Tuesday, August 28, 2007

Zale Corp

Long-time excellent stock picker Jim Garvin noticed this today and passed it along:

Hi Gene, This morning Goldman Sachs highlighted Zale as a "source of opportunity". They recommend that their clients short the stock, and put a target of $18. The reasoning: "...growing macro headwinds, management upheaval, and poor strategic positioning will likely pressure earnings." I've never shorted a stock in my life, but I found this interesting and wanted to pass it on.

I had noticed the downdraft in the stock, but hadn't seen the Goldman analyst report.

(Chart).

I've got a lot to say about this. The Zale board and CEO should have been gone long ago. Apparently they announced that they are looking for a COO. Well, they had an excellent COO - Sue Gove, who knew the business inside and out - and they threw her out about three years ago or so on accounting concerns - which proved to be completely unfounded. As far as I know, they never apologized to Sue after their review showed that there weren't any issues tied to her.

Zale has been up and down since the hostile takeover 20 years ago - when Jim and I worked there. It was one of the last hurrahs for Milken and Drexel Burnham - with tiny People's Jewelers acquiring Zale. At the time, Zale had a strong vertical integration, and leadership positions in Europe - all of which got unwound after the takeover. The company eventually went bankrupt under the failing leadership from Peoples - and languished for years in bankruptcy. It has been a revolving door of CEO's since - I would guess average tenures of less than four years - not long enough to learn the intricacies of a more complicated industry than apparent.

So, let me make a rescue proposal to anyone on the board paying attention: Don Zale, who's family name still adorns most of the doors, is still there in Dallas - bring him back as Chairman - and beg Sue Gove to come back and stop the bleeding...

Jim, Sue and Donald, you are all welcome to comment.

(In edit: Jim - I'm surprised you've never shorted - this is a great time to play on the dark side...)

1 comment:

James said...

This morning I saw the news that Zale has made a deal to sell Bailey, Banks & Biddle to Finlay for $200,000,000. The price equates to about 70% of annual sales, or 8.7 times EBITDA. I think that is a good strategic move as it will narrow the focus and should enable Zale to get rid of a ton of headquarters expense.