Back in early February, Zale Corporation (ZLC) -- which operates Zales Jewelers -- hired turnaround firm, Peter J. Solomon, to help the retailer deal with its suffocating debt load. Since then, there has been discussions with a variety of private equity firms -- which has stirred-up some rumors along the way.

But this week, Zale got a deal done. Golden Gate Capital, which has much experience in the retail space, has agreed to lend $150 million to the company for a five-year term. This is a secured loan, which also includes warrants to purchase up to 25% in Zale.

Zale also restructured its bank facility with Bank of America (BAC), GE Capital (GE) and Wells Fargo (WFC). Each has committed $125 million.

Next, Zale put together a deal with TD Financing Services to offer a store credit card for its Canadian outlets. As for the U.S., there are continued negotiations with Citibank (C).

Clearly, Zale has worked hard to put these transactions together -- and the result is improved liquidity. Going forward, the company will have more time to focus on its operations, not financial engineering. Yet, there are many challenges facing the jewelry retailer.

Recession Dulls Zale

Zale got its start back in 1924, with a focus on quality merchandise at low prices. It was a smart strategy that led to strong growth over the years.

Now, Zale has six retail brands and roughly 1,900 stores across the U.S. (the focus is mostly in malls). There are also e-commerce sites at zales.com and gordonsjewelers.com.

However, the recession has taken a toll, as has the increasingly competitive environment. The largest retail jeweler in the U.S. is Wal-Mart Stores (WMT), a formidable rival.

Zale posted a miserable 11.2% decline in comparable store sales in the second quarter of fiscal 2010. But the company was still able to produce net earnings of $6.7 million, or $0.21 per share. All in all, Zale has been restructuring its operations over the past year and seems to be gaining traction with its cost-cutting efforts. The company has also closed 187 locations.

Wait and See


While Zale has made progress -- there are signs of improvement in the core business -- it's far from clear if the changes are sustainable. The company will probably need to find more ways to cut costs and reposition its product mix. Moreover, the economic recovery still appears to be tepid.

Besides, Golden Gate got a deal that carries an expensive interest rate of 15%. There's also the overhang of the warrant, which is highly dilutive (the exercise price is $2 per share).

So for investors looking for a value play, there's no rush to get into Zale.

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