While jewelry sales took a hit during the financial crisis, consumers are back to spending their discretionary income in this specialty product category. According to data provider Rapaport, domestic jewelry-store sales rose 9.1% in the first six months of 2013, to $15 billion.
The industry’s rising sales have lifted all boats, none more so than value-priced retailer Zale Corporation (NYSE:ZLC), which received $150 million of much-needed financing from investment firm Golden Gate Capital in 2010 to stay afloat. As the chart below shows, Zale Corporation (NYSE:ZLC)’s trailing twelve month stock price performance has outshone its primary competitors, Signet Jewelers Ltd. (NYSE:SIG) and Tiffany & Co. (NYSE:TIF), as well as the market as a whole. With its first annual operating profit since 2008 under its belt and a rising stock price, can Zale Corporation (NYSE:ZLC) provide investors with more gains?
What’s the value?
Zale Corporation (NYSE:ZLC)’s ultimate value comes from its ability to potentially leverage the volume buying power of its national domestic network of stores, further complemented by a leading market share position in Canada. While the company has been pruning its overall network, with 84 net store closures over the past year, it maintains almost 1,700 locations led by the 600-plus stores in its namesake store chain. Zale Corporation (NYSE:ZLC) also has a strong presence in the outlet arena, which counter-intuitively enjoys the highest average transaction value of all of the company’s segments.
In fiscal year 2013, Zale Corporation (NYSE:ZLC) continued its resurgence with rising comparable-store sales, up 3.3%, helped by a double-digit increase in online sales. More importantly, its greater focus on its exclusive brands, including Vera Wang Love and the Celebration Diamond Collection, brought higher volumes of customers to its stores and an improvement in its gross margin. Combined with the closure of under-performing stores, the net result was that Zale’s operating margin nearly doubled versus the prior-year period.
Looking ahead, the company plans to shut an additional 50 to 55 stores in FY 2014, which should hopefully lead to further margin expansion.
Despite Zale’s clear financial improvement, its relatively low operating margin and relatively high leverage puts it at a disadvantage to its stronger national competitors, including Signet Jewelers Ltd. (NYSE:SIG) and Tiffany & Co. (NYSE:TIF). Both companies enjoy double-digit operating margins, partially due to their direct relationships with diamond miners, and retail networks that reach customers at higher price points.
Greater profitability has allowed Signet Jewelers Ltd. (NYSE:SIG) and Tiffany & Co. (NYSE:TIF) to expand operations over the past year, while Zale continues to downsize.