical of Zales efforts to turn the company around, Gerstein became determined to take over the company. Under Texas law, however, Peoples needed approval from at least two-thirds of Zales stockholders to complete a takeover, and the Zale family controlled more than one-third of the stock.

In early 1986, Peoples, aided by Drexel Burnham Lambert, made offers of $420 million and $470 million to take over the company. The Zale family refused to sell. Gerstein next met with the Swarovski company, makers of crystal and jewelry, which agreed to back Peoples in its next takeover effort. Later in 1986, Gerstein constructed lending arrangements that allowed him to tender an offer of $50 per share of Zale stocknearly double its trading price. The Zale family, under pressure from its own investment company, at last gave in and agreed to sell the company. By the end of that year, Peoples and Swarovski, each with 50 percent ownership, took Zale private.

Gerstein moved quickly to settle some of the companys debt, selling some $700 million in junk bonds, leaving the company about $900 million in debt. His next step was to close Zales New York and Puerto Rico manufacturing operations instead turning to vendors for store stock. He also sold off the companys diamond inventory and reduced the companys large advertising budget. With expenses reduced by $80 million, the companys net earnings rose, allowing Gerstein to declare a $5 million dividend to both Peoples and Swarovski. In 1989 the company acquired Gordon Jewelry Corporation, the nations second largest retail jewelry chain. Three years later, Zale verged on collapse.

Early to Mid-1990s: Bankruptcy and a Sharp Turnaround

At the beginning of the 1990s, Zale, including the Gordons chain, had grown to 2,000 stores, with revenues of $1.3 billion. But the international recession of the 1990s, the economic uncertainty produced by the Persian Gulf War, and a new luxury tax on purchases over $10,000 quickly took their toll on jewelry sales. In 1990 Zale posted a $64 million loss. The following years losses amounted to over $106 million in the first six months alone. By the end of the year, the company was unable to make a $52 million interest payment on its $850 million in debt.

Zale attempted to restructure the company, announcing the closing of 400 stores and a reduction of its headquarters, but its creditors began threatening to force the company into bankruptcy. By the end of January 1992, Zale joined the growing list of failing jewelry companies and petitioned for voluntary bankruptcy.

Key Dates:

1924:
Morris B. Zale opens his first jewelry store in Wichita Falls, Texas.
1944:
Acquisition of Corrigans marks move into higher-end jewelry.
1957:
Company goes public.
1962:
Bailey Banks & Biddle is acquired.
1965:
Diversification begins with the purchase of the Skil-lern drugstore chain.
1974:
In addition to jewelry stores, the company is also operating shoe stores, drugstores, clothing stores, sporting goods stores, home furnishings stores, and tobacco newsstands.
1980:
Most of the non-jewelry retail operations are divested.
1986:
Company disposes of its European retail operations and the remainder of its non-jewelry divisions; business is acquired by Peoples Jewellers of Canada.
1989:
Zale acquires Gordon Jewelry Corporation, number two U.S. retail jewelry chain.
1992:
Company files for Chapter 11 bankruptcy protection.
1993:
Zale emerges from bankruptcy independent, with debt under control and 700 fewer stores.
1994:
Robert DiNicola is hired as chairman and CEO and leads a turnaround.
1998:
All of Zales upscale chains are converted to the Bailey Banks & Biddle banner; the first Zales Outlet stores are opened.
1999:
Peoples Jewellers, the leading Canadian jewelry chain, is acquired.
2000:
Piercing Pagoda, Inc., operator of kiosk-based jewelry outlets, is acquired.

When Zale emerged from Chapter 11 in 1993 as an independent, publicly traded company (Peoples also went into bankruptcy and lost control of Zale), its debt was settled and it had 700 fewer stores. In April 1994 former Macys executive Robert DiNicola was hired as chairman and CEO to lead the company back to profitability. The new management team worked to restructure the company, creating separate and independent divisions of the Zales and Gordons stores. Zales was repositioned as the McDonalds of jewelry retail, with national ads promoting chain wide, standardized merchandise. Gordons was positioned as more of a regional player, with its product line tailored for the local market; it also aimed for customers slightly more affluent than Zales middle-class customers, placing Gordons between Zales and the companys upmarket chains, such as Bailey Banks & Biddle. In all three chains, the merchandising practices were overhauled through a key item approach in which each formats bestselling products were given special prominence. The key products were promoted heavily in advertising, and each store began keeping a generous supply of the items to make sure customers could always find them in stock. DiNicola also brought to Zale a newfound focus on tying promotions to the various gift-giving and high-traffic holiday periods that occur throughout the year, rather than depending so heavily on the November-December shopping season, as had been company tradition. At the same time, Zale began spending millions of dollars remodeling stores and also opened new outlets and closed additional underperforming units. During 1995, for example, the company opened 35 units, closed 85, and remodeled 150.

While the overall number of store units was remaining fairly constant in the mid-1990s as the restructuring unfolded, the Zales chain was being steadily expanded. The number of Zales outlets grew from 521 in 1994 to 642 in 1997. The latter year saw Zale initiate additional changes to its lineup of formats. The companys Diamond Park Fine Jewelers division, which at the time operated 186 leased jewelry shops within such department stores as Parisian and Marshall Fields, was sold to Finlay Enterprises, Inc. for about $63 million. Zale also announced late in 1997 that it would convert all of its upscale chains, including Corrigans, to Bailey Banks & Biddle Jewelers in the spring of 1998. Following this move, Zale had three national jewelry chains positioned in three different segments of the market. It could begin expanding Bailey Banks & Biddle backed by national advertising and promotion.

By 1998 Zale appeared to be fully recovered from its fall into bankruptcy. Revenues that year hit $1.43 billion, a 43 percent increase over the $920 million figure of 1994. Net income during the same period nearly tripled, from $23 million to $63 million. Perhaps even more importantly, for the first time in the companys history Zale posted profits in all four quarters of the 1998 fiscal year; historically, Zale had made all of its profits in the second quarter, which included the November-December shopping season. Another important statistic, sales per store, was also increasing smartly, growing from $770 million in 1994 to $1.17 billion in 1998. At the end of 1998, there were 701 Zales stores, 317 Gordons, and 107 Bailey Banks & Biddle outlets.

Late 1990s and Beyond: Expanding Aggressively, Then a Setback

Zales improved financial health provided additional opportunities for expansion beyond the opening of new stores. The company had entered the direct selling business in 1996 when it produced its first sales catalog, then followed up with the launch of zale.com (later relaunched as zales.com) as its Internet shopping site. In 1998 a new division called Zales Outlet was formed, and ten Zales Outlet stores were soon opened throughout the country to pursue sale growth through the burgeoning outlet mall channel. Zale envisioned that there was long-term potential for between 150 and 200 outlet locations nationwide.

The company also felt confident enough about its future to complete two major acquisitions. In June 1999 Zale spent about $75.3 million to acquire Peoples Jewellers Corp., the same firm that had so disastrously acquired Zale in 1986. Peoples had gone through its own period of bankruptcy, and at the time of the acquisition was the leading Canadian jewelry retailer, with 176 stores. Most of these were Peoples Jewellers outlets, which were essentially the Canadian equivalent of the Zales chain, with a couple of dozen or so Mappins Jewelers stores, which were similar to Gordons. In September 2000 Zale acquired Piercing Pagoda, Inc. for about $260 million. This companys outlets, most of which were mall kiosks operating under the Piercing Pagoda name, catered primarily to teens and offered low-priced gold jewelryincluding chains, charms, bracelets, rings, and earringsand a selection of silver and diamond jewelry. One of the firms marketing tactics was to offer free ear piercing with the purchase of earrings. Because the typical Piercing Pagoda customer was unlikely to shop at a Zales or any of Zale Corporations other outlets, Zale saw this acquisition as a way to further expand its presence in malls without cannibalizing existing sales.

In between the two acquisitions, a number of other significant events occurred. In September 1999 Beryl B. Raff was promoted to president and CEO of Zale, with DiNicola remaining chairman. Raff had worked with DiNicola at Macys and was hired in 1994 by DiNicola from Macys, where she had been the department stores top jewelry executive. In July 2000 Zale sold its private label credit card operation to Associates First Capital Corporation for about $542 million. By doing so, Zale eliminated its exposure to bad consumer debt, an increasing problem in the late 1990s and into the 21st century as personal bankruptcies were increasing steadily. As part of the deal, Associates agreed to continue to operate Zales credit card business as a third party. Zale used proceeds from the deal to pay down debt and help fund the acquisition of Piercing Pagoda. Just prior to the completion of the Piercing Pagoda deal, DiNicola retired as chairman of Zale, having shepherded the company to its strong position at the end of the 2000 fiscal year, when the company reported record net income of $112 million on record revenues of $1.79 billion. Zale ended the calendar year 2000 with 2,372 outlets, including 827 Zales, 309 Gordons, 119 Bailey Banks & Biddle, 171 Peoples Jewellers/Mappins Jewelers, and 946 of the Piercing Pagoda locations. With DiNicolas retirement, Raff became CEO and chairman.

Raffs stay at the top proved short-lived, however, as Zale began suffering from disappointing sales during the 2000 holiday shopping season, when the company reported a 3.1 percent decrease in comparable store sales. Raff resigned in February 2001, and DiNicola, who had remained on the board of directors, became chairman and CEO once again. In the weakening business climate, Zale had $150 million in overstock merchandise and had failed to lower its capital expenditures to match the economic situation. This was particularly true in the companys Internet operation, which generated less than $10 million per year but was the subject of an ambitious expansion under Raff, an expansion halted once DiNicola was back in charge. DiNicola began getting the companys inventory under control, writing off $25 million in the second quarter of fiscal 2001, and took a more conservative approach to the business in keeping with the uncertain state of the economy during the first half of 2001. DiNicola also overhauled the companys team of top managers as part of his effort to return Zale to the strong position of growth and profitability it had enjoyed in the late 1990s.

Principal Subsidiaries

Zale Delaware, Inc.; Zale Puerto Rico, Inc.; Dobbins Jewelers, Inc.; Jewelers Financial Services, Inc.; Zale Life Insurance Company; Zale Indemnity Company; Jewel Re-Insurance Ltd.; Zale Employees Child Care Association, Inc.; Jewelers Credit Corporation; Jewelers National Bank; Jewelry Expansion Corp.; Piercing Pagoda, Inc.; EARS, Inc.; PPIFLA, LLC; Zale International, Inc.; Zale Canada Company; Zale Canada Finance, Inc.

Principal Divisions

Zales Jewelers; Zales Outlet; Gordons Jewelers; Bailey Banks & Biddle Fine Jewelers; Zale.com; Peoples Jewellers; Piercing Pagoda.

Principal Competitors

Signet Group pic; Wal-Mart Stores, Inc.; Tiffany & Co.; Helzberg Diamonds; J.C. Penney Company, Inc.; Finlay Enterprises, Inc.; Friedmans Inc.; Whitehall Jewellers, Inc.; Fred Meyer, Inc.; QVC Network Inc.; Service Merchandise Company, Inc.; Target Corporation; Kmart Corporation; Mayors Jewelers, Inc.; Crescent Jewelers; Samuels Jewelers, Inc.; Reeds Jewelers, Inc.

Further Reading

Bancroft, Thomas, Zales Woes, Forbes, June 22, 1992, p. 46.

Beres, Glen A., Zale Flexes Its Mall Muscle, Jewelers Circular Keystone, December 1997, pp. 60 +.

CEO Interview: Beryl Raff, Zale Corporation, Wall Street Transcript, April 10, 2000.

Feldman, Amy, Shaking Things Up, Forbes, October 23, 1995, pp. 260+.

Gubernick, Lisa, To Catch a Falling Star, Forbes, June 2, 1986, p. 71.

Halkias, Maria, Associates Buys Zales Credit Cards, Dallas Morning News, July 11, 2000, p. 13D.

, Former Zale CEO to Return, Dallas Morning News, February 13, 2001, p. 1D.

, Polishing a Gem in the Rough, Dallas Morning News, December 7, 1994, p. 1D.

, Zale, FTC Settle Advertising Dispute, Dallas Morning News, February 11, 1997, p. 4D.

, Zale Promotes President to CEO, Dallas Morning News, September 8, 1999, p. 2D.

, Zale Reports Lower Profits, Begins Rebuilding Effort, Dallas Morning News, March 8, 2001.

, Zale to Acquire Peoples Jewellers, Dallas Morning News, March 17, 1999, p. 2D.

McDonald, John, Diamonds for the Masses, Fortune, December, 1994, p. 134.

Mehlman, William, Canadian Admirer Gets Cold Shoulder from Cash-Rich Zale, Insiders Chronicle, February 2, 1981, p. 1.

Moin, David, DiNicola: Zale Will Shine Again, Womens Wear Daily, March 8, 2001, pp. 8 +.

, Once in Bankruptcy, Zale Outlines Program to Restore the Luster, Womens Wear Daily, June 15, 1998, pp. 1 +.

, Taking Zale Further Down the Growth Trail, Womens Wear Daily, August 31, 2000, p. 15.

Reda, Susan, Turnaround at Zale Highlights Resurgence of Jewelry Business, Stores, April 1997, pp. 62, 64.

Shuster, William George, The New Zale: Focus on Basics Brings Success, Jewelers Circular Keystone, March 1996, pp. 8087.

, The Tale of Zale: A 75Year Retrospective, Jewelers Circular Keystone, March 1999, pp. 148 +.

, Zale Strategy: Return to Fundamentals, Jewelers Circular Keystone, September 1994, p. 140.

Weil, Jonathan, Once-Fading Zale Has Polished Its Act and May Be Ready to Shine, Wall Street Journal, September 3, 1997, p. T2.

Wilson, Marianne, Putting the Sparkle Back in Zale, Chain Store Age, January 1999, pp. 4849.

Zimmerman, Amy, Zale Chairwoman Raff Resigns; Retired DiNicola to Take Helm, Wall Street Journal, February 13, 2001, p. B8.

, Zales Beryl Raff Is Named Chairman As DiNicola Retires amid Record Profit, Wall Street Journal, August 31, 2000, p. B2.

M. L. Cohen
update: David E. Salamie

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Zale Corporation

Zale Corporation

901 West Walnut Hill Lane
Irving, Texas 75038-1003
U.S.A.
(214) 580-4000
Fax: (214) 580-5336

Public Company
Incorporated:
1924
Employees: 9,000
Sales: $1.04 billion (1995)
Stock Exchanges: NASDAQ
SICs: 5944 Jewelry Stores

Zale Corporation is the largest operator of retail jewelry stores in the United States. Zales 1,177 stores, located in 48 states, as well as in Puerto Rico and Guam, generated $1.4 billion in sales in 1995, achieving net earnings of $31.5 million and a return to profitability since the companys bankruptcy reorganization in the early 1990s. Zale stores operate within four distinct divisions: the Zales division, with 534 stores in 48 states and Puerto Rico representing 42 percent of company revenues, focuses on mainstream, middle-income consumers, and specializes heavily in diamonds; the Gordons division is positioned as a regional retailer for the lower and middle-income consumer, with 332 stores operating primarily under the Gordons name (14 stores operate as Daniels Jewelers in Arizona) providing 26 percent of Zale Corp. revenues; the upscale Fine Jewelers Guild division accounts for 19 percent of company revenues and comprises 123 stores operating under the Bailey, Banks & Biddle, Zell Bros., Sweeneys, Corrigans, and Linz trade names; the fourth division, Diamond Park Fine Jewelers, operates 188 leased jewelry departments for such leading department store chains such as Dillards and Dayton Hudson, providing 13 percent of company revenues.

Early Growth

Morris B. Zale, born in Russia but raised in Texas, opened his first jewelry store in Witchita Falls, Texas, in 1924. Two years later, Zale opened a second Texas store and was joined b, childhood friend, and brother-in-law, Ben Lipshy. From the beginning, Zale stores offered credit, with payments typically spread out over 12 months, even to its low-income customers. It leased its first locations, a practice that placed pressure on the company, grown to three stores at the beginning of the 1930s, when the company was stuck with long-term leases fixed at high, pre-Depression rents. However, despite the Depression, the company continued to expand through the decade, opening a fourth store in Amarillo in 1934, and growing to 12 locations by 1941. In that year, the companys revenues had grown to $2.73 million. Zale avoided building long-term debt by paying modest salaries and dividends to himself, Lipshy, and other family members joining the company; instead, earnings were invested back into the company.

The years of the Second World War limited Zales expansion of new locations but not its revenue growth. The devotion of raw materials to the war effort during this period led to a scarcity of most consumer items; jewelry, with limited strategic value, drew consumer interest. By 1944, Zales revenues had doubled, to over $5 million. In that year, Zale acquired a thirteenth store, Corrigans in Houston, which allowed it to move into higher-end jewelry. Two years later, revenues doubled again, passing $10 million for the year. By then, Zale had begun to operate as a big company, rather than as a collection of stores. In 1942, Zale opened a buying office in New York, which allowed the company to purchase diamonds and watches in quantity at wholesale prices. As the company grew, to 19 stores in 1946, Zale set up a central design, display, and printing operation in Dallas to service its growing chain. The companys next step toward centralization of its operations came when it opened its own shops for building store fixtures and constructing store interiors. Company headquarters were also moved to Dallas in 1946.

The postwar boom in consumer spending brought a new period of growth to Zale, which added more than 50 stores between 1947 and 1957, the year in which the company went public. That offering, of 125,000 shares, raised $1.5 million, which, according to Fortune magazine, appear[ed] to have been the only new money put into the company since it was started. Listed on the American Stock Exchange in 1958, the company operated 102 stores, primarily under the Zale trade name. Much of this growth came through the acquisition of existing stores; stores marketing to high-end consumers generally kept their original names. Diamonds formed the largest part of company sales, with diamond rings, other diamond jewelry and diamond watches providing about 38 percent of revenues; costume jewelry and watches added to sales, while the company also sold electric appliances, silverware, dinnerware, luggage, cameras, eyeglasses, and other items.

With sales topping $37 million in 1958, Zale moved closer to complete vertical integration of the company when it was invited to purchase its diamonds directly from the Central Selling Organization, otherwise known as the diamond syndicate. Based in London and representing a group of diamond producers including the De Beers of South Africa, the diamond syndicate represented more than 80 percent of the worlds supply of rough diamonds. The syndicate not only controlled the worlds diamond output, but also the choice of companies allowed to purchase its diamonds, and which diamonds a company was allowed to purchase. Zale, because of its integrated operations, including cutting, polishing and setting operations in New York, and its ability to market the full scale of diamonds from the smallest to the largest, most expensive diamonds, became the only U.S. jewelry retailer invited to purchase directly from the syndicate.

Branching Out and Buckling Under

By the mid-1960s, Zale operated the nationsand the worldslargest retail jewelry chain. Its 403 stores produced $81 million in 1963, with a net income of nearly $5 million. Diamonds continued to represent the largest share of Zales sales, about $27 million. Operating manufacturing plants in New York, Tel Aviv, and Puerto Rico, the company also operated a wholesale division, selling to other jewelry retailers. Zale also made and sold watches under its own Baylors label, buying mechanisms from Switzerland.

By 1965, Zale found itself with a surplus of cash. Its business was tied up in its jewelry store operations, and the development of the first synthetic diamonds, at the time viewed as a potential replacement for real diamonds in the retail jewelry trade, frightened the company into diversifying its product base. The company decided to move into the broader retailing field, purchasing the Texas-based Skillern drug store chain. This acquisition was followed by forays into budget fashion apparel, sporting goods, shoes, furniture, and a chain of airport-based tobacco and newsstand concessions. By 1974, in addition to 956 retail jewelry stores, Zale had grown to include 351 shoe stores, 83 drug stores, 146 clothing stores, 25 sporting goods stores, 13 home furnishings stores, and 13 tobacco/newsstand concessions. Together, these divisions produced revenues nearing $600 million; half of the companys revenues, however, continued to come from its jewelry operationswith one highlight coming from the 1969 purchase of the Light of Peace diamond for $1.4 millionwhich also contributed three-quarters of the companys more than $30 million in 1974 profits.

Trouble began to brew for Zale in the mid-1970s. Charges that the companys chief financial officer had been embezzling fundsthe CFO was eventually acquittedled to investigations from the Internal Revenue Service and other government agencies into alleged misappropriation of funds, including avoiding some $27 million in federal tax payments. These investigations would culminate in a $78 million tax charge brought by the IRS against Zale in 1982, and contributed to the replacement of Ben Lipshy, president of the company since 1957 and chairman of the board since 1971, by M. B. Zales son, Donald Zale as chairman in 1980. By then, Zales more than 1,400 stores included international operations in the United Kingdom, Switzerland, France, West Germany, Canada, and South Africa.

At the beginning of the decade, Zale abruptly began selling off its non-jewelry retail operations. Despite raising revenues, which topped $1 billion in 1980, these operations produced little of the companys profits. By then, also, the synthetic diamond scare had passedthese found industrial applications, but could not be successfully developed for retail sales, partly because of consumer insistence on purchasing real diamonds. In the space of a few weeks at the end of 1980, Zale sold off the Skillern chain to Revco, Inc. for $60 million; its 37-store sporting goods chain went to Oshman Sporting Goods, Inc. for $14 million; and its Butler Shoe division, with 385 stores, went to Sears for $100 million. Except for its newsstand/tobacco concessions, which would grow to 90 stores, and its O.G. Wilson catalog showroom division, the company had come back to its core jewelry business.

Jewelry sales slumped across the industry during the recession of the early 1980s. Worse, gold and diamond values, which had traditionally seen steady appreciation, began to fluctuate wildly. Zale saw revenues fall to $939 million in 1982. Profits slipped more drastically, from $33 million in 1981 to a loss of $6 million in 1982, the result, in part, of a $10.6 million charge brought on by the companys settlement with the IRS for its 1970s tax liabilities. The collapse of the oil industry in the Southwest, where the highest concentration of Zale stores were located, also hurt the companys sales. The company struggled to maintain its share of the jewelry market, while facing increasing competition from department stores. Zale, which had perennially relied on sales of wedding rings for its chief source of revenues, had fallen behind the timesparticularly with the decline in marriages since the 1970s. Meanwhile, it saw customers departing for the larger assortments of jewelry, and especially gold jewelry, available elsewhere.

Part of Zales troubles were blamed on the lingering influence of its old management, which had been manufacturing-oriented, rather than marketing-oriented, allowing further inroads into the jewelry market by retailers more responsive to trends in consumer demands. Breaking the hold of former management, who were still largely loyal to M. B. Zale, would take several years and eventually a relocation of the companys headquarters. Zale struggled to recover from the recession, but sales in its 1,500 stores barely budged, remaining around $1 billion.

The Peoples Takeover

In 1986, the company posted a net loss of over $60 million, including a restructuring charge of about $80 million as it disposed of its European retail operations, and the last of its non-jewelry divisions, and a $50 million writedown of old inventory. By that time, Zale had already rejected an attempt at a takeover by Peoples Jewelers of Canada. Peoples, led by Irving Gerstein, was looking to expand beyond its Canadian base. That company already owned 15 percent of Zales stock, purchased for $70 million in 1980. When Zales problems rose in the early 1980s, Peoples attempted to sell its stock back to Zale, but Zale refused to buy.

Critical of Zales efforts to turn the company around, Gerstein became determined to take over the company. Under Texas law, however, Peoples needed approvals from at least two-thirds of Zales stockholders to complete a takeover, and the Zale family controlled more than one-third of the stock.

In early 1986, Peoples, aided by Drexel Burnham Lambert, made offers of $420 million and $470 million to take over the company. The Zale family refused to sell. Gerstein next met with the Austrian Zwarovski company, makers of crystal and jewelry, which agreed to back Peoples in its next takeover effort. By 1988, Gerstein had constructed lending arrangements that allowed him to tender an offer of $50 per share of Zale stocknearly double its trading price. The Zale family, under pressure from its own investment company, at last gave in and agreed to sell the company. By the end of that year, Peoples and Zwarovski, each with 50 percent ownership, took Zale private.

Gerstein moved quickly to settle some of the companys debt, selling some $700 million in junk bonds, leaving the company about $900 million in debt. His next step was to close Zales New York and Puerto Rico manufacturing operations instead turning to vendors for store stocksold off the companys diamond inventory, and reduced the companys large advertising budget. With expenses reduced by $80 million, the companys net earnings rose, allowing Gerstein to declare a $5 million dividend to both Peoples and Zwarovski. The following year, the company acquired Gordon Jewelry Corporation, the nations second largest retail jewelry chain. Three years later, Zale verged on collapse.

Bankruptcy and Beyond

At the beginning of the 1990s, Zale, including the Gordon chain, had grown to 2,000 stores, with revenues of $1.3 billion. However, the international recession of the 1990s, the economic uncertainty produced by the Persian Gulf War, and a new luxury tax on purchases over $10,000 quickly took their toll on jewelry sales. In 1990, Zale posted a $64 million loss. The following years losses amounted to over $106 million in the first six months alone. By the end of the year, the company was unable to make a $52 million interest payment on its $850 million in debt.

Zale attempted to restructure the company, announcing the closing of 400 stores and a reduction of its headquarters, but its creditors began threatening to force the company into bankruptcy. By the end of January 1992, Zale joined the growing list of failing jewelry companies and petitioned for voluntary bankruptcy.

When Zale emerged from Chapter 11 in 1993, its debt was settled. With 700 fewer stores, Zale, led by former Macys executive Robert DiNicola as chairman and chief executive officer, moved to return the company to profitability. The new management team worked to restructure the company, creating separate and independent divisions of the Zale and Gordon stores. The company also announced plans to spend more than $80 million over the next several years upgrading locations. At the same time, the company revitalized its purchasing, introducing a broader range of items to win back its customers.

By 1995, the company appeared back on the road to good health. Its revenues of that year, $1.04 billion, represented a 12.6 percent increase over the previous years. Net income grew by 36 percent, to $31.5 million, while the company continued to shrink its total debt, down to $443 million. With a commitment to its back-to-basics approach, and a booming economy, the companys future looked bright. As DiNicola told the Dallas Morning News, Tor the long term, well be running the No. 1 jewelry company in the country. Thats what we have to look forward to.

Principal Divisions

Zales; Gordons; Fine Jewelers Guild; Diamond Park Fine Jewelers.

Further Reading

Gubernick, Lisa, To Catch a Falling Star, Forbes, June 2, 1986, p. 71.

Halkias, Maria, Polishing a Gem in the Rough, The Dallas Morning News, December 7, 1994, p. Dl.

McDonald, John, Diamonds for the Masses, Fortune, December, 1994, p. 134.

Mehlman, William, Canadian Admirer Gets Cold Shoulder from Cash-Rich Zale, The Insiders Chronicle, February 2, 1981, p. 1.

Shuster, William George, Zale Strategy: Return to Fundamentals, Jewelers Circular-Keystone, September 1994, p. 140.

M. L. Cohen

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