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Market Developments

Zale ‘sets the record straight’ on Signet deal

By Michelle Graff

May 20, 2014

Dallas--TIG Advisors LLC are “short-term opportunists” who are spreading inaccurate information about the proposed Signet-Zale merger and misrepresenting the facts, Zale Corp. has said in a letter designed to “set the record straight” regarding the deal.

Made public Tuesday morning, the letter outlined eight assertions made by TIG and then presented “the facts,” with Zale noting that TIG’s recent communications regarding the merger “exemplify TIG’s approach to this investment as short-term opportunists who are clearly ignoring the risks they are imposing on Zale’s long-term stockholders.”  

Sent from Terry Burman, Zale’s chairman of its board of directors, to Drew Figdor, portfolio manager at TIG Advisors, the letter begins by stating that TIG’s valuation analysis of the proposed merger with Signet Jewelers Ltd. is flawed and that the $21 cash-per-share consideration “represents immediate and certain value for the company’s stockholders.”

Burman noted that the board “weighed the uncertainties associated with executing the continued turnaround of Zale in a difficult macroeconomic climate and highly competitive retail environment,” when deciding to merge with Signet.

His letter goes on to counter other claims made by TIG Advisors, including that the sale process was replete with conflicts of interests and that the $21-per-share price was based on “stale financial forecasts.” It notes that Zale’s forecast for fiscal year 2014 included in its three-year business plan was revised down following lower-than-expected sales in the first two quarters and that this is the information used when the board evaluated the Signet deal.

“Contrary to being ‘stale’ the three-year business plan and the financial results that were reviewed by the board and made available to its financial advisor when evaluating the $21.00 offer price represented the most up-to-date information available,” the letter states.

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Burman ended the letter, the latest in a series of exchanges between Zale and TIG Advisors, by again urging shareholders to vote for the merger with Signet. The full text of the letter can be read on the Zale Corp. website.

Zale released the letter Tuesday morning in conjunction with its fiscal third quarter results.

Same-store sales increased 2 percent on a constant exchange rate basis (0.6 percent on a U.S. dollar reported basis) in the period while total sales fell 3 percent, from $442.7 million to $431.0 million. Zale said the decline in total sales was attributable to the closing of 78 stores and a decline in the Canadian exchange rate.

Gross margin on sales rose from 52.6 percent to 56.0 percent due to more favorable commodity costs, fewer markdowns and the company’s sourcing initiatives.

Net earnings increased from $5.1 million to $8.8 million.

In the U.S., Zales/Zales Outlet outperformed the chain’s other stores, posting a 2 percent increase in same-store sales at constant exchange rates, compared with a 0.4 percent increase for Gordon’s and a 0.1 percent decline for Piercing Pagoda.

In Canada, Peoples reported a 5 percent increase in same-store sales while comps for Mappins fell 3 percent. All same-store sales include sales from the associated e-commerce businesses.

Zale did not hold a conference call to discuss its third quarter results.

Based in Dallas, Zale operates a total of 1,629 jewelry stores in the United States and Canada as of April 30, down from 1,707 a year ago.