Directors step in, firing execs, in bid to save '06 holiday season

08:26 AM CDT on Tuesday, May 30, 2006

By MARIA HALKIAS / The Dallas Morning News

IRVING – When Zale Corp.'s board started firing top management in January, its directors took on the challenge of saving Christmas 2006.

There was no time to hire a new chief executive before developing a strategy for this year's holiday quarter, the period when Zale makes nearly all its annual profit.

The directors – as diverse in background as a construction company executive and a university professor – quickly immersed themselves in operational decisions they historically left to management.

Experienced turnaround executive and board member Betsy Burton stepped in as interim CEO, meeting with her board colleagues weekly and regularly consulting with chairman Richard C. Marcus.

They patched together a new team as they simultaneously dismantled the old team: former CEO Mary Forte left in January, chief operating officer Sue Gove in March and president of Zales division Paul Leonard in February. CFO Mark Lenz was put on indefinite leave earlier this month.

In an interview last week, Ms. Burton said she understands from the outside looking in, Zale may appear "soap-opera-like," but the board had to act quickly or risk letting the jewelry retailer fall further behind competitors.

"Zale isn't a financial turnaround. ... It's a market share turnaround," Ms. Burton said.

"There's been continued market share erosion for some time. It was gradual, and there wasn't a lot of focus on it."

For three years, Zale's same-store sales, a key measure of a retailer's health, have lagged behind chief competitors, UK's Signet Group PLC, which owns U.S. chains Kay Jewelry, and Jared the Galleria of Jewelry.

And last year, Kay Jewelers' sales exceeded those of the Zales chain for the first time, and Signet's U.S. division became bigger than Zale Corp.'s overall U.S. operations, which also include Gordon's, Piercing Pagoda and Bailey Banks and Biddle.

It wasn't an abrupt decision to ask Ms. Forte and her team to leave, Ms. Burton said.

Ms. Forte couldn't reverse declining trends at Zale. Her pick for Zale division president, Mr. Leonard, pushed through too many changes last year as he tried to reposition the namesake division as more upscale. Holiday 2005 results missed targets for the second year in a row.

Another board disappointment came when plans to resurrect the Linz name had to be put on hold. Linz was a respected name in the Dallas market and was absorbed into the Bailey Banks & Biddle chain in the 1990s. It was to be used for new, off-mall stores to compete with Signet's fast-growing Jared chain.

Instead, Zale signed a lease this month in Southlake to open its first off-mall store under the Bailey Banks & Biddle name, Ms. Burton said. Zale's new-store construction was largely from the expansion of Zales Outlet stores in power strip centers. Zale also closed 30 Bailey Banks & Biddle stores this year.

By contrast, Signet last month announced plans to spend $1 billion in new U.S. store space over five years. That should finance a 40 percent increase in stores.

Zale's stock price has fallen since last summer.

In hindsight, both executive promotions were "probably a mistake," Ms. Burton said.

"When you're a CEO, the buck stops there," Ms. Burton said. "Mary got three years. That's a long time for a board to be patient with declining sales and earnings."

Analysts seem slightly more confident in Zale since a recent conference call with Ms. Burton. KeyBanc Capital Markets analyst Jeff Stein said he was giving Mr. Burton "a lot of credit for keeping the divisions focused on the tasks at hand despite distractions."

A new Zale CEO will be hired soon, Ms. Burton said.

In the meantime, holiday plans are 70 percent complete. The board has put its Canadian Peoples division head John Zimmermann in charge of all of North America. He's building the merchandise selection back to its pre-2005 mix and expanding on it with even more breadth. A new creative team is working on ads that reclaim "The Diamond Store" tag line that had been put aside.

Last week, Ms. Burton held a "town hall meeting" with about 200 corporate executives. "People are coming up with creative solutions. Everyone is working hard to get market share back and fix the Zales brand," she said. "Morale is at an all-time high. Many of these people had never been brought into the loop on information that helps them do their jobs better. A lot of people were afraid to speak up."

The new CEO needs to be balanced in leadership qualities and skills to get results, Ms. Burton said. "And must have a proven track record and be a good cultural fit."

The board has laid out three big initiatives for the new CEO: to increase market share, improve gross margins and invest in people.

"We're not looking for a change agent or to have change just for change sake," Ms. Burton said. "Clearly, we don't want additional disruption."

Once a new CEO is hired, Zale's board may still have some issues to work through from a pending investigation by the U.S. Securities and Exchange Commission. In April, Zale disclosed several areas under SEC investigation, including several accounting issues.

If accounting irregularities are discovered, the board's management decisions will be clearer, said Hemang Desai, an accounting professor at Southern Methodist University's Cox School of Business.

With an SEC investigation looming, "and without knowing all details, it looks to me this board is being proactive," he said.

CEOs are asked to leave when they can't deliver results, but "in recent years, boards have been extremely sensitive to accounting irregularities," Mr. Desai said. "The sensitivity to CEO performance turnover hasn't increased dramatically in recent years, but what we are finding is that accounting irregularities do precipitate CEO turnovers."

E-mail mhalkias@dallasnews.com

Zale Corp.'s board of outside directors has taken operational control of the company while it searches for a new CEO. The board members are:

Richard C. Marcus, 67, joined Zale's board in 1993 and has been chairman since August 2004. Also a former chairman and CEO of Neiman Marcus.

Mary E. "Betsy" Burton, 54, acting CEO since Jan. 30. Joined the board in August 2003.

George R. Mihalko Jr., 50, Zale's acting chief administrative officer and acting CFO.

J. Glen Adams, 66, director since 1993.

John B. Lowe Jr., 66, chairman of TDIndustries. Director since March 2004.

Thomas C. Shull, 53, director since August 2004.

David M. Szymanski, 48, director since January 2004.

SOURCE: Zale