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Zale Still Sparkles Despite Slowdown; Emulex a Dizzying Ride

Stock Exchange lets readers listen in as Times staff writers James Peltz and Michael Hiltzik debate merits of individual stocks.


Zale (ZLC) Jim: Buy

Mike: Buy


Jim: Our two stocks today both got knocked silly recently, Mike, which no doubt prompts many investors to wonder whether the shares might now be a buy on the premise that the bad news is out of the way.

Mike: Except that these situations always beg the question: Is the bad news really out of the way? Sometimes bad news begets more bad news.

Jim: Where there's smoke there's fire.

Mike: Or a smoke-making machine. Anyway, at Zale Corp.--started by the Zale family in 1924 and now the nation's largest jewelry retailer--the news was twofold: its chief executive, Beryl Raff, resigned after just six months on the job; plus, Zale's sales over the holidays were lousy.

Jim: Not that Zale was alone. Retail sales in general were poor over the holidays, and they were especially bad for purveyors of fine jewelry.

Mike: I think of Zale as the General Motors of the jewelry business, because its 2,300 stores are divided into various brand names that appeal to different markets. Zales itself is the Chevrolet for middle-market customers. . . .

Jim: Incidentally, for all our grammarians out there, it's "Zale" the parent company, but the stores are routinely called "Zales," and even the parent advertises them with that spelling, with no possessive apostrophe.

Mike: That's British usage, by the bye. Now, as for the other Zale names, there's the Gordon's chain, which is like, say, GM's Buick. And if you're feeling really flush and think you're in the Cadillac class, there's Bailey Banks & Biddle Fine Jewelers. Between them Zale probably owns half the jewelry stores in South Coast Plaza.

Jim: And they've all been hurt by the slowing economy. Even the wealthy have cut back, because Tiffany & Co. also had a disappointing fourth quarter of 2000.

Mike: I'm not surprised. We talked about Tiffany a while back and warned that if the economy flattened, it and other sellers of discretionary goods would feel the pinch first.

Jim: OK, so everyone's hurting. But one has to wonder whether the resignation of Raff just a week ago sends up a red flag that there are internal problems unique to Zale.

Mike: Really? According to what I read in the papers, Ms. Raff quit as head of a major jewelry company to devote more time to her family--to drive carpool for her school-age son, things like that. Are you telling me you don't buy that?

Jim: Let's just say I figure there's more to the story.

Mike: You, you skeptic.

Jim: Raff was succeeded by the man she had replaced, Robert DiNicola, who won plaudits for taking over the Irving, Texas-based company in 1994 after it emerged from bankruptcy and then turning it into a real money maker.

Mike: You know, I'm always fascinated when a company's board, facing tough times, turns back to the old days--much like the Russian people in the throes of their agony sometimes wish for the return of Stalin. I'm not saying that Mr. DiNicola is Joe Stalin, but clearly the board is hoping he can work his magic again.

Jim: Or at least restore order. Right now, Zale's stock is trading for only 10 times the per-share profit the company is expected to earn in its fiscal year ending July 31.

Mike: Now, on the premise that the stock market has predicted only five of the last 10 recessions but accurately anticipated every one of the economy's last 10 recoveries, I'm inclined to believe this stock will rally before the company and the economy rebound. Therefore I call it a buy.

Jim: Really? Me too. I think the economic slowdown we saw during the holidays was priced into this stock months earlier, which is why Zale shares drifted lower for the last six months of 2000. Yet right after Christmas, the stock was rebounding smartly. . . .

Mike: Until the day Ms. Raff decided that she needed to go home and feed the dog. By the way, in all fairness, it seems Ms. Raff may simply have been in the wrong job. By all accounts she was a superb marketing and sales executive but may not have been cut out to be CEO.

Jim: Right. Now, there's no question this stock would be a speculative buy. Last week, as the firm announced Raff's departure, it also said it would delay the release of its fiscal second-quarter earnings until March 7. That's another red flag.

Nonetheless, I too expect Zale to regain its momentum later this year. And long term, its diversity among different market segments appeals to me.

Mike: Agreed. DiNicola's return also is a positive sign. And with the stock's low price-to-earnings ratio, it's that much cheaper to buy into his proven track record.

Emulex (EMLX)

Jim: Don't Buy

Mike: Buy


Mike: Our second stock today is Emulex. . . .

Jim: Which just can't seem to keep itself out of the papers.

Mike: That's right. This is certainly an exception to the old saw that there's no such thing as bad publicity as long as they spell your name right.

Jim: Emulex is on Harbor Boulevard in Costa Mesa, which puts it not very far geographically from Disneyland.

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