ONCE IN BANKRUPTCY, ZALE OUTLINES PROGRAM TO RESTORE THE LUSTER

Byline: David Moin

NEW YORK — What Gap does for basics, Zale Corp. wants to do for bracelets and rings.
“We can be the Gap of the jewelry business,” contends Robert J. DiNicola, Zale chairman and chief executive officer.
Gap-like size may be unattainable, but DiNicola is really talking about brand recognition and market coverage. He said Zale’s three divisions — Zales Jewelers, Gordon’s Jewelers and Bailey Banks & Biddle — mirror Gap’s three-tiered brand strategy: Old Navy, the Gap and Banana Republic.
Zale, the nation’s largest retailer of fine jewelry with $1.3 billion in sales last year, has come a long way since emerging from bankruptcy in July 1993.
It’s out of its rebuilding phase, entering a rapid-growth stage and is being positioned to pounce on the rich fine-jewelry category that most stores only peck at, but that year after year proves more reliable at retail than ready-to-wear. It’s a segment of the industry ripe for someone to step up and take a big bite — and Zal knows it.
By 2001, Zale’s goal is to hit $1.8 billion in volume, boost average store volume to $1.5 million from the current $1.1 million and raise EBITDA (earnings before interest, taxes, depreciation and amortization) to $268 million from $148 million last year.
An aggressive ceo with a vision, DiNicola has been refocusing Zale’s three divisions so they have sharper, more distinct images and price differences. Zales’ average price is $250, Gordon’s is $300 and Bailey Banks & Biddle’s is $500. The company spends about $45 million annually on marketing.
“Within each division, there is a core media strategy,” DiNicola said.
Zale uses TV; at Gordon’s, it’s print, and Bailey’s hits its audience primarily through direct mail.
DiNicola has set more stringent standards and timetables for receiving, stocking and clearing merchandise at the divisions, aping strategies Federated Department Stores implemented in the early Nineties to lift itself out of bankruptcy and keep the selling floors looking fresh. At the time, DiNicola was ceo of Federated’s Bon Marche division, running it smoothly — and anonymously — cloaked under the corporate umbrella of Federated Department Stores, where former ceo Allen Questrom had the spotlight.
Now DiNicola has his own show, and he’s a lot more visible. And so, of course, is Zale.
“For the first three years [since joining Zale] we worked to get Zale positioned correctly,” he said. “Now we’re cranking up the push on Bailey Banks & Biddle.
“We closed 20 Baileys over the last year that were in inappropriate malls. Today, there are 106 units. Over the next three to four years, by 2002 or 2003, we expect to have 250 in premier locations in the country, primarily in mall locations, but also in affluent downtown settings such as Greenwich, Conn.”
DiNicola said he hopes to select a Manhattan flagship site before the end of the year.
“We recognize the need to have a flagship in Manhattan to help position Bailey Banks & Biddle as a national brand at the upscale end of the market,” DiNicola said.
West of the Mississippi, many Bailey Banks & Biddle stores operate under the Corrigans, Zell Bros. and Sweeney’s names.
“It all will be consolidated under the Bailey Banks & Biddle name by summer 1999,” DiNicola said. “We have our work to do with Bailey’s to capitalize on a great franchise.”
In the last four years, Zale has renovated 525 of its 1,100 stores, closed 180 stores and built 253 new ones.
“In that process, we’ve had a strategy to reenter certain regions, including the I-95 corridor from Washington to Boston, and in New Jersey last year there were 20 new stores or remodels,” DiNicola said. “We’re closing in on New York, but that requires a very careful selection process and strong eye on productivity.”
At the Roosevelt Field mall on Long Island, there were two openings last year: a 2,000-square-foot Zales and a 5,000-square-foot Bailey Banks & Biddle.
By 2001, the Zales Jewelers division is expected to be operating 850 units, from the current 700, and the 320-unit Gordon’s Jewelers, whose stores adapt merchandise to suit to regional tastes, is considered to have the potential to grow to 500 stores ultimately. “All three divisions contribute to the bottom line very evenly and consistently,” DiNicola said, adding that they get the same rate of return — 13.7 percent.
In its third quarter ended April 30, Zale said it achieved a “breakthrough in profitability.” Diluted earnings per share were 4 cents, against a loss of 4 cents for the 1997 period. Operating earnings gained 42 percent to $10.5 million, against $7.4 million, and net earnings were $1.5 million, compared with a loss of $1.4 million.
Net sales hit $258.3 million, compared with $244.4 million, with comp-store sales increasing 11.9 percent.
For the nine-month period, operating earnings were $122.9 million compared with $104.4 million, net earnings hit $61.5 million compared with $48.9 million and net sales were $1 billion against $980.2 million. Comp-store sales tracked at 9.2 percent.
In the past year, Zale stock has climbed from the teens to the low 30s on the strength of improved inventory management and better results. The stock, traded on the New York Stock Exchange, closed Friday at 30 9/16, down 7/16.
When DiNicola joined Zale, he discovered, to his astonishment, that it was being run like a loose network of mom-and-pop shops.
For example, during the week of Valentine’s Day, a peak selling period for jewelry merchants, “there were dozens of Zales stores that did inventory and closed early — and nobody who said, ‘Why are we doing this?’,” recalled DiNicola. Some stores didn’t even have hearts in the assortments, he noted.
On top of all that, the pricing policy was loose. Prices often weren’t displayed, leading to haggling between shoppers and salespeople, a common problem that brings down prices and margins in many jewelry and watch stores.
“In our stores, we’ve put the prices face up on all the jewelry and in all the cases, and we leave the prices for 365 days out of the year,” DiNicola said. “We’ve taken the mystery out of the jewelry business.”
“Bob took a losing situation and fundamentally upgraded management and upgraded the stores with selling techniques and never-out programs on certain basics, like gold chains,” observed Robert Kerson of Levy-Kerson Associates, an executive search firm.
“He’s taught and trained the stores to sell better goods, and has a more effective field organization. But it’s his combination of street smarts and strategic thinking that has made the difference in this business.”
“What Bob has done is what you should always do when you enter a new experience — borrow from the best of your previous experience,” said Arnold Aronson, managing director of retail strategies for Kurt Salmon Associates.
“He’s taking the best department store merchandising techniques that he knows and applying it to Zale. He’s looking at the ‘good, better, best’ formula that Federated has through Stern’s, Macy’s and Bloomingdale’s, and Gap has with Old Navy, Gap and Banana Republic, and taking techniques, like key-item merchandising and very disciplined assortment planning, to get the biggest bang for the buck out of the sku’s. He’s focused the assortments and is never out of fashion basics.”
Wedding and engagement items represent 32 percent of the volume; diamond and fashion diamonds, 26 percent; fashion jewelry, including gold, color items such as sapphires, rubies and emeralds, 25 percent, and watches, 12 percent. Key items kept in stock, such as tennis bracelets, bridal sets, diamond stud earrings and Mother’s Day keepsake boxes with foiled chocolates or diamond hearts represent 30 percent of the business, and each division operates with 250 key items of a total 1,750 sku’s per store.
Aronson said the $63 million sale of the Diamond Park Fine Jewelers leased division to Finlay Enterprises in 1997 reflects efforts to prune the portfolio to essentials.
Last year, roughly $35 billion in jewelry was sold in the U.S. — $15 billion by specialty stores, $15 billion by department stores and mass merchants, and $5 billion through direct marketing and home shopping. Two years ago, Zale Direct for the Zales division was launched, and Zale went live with the Web a year ago. In the past, Zale Direct did six mailings a year, close to a million catalogs each time.
For the jewelry industry, it’s been a steady, healthy run at retail for practically two decades straight, except for a dip in 1991 due to the Gulf War. Fueling sales are the addition of women to the workforce; also, retailers are giving jewelry more exposure through advertising and marketing, and consumers are starting to acknowledge that jewelry is a way to update wardrobes when ready-to-wear offerings seem dull.
However, the retail landscape in jewelry is fragmented. Such players as Sterling, Bulgari, Tiffany’s and Zale have been performing well, but some retailers — Best, Service Merchandise and Montgomery Ward — have struggled, mainly due to internal issues. And there is a vast number of small shops across the country that are being hurt by the high cost of financing inventory and their lack of buying clout.
Zale is on the move, but isn’t the only chain that’s growing. Tiffany’s is expanding its merchandise appeal and locations, and opened its first Long Island store Wednesday at the Americana at Manhasset shopping center.
Bulgari is broadening its product line, and even searching for a site in SoHo to appeal to a different customer from the one who shops its prestigious 57th Street flagship. The Limited Inc. is experimenting with some merchandise in its Express division, and Neiman Marcus this year will test its first two Galleries at Neiman Marcus shops for fine jewelry, gifts and home accessories.
DiNicola believes Zale’s strategy breaks away from the field.
“We’re more brand-oriented than Tiffany’s, and our approach is warm, fuzzy and traditional, while Tiffany’s is urban, contemporary and at the high end. “Zale is for the rest of America.”

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