A Message from Theo Killion
Dear Shareholders,
Over the last year and a half, we have focused on a multi-year turnaround strategy aimed at returning the Company to profitability. While fiscal 2009 has been especially challenging and the financial results very disappointing, we have taken substantial steps to stabilize the business and position it for future growth. In the second half of fiscal 2008, we laid the foundation by making changes to our organizational structure to increase effectiveness. In fiscal 2009, we continued these efforts and executed key actions designed to strengthen the business and improve performance. Based on the extreme economic challenges that occurred during the year, we acted with an even greater sense of urgency, and as a result, we intensified our efforts following Holiday to manage expenses, liquidity and debt levels.
Our financial focus was on 3 major drivers:
- SG&A
- Working capital
- Real estate
During 2009, we identified an additional $65 million of expense savings, bringing the total two-year program to $130 million. As of July 31, 2009, we have achieved $88 million of expense reductions with the balance to be achieved in fiscal 2010.
We also identified an incremental $75 million inventory reduction, of which $54 million was achieved in 2009 with the balance expected to be accomplished in fiscal 2010. In total, we will have permanently reduced inventories $175 million since the beginning of this initiative in February 2008.
In real estate, we restructured our portfolio in order to rationalize the size and scale of our footprint. We announced the closure of 191 stores in the second half of fiscal 2009. Additionally, we partnered with our landlords to negotiate leasing arrangements more in line with our current level of business. We are confident the steps we have taken were necessary and will have a significant impact on our future financial performance. In addition to store closings, we believe we have adequately addressed the entire Bailey Banks & Biddle contingent liability at a significant discount from the potential remaining rent obligations.
The end result was that despite the extremely disappointing performance of the business in fiscal 2009, we reduced our debt, lowered our cost and inventory levels and have a healthier real estate portfolio. While we still have more work to do, we are confident the accomplishments of 2009 will have a significant impact on the financial well being of the Company.
Separately, during our year-end financial close, there were items identified that impacted prior year financial statements. We conducted a thorough review and have addressed the issues. We are taking the necessary steps to strengthen our accounting processes and are putting measures in place to prevent this from happening again.
During 2009, we continued to focus on talent by adding key individuals to the senior management team.
- Matt Appel, Chief Financial Officer. Matt's straight-forward style and experience in balance sheet management and turnaround situations, gives us confidence that we have a strong, extremely focused financial partner.
- Richard Lennox, Chief Marketing Officer. Richard brings an impressive 10-year track record of diamond product innovation on campaigns for the DeBeers Group during his tenure at J. Walter Thompson. He has created powerful ideas that have excited consumers and driven growth for the entire jewelry industry. He will play a pivotal role as we evolve our marketing program and create a more aspirational feel for our jewelry.
These additions, coupled with our existing senior management team, have created a very strong, seasoned team in place to drive performance.
Going forward, our focus will be squarely on leveraging the actions we've taken to return to profitability. While we will continue to look for efficiencies in the business, we must gain top line traction.
In fiscal 2010, our merchandising initiatives will center on Big Ideas. While we will still have a focus on individual items, we are creating more merchandise collections that will be supported by robust testing, extensive education and compelling marketing. This is critical as we intend to get behind our Big Ideas in substantial product launches in order to tell a story to our guests - especially during key selling periods. Three of our Big Ideas include the Shared Heart® Collection, Fashion Watches and the Everlon™ Collection.
The Shared Heart® Collection symbolizes timeless love and tells a compelling emotional story of two hearts beating as one. We tested the Shared Heart® Collection in 135 stores at Mother's Day with very positive results and have since rolled the collection out to all stores. We believe the opportunity is significant and we will be behind it in a big way at Holiday. We have supported this launch with product education for our fine jewelry consultants and an advertising campaign that we believe captures the emotional high ground by making the purchaser the hero. We are also very proud to donate a portion of the proceeds from Shared Heart to Autism Speaks.
Fashion Watches are another opportunity to differentiate the assortment. We are the exclusive specialty jeweler to carry the Fossil brands. At Mother's Day, we tested watches from DKNY, Diesel and Armani as well as Fossil. This new assortment has done well so far and is consistent with our emphasis on expanding margins. We believe fashion watches will generate excitement and will drive increased traffic to our stores.
We are also partnering with DeBeers on their launch of the Everlon™ Collection with a select group of retailers this Holiday. As you recall, DeBeers' last initiative was the Journey pendant in 2006, which received tremendous marketing support and was a major financial success for the industry. We are excited to join forces with DeBeers to potentially set another industry trend. We feel extremely fortunate to have Richard Lennox, who led the development campaigns for Three-Stone Rings and Journey as well as the upcoming Everlon™ Collection during his 10 year relationship with DeBeers.
Importantly, this year we will have a broader merchandise selection at each price point, offering compelling merchandise to the guest regardless of their budget. Given the improvements in sourcing and merchandising during the past year, we are confident the quality and value we will offer our guests this season will exceed their expectations.
Supporting the merchandise initiatives, the marketing strategy will build on the steps we've taken to create an emotional experience which resonates with our guests. Under Richard's leadership, we will continue to develop and refine our guest segmentation to more effectively communicate our message. As marketing is a blend of art and science, Richard brings both the analytical rigor as well as the ability to maximize the creative talent. He has hit the ground running and, most importantly, will make a significant impact on our multi-channel Holiday campaigns.
Critical to the execution of our merchandise initiatives is the development of our fine jewelry consultants. Education is paramount to improving the guest experience. Recently, all 14,000 employees, both in the field and at the store support center, have participated in a new guest-centric education program that unifies our Company. In the field alone, this was over 80,000 hours of education. The development of this education was extremely collaborative and was not created in a vacuum and pushed down from senior management. The education was created by and for members of our team, including our fine jewelry consultants. Our senior management team has been out in the field at these sessions, underscoring the importance we place on education and improving the guest experience. The response has been tremendous both inside the organization and outside from our guests. Our success at Holiday will be tied directly to how well we execute, and our people are the competitive advantage that will set us apart.
Inventory management continues to be an important area of focus in 2010. We feel strongly that we will have the right inventory at the right store at the right levels for our guests. Our Planning and Allocation organization has been restructured to build deep functional expertise in each area. Accordingly, the Planning area will concentrate on driving sales at the category level. The Allocation area will focus on store attributes, store assortments, store capacity and regional differences. Merchandise will be allocated based on each individual store's strengths such as bridal, gold, or fashion. We have also developed a tiered assortment strategy by store volume that repositions inventory into greater depth in our high volume locations. Additionally, we have placed an extreme focus on replenishing our core merchandise programs with a process that is more systematic to ensure we are in-stock with the items guests' desire. Having significantly adjusted inventory levels, these productivity improvements are even more important.
In summary, during a challenging year, we have made progress in key areas during 2009 that position us for improved performance as we go forward. With estimates of 2,000 jewelry stores closing in the last year, there is significant market share opportunity for those who run their business efficiently. We have taken important steps during this critical transition period of doing just that.
On behalf of all of us at Zale, we would like to thank our shareholders, vendors and associates for their continued support. Without the dedication and commitment from our entire team, the actions we have taken to stabilize the business would not have been possible.
Sincerely,
Theo Killion
Interim Chief Executive Officer