Zale Receives 3rd Citibank Termination Notice, to Pay Compensation

Zale Corporation received on July 19 a third termination notice from its private label credit card provider Citibank for failure to meet a minimum volume of transactions. To avoid termination of its Merchant Services Agreement, Zale will be required to pay Citibank approximately $335,000 by August 18.

The notices are an indication that Zale clients in the U.S. and Canada are limiting their use of the Zale credit cards and by extension, decreasing their purchases from the jewelry retailer.

Two of the company's subsidiaries have a Merchant Services Agreement with Citibank to provide private label credit cards. If the volume of credit card sales does not meet agreed-upon levels, Citibank is entitled to terminate the Agreement on 180 days notice. Zale may avoid that termination by compensating Citibank for the shortfall.

The first notice, for the year ending February 2010, cost Zale $4.1 million. The second notice, covering the March-April period of 2010, cost the company another $1.1 million.

If Zale fails to pay the latest compensation, the agreement with Citibank will end on January 15, 2011.

Even if Zale does not make this last payment, two months later the agreement with Citibank is scheduled to end. 

“All terminations are subject to the parties' obligation to continue to perform under the Agreement for up to an additional 365 days in order to facilitate the transition to a new provider of private label credit cards,” Zale said in a SEC filing, adding that the sides are continuing negotiations on a new agreement on a non-exclusive basis.