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Zale Could Shrink More After it Merges with Rival Signet Jewelers

Real Estate Optimization Called Critical to Future Productivity
February 21, 2014
Signet Jewelers Ltd., the largest specialty retail jeweler in the U.S., plans to acquire rival retailer jeweler Zale Corp. for about $690 million.

With about an equal number of retail outlets in the U.S., the acquisition strengthens Bermuda-based Signet’s omni-channel presence with some of the most recognizable jewelry store brands in the world, each operating as stand-alone brands including: Kay Jewelers, Jared The Galleria of Jewelry, H.Samuel, Ernest Jones, Zales, and Peoples.

However, in the short term the merger likely means a continued shrinking of Zale’s stores. Since 2009, Zale has reduced its number of stores by more than 180 stores; as of Sept. 30, 2013, Zale operated 1,064 stores.

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Signet, on the other hand, has been expanding, adding about 300,000 square feet in the last three years.

“The real estate portfolio is key to any retailer. Over the past three years Zale’s has undertaken the closure of a significant portion of its low performing stores and significantly improved productivity per store,” said Ron Ristau, Signet’s CFO. “Portfolio optimization remains critical to enhancing future sales productivity and allowing management to focus on high-quality real estate locations. This activity will continue.”

“Once the business model further stabilizes we believe real estate expansion will again be possible,” Ristau added. “We are committed to driving productivity via a number of initiatives.”

Zale currently leases a 430,000-square-foot facility, which serves as its corporate headquarters and primary distribution facility. The lease for this facility extends through March 2018. The facility is in Las Colinas, a planned business development in Irving, TX, near the Dallas/Fort Worth International Airport.

Zale currently leases 21% of its store and kiosk locations from Simon Property Group and 11% from General Growth Properties.

Signet Jeweler also leases a significant portion of its stores from Simon Property Group, 18% of its 2.62 million square feet of selling space.

Its head office in the U.S. is in a 340,000- square-foot office and distribution facility in Akron, OH. That lease extends through 2032. It also leases an 86,000-square-foot office building next door to the head office, also leased through 2032. It also owns a 39,000-square-foot repair center in Akron,

Signet expects to finance the acquisition through bank debt, other debt financing and the securitization of a significant portion of Signet’s accounts receivable portfolio.

The transaction is subject to Zale stockholder approval, certain regulatory approvals and customary closing conditions.

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