901 West Walnut Hill Lane
Irving, Texas 75038-1003
Telephone: (214) 580-4000
Fax: (214) 580-5336
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. Zale's 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 company's 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 Gordon's division is positioned as a regional retailer for the lower and middle-income consumer, with 332 stores operating primarily under the Gordon's name (14 stores operate as Daniel's 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., Sweeney's, Corrigan's, and Linz trade names; the fourth division, Diamond Park Fine Jewelers, operates 188 leased jewelry departments for such leading department store chains such as Dillard's and Dayton Hudson, providing 13 percent of company revenues.
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 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. 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 company's 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 Zale's 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, Zale's revenues had doubled, to over $5 million. In that year, Zale acquired a thirteenth store, Corrigan's 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 company's 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 world's supply of rough diamonds. The syndicate not only controlled the world's 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 nation's--and the world's--largest 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 Zale's 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 Baylor's 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 company's revenues, however, continued to come from its jewelry operations--with one highlight coming from the 1969 purchase of the Light of Peace diamond for $1.4 million--which also contributed three-quarters of the company's more than $30 million in 1974 profits.
Trouble began to brew for Zale in the mid-1970s. Charges that the company's chief financial officer had been embezzling funds--the CFO was eventually acquitted--led 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. Zale's son, Donald Zale as chairman in 1980. By then, Zale's 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 company's profits. By then, also, the synthetic diamond scare had passed--these 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 company's 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 company's 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 times--particularly 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 Zale's 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 company's 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 Zale's stock, purchased for $70 million in 1980. When Zale's problems rose in the early 1980s, Peoples attempted to sell its stock back to Zale, but Zale refused to buy.
Critical of Zale's 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 Zale's 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 stock--nearly 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 company's debt, selling some $700 million in junk bonds, leaving the company about $900 million in debt. His next step was to close Zale's New York and Puerto Rico manufacturing operations--instead turning to vendors for store stock--sold off the company's diamond inventory, and reduced the company's large advertising budget. With expenses reduced by $80 million, the company's 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 nation's 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 year's 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 Macy's 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 year's. 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 company's future looked bright. As DiNicola told the Dallas Morning News, "For the long term, we'll be running the No. 1 jewelry company in the country. That's what we have to look forward to."
Principal Divisions:Zales; Gordon's; Fine Jewelers Guild; Diamond Park Fine Jewelers.
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. D1.
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.
Source: International Directory of Company Histories, Vol. 16. St. James Press, 1997.