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Zale Up to Strong Buy

Zacks Equity Research

On Mar 1, 2014, Zacks Investment Research upgraded Zale Corporation (ZLC), the specialty retailer of fine jewelry, to a Zacks Rank #1 (Strong Buy).

Why the Upgrade?

The company has been witnessing rising earnings estimates since it released its second quarter fiscal 2014 earnings results, where on the back of strong sales from Zale branded stores and People branded stores, its earnings surged 10.8% to $1.13 a share, cruising ahead of the Zacks Consensus Estimate of $1.04.

Moreover, the company delivered a 1.9% rise in comparable store sales with the gross and operating margins expanding 240 and 150 basis points (bps) to 53% and 9.1%, respectively. Margins primarily benefitted from Zale’s strong promotional initiatives throughout the holiday period, its effective cost management and its sourcing methods.

Additionally, the stock has been gaining momentum owing to its latest agreement with Signet Jewelers Ltd (SIG), as per which, Signet will acquire all of Zale’s outstanding shares at $21 each by cash. The acquisition would result in combined sales of $6.2 billion generating from approximately 3,600 retail outlets and annual synergies of roughly $100 million within the three fiscal years, resulting from operational efficiencies.

The transaction is valued at $1.4 billion and has also received a nod from Golden Gate Capital, holding 22% stake in Zale. The deal is anticipated to be accretive to earnings in the high single-digit percentage in the first full fiscal year after the transaction is concluded.

As the jewelry market in the U.S. is still recovering from the recession, the news of Zale’s timely buyout by Signet has brought optimism into the environment. This has triggered an uptrend in the Zacks Consensus Estimates, as analysts became more constructive on the stock’s future performance. This is evident from the movement witnessed in the Zacks Consensus Estimate that jumped 12% to 56 cents for 2014 and 4.2% to 75 cents per share for 2015 in the past 30 days.

Other Stocks to Consider

Other top-ranked stocks worth considering in the retail space include Advance Auto Parts Inc. (AAP) and Christopher & Banks Corporation (CBK), both sporting a Zacks Rank #1(Strong Buy).

Read the Full Research Report on AAP
Read the Full Research Report on SIG
Read the Full Research Report on ZLC
Read the Full Research Report on CBK

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