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Stefan Kaluzny Zale’s

February 29, 2012

Stefan Kaluzny Zale

Zale’s unveils restructuring plan to boost cash flow

Zale’s three-part recapitalization gives it a stronger future. ‘This gives us a very healthy foundation to complete our turnaround strategy,’ said chief financial officer Matt Appel.

Zale Corp. on Monday announced a three-pronged recapitalization, including a $150 million loan from a private equity firm, to help turn around the struggling jeweler beset by falling sales and cash-flow issues.

“This gives us a very healthy foundation to complete our turnaround strategy,” said Zale chief financial officer Matt Appel. The Irving-based retailer has been hurting for cash and closing stores.

San Francisco-based private equity firm Golden Gate Capital provided the $150 million loan in exchange for a 25 percent equity stake. Golden Gate’s stake will be in common shares that it can purchase later at $2 each.

Zale closed on a $650 million bank credit line to replace its previous $600 million credit facility. The lead bank was Bank of America , which partnered with General Electric Capital Corp. and Wells Fargo Retail Finance.

It also reached a five-year agreement with TD Financing Services to offer a store-brand credit card to customers of Peoples Jewellers and Mappins Jewellers in Canada starting July 1. Zale still is negotiating with Citibank to reach a similar agreement for its U.S. stores by the end of this month.

When asked about the cost of the deals, Appel said: “This is right in the strike zone and in the sweet spot of what we were expecting.”

Zale announced the restructuring after the stock market closed Monday. Zale shares rose 27 cents, or roughly 10 percent, to close at $3.

The infusion comes at a critical time for Zale. The 1,900-store chain has been losing market share and running short on cash. In January, the company replaced its chief executive and two other top executives. In February, it hired a New York investment banking firm to help it find at least $100 million.

Zale received nearly a dozen offers, CEO Theo Killion said in a conference call with analysts Monday.

With the recapitalization behind it, Zale can focus on inventory, expense and capital management, and invest in Internet sales and restructuring its retail network, Appel said in the call. He also said the company has no plans for asset sales or “significant” store closings.

“The value that Golden Gate brings to Zale is its extensive retail experience,” Appel said. “Its retail experience is well-documented with Express, J. Jill and Eddie Bauer. They’re experienced in multi-channel, Internet-based sales and retail and real estate logistics.”

Golden Gate has been on a recent spending spree in the Dallas area, investing $170 million in Dallas-based window and door maker Atrium Cos . as part of a plan to exit bankruptcy and buying On the Border Mexican Grill & Cantina from Dallas-based Brinker International Inc. It also owns a majority stake in the Romano’s Macaroni Grill chain.

Golden Gate officials didn’t return a phone call Monday.

“This is a great brand with great potential,” Stefan Kaluzny, a managing director at Golden Gate, said in a written statement. “I look forward to partnering with management and supporting the company as its turnaround plan is executed.”

Zale named Golden Gate’s Kaluzny and principal Peter Morrow to its board of directors; existing directors Thomas C. Shull and David M. Szymanski resigned. It also said chairman John B. Lowe Jr. will resign when his term expires at the end of the year.

Analysts on the conference call wanted to know more about the recapitalization’s effect on Zale’s balance sheet.

Zale will see higher interest expense on the Golden Gate loan starting in the fiscal fourth quarter, but it will not take any charges against earnings, Appel said. The loan carries a 15 percent annual interest rate.

Appel said Zale never considered bankruptcy.

“There was never any need for it. It was never on our radar screen,” he said. “Business is performing better.”

Zale posted its first quarterly profit in two years in February, helped by a tax benefit and cuts in expenses. Last year, revenue fell 17 percent to $1.78 billion, and Zale closed 187 locations.

The company is scheduled to report earnings for the quarter ended in April later this month.

By SHERYL JEAN / The Dallas Morning News


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