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Anything Under Zale's Tree?

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The Christmas season may not have come soon enough for the folks at Zale Corp. Plagued by the recession, mounting losses, and a heavy debt load, the world's largest retail jewelry chain is facing a cash crunch and scrambling to find an 11th-hour solution to avoid bankruptcy. Without hearty Christmas sales, it hardly stands a chance.

Even that glittering possibility -- slim as it is -- may only forestall a painful overhaul of the Irving (Tex.) chain. Zale's second-quarter net loss of $ 85 million has already thrown the company into default on its bank credit lines. And earlier this month, the jeweler missed a $52 million interest payment on its junk bonds. Zale is banking on Christmas sales to pay bondholders by Dec. 31, when a 30-day grace period expires. "If they don't pay, I'll put them in bankruptcy," vows David Glatstein, president of Barre & Co. The Dallas-based securities firm has sold $50 million in Zale bonds, which recently have been trading between 15~ and 40~ on the dollar, and still holds some in inventory.

Zale's holiday gloom is rooted in its hefty $1.2 billion debt load, which stands at a steep 71% of capital. The tab includes about $500 million borrowed in its 1986 Drexel Burnham Lambert Inc.-financed hostile takeover by a joint venture of Peoples Jewellers Ltd. of Toronto and Swarovski International Holding of Switzerland. Peoples and Swarovski each own 47% stakes, and the balance is held by employees. Three years later, Zale, which also owns jewelry chain Bailey, Banks & Biddle, piled on an additional $300 million raised by Drexel to buy top rival Gordon Jewelry Corp.

NO GOLD WATCH. Until recently, Zale's cash flow was strong enough to service the debt. But in a sputtering economy, nervous consumers are forgoing such luxuries as diamonds and gold watches. So far this fiscal year, which started in April, Zale's sales are off more than 8% vs. about 5% for the retail jewelry industry. Last year, Zale reported a $54 million loss, while sales ran about flat at $1.3 billion.

Even if Zale makes the December bond payment, it faces a flood of obligations totaling $230 million over the next six months, most ominously a $ 108 million payment due on outstanding bonds. But it's expected by Barre & Co. analyst Jeffrey B. Middleswart to generate only $90 million in cash flow. Many analysts, such as Raz Kafri of Lehman Brothers, a unit of Shearson Lehman Brothers Inc., believe Zale will have to file for Chapter 11 soon after Christmas, using holiday cash to operate in bankruptcy.

In the spirit of the season, Zale officials remain decidedly upbeat. Charles F. Gill, president of Peoples Jewellers, refuses to acknowledge the possibility of Chapter 11. "This company still has tremendous value, which is best maxi- mized by working together outside of formal proceedings," says Gill, who also serves as assistant to Irving R. Gerstein, chief executive of Zale and Peoples. Gerstein, who did not comment, and his family make up Peoples' principal owners.

Meanwhile, Zale is slashing costs and scrambling to raise cash. It has cut inventory this year by $60 million and capital expenditures by $25 million. Some $80 million worth of accounts receivable are being sold. Also on the auction block are other assets worth $65 million. To date, Zale has raised about $35 million by selling 25 stores, and it plans to unload another 80 of its 2,000 units. It has clinched another $40 million by selling a 5.5% equity stake to employees.

SUGAR DADDY? If those efforts fall short, Zale still has one long shot: a cash infusion from an outsider. Neither Peoples nor Swarovski, which together put up an additional $100 million in 1990, is expected to pour more money into the venture. Zale insists it has "several" prospects after more than a year of searching. Former CEO Donald Zale, whose father founded the company, says he may try his hand again. He has been approached by a group that's interested in investing in Zale, and he is mulling whether to join the group.

For now, the company is concentrat- ing on Christmas. With 40% of its annual revenue at stake, the company is beefing up its sales staff, fine-tuning its merchandise selection, and aggressively targeting customers through direct mail. "The last couple of weeks can make all the difference," says Gill.

Perhaps. But even if Zale gets into 1992 without filing for Chapter 11, it won't have an easy time of it. For beyond its own very pressing financial problems, Zale still has to worry about when the economy will begin growing in earnest again. When consumers return to the mall, diamonds, gold anklets, and such baubles likely won't be priorities for shoppers. Instead, they figure to be spending more time prowling for wardrobe staples. Heck, what was it President Bush picked up the last time he hit a mall? Socks.Stephanie Anderson Forest in Dallas

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