Zale's Merchant Credit Extended by A Month

Citibank agreed to give Zale another month to pay the credit company $6 million for a shortfall in jewelry credit sales, the embattled jeweler said on Tuesday. Last year Citibank notified Zale that it does not intend to renew the Merchant Service Agreements, unless it pays the $6 million by April 1.

On Monday, Citibank and Zale agreed to extend the payment deadline to April 30.

In December Citibank notified Zale that it does not intend to renew the Merchant Service Agreements, and it will therefore expire in March 2011. Citibank provides financing to Zale customers in about 40 percent of purchases in Zale's U.S. store and 25 percent of purchases in Canada.

The non-renewal is due to Zale’s failure to maintain a minimum volume of credit sales and a fixed charge coverage ratio. The agreements, however, may be terminated as early as June 2010, unless Zale pays Citibank the $6 million by the end of April.

Zale has already warned the market that based on its cash flow projections for the remainder of 2010, “We may not have sufficient liquidity to meet our operating needs.” 

In a March 11 Securities and Exchange Commission filing, the embattled North American jewelry retailer stated five times that it may not have sufficient funds to meet its operating needs. As a result, it may lose some of its financing.

“As a result [of not having sufficient liquidity], we may not maintain our borrowing availability above $50 million, which would require us to satisfy a minimum fixed charge coverage ratio that we currently do not meet. This covenant violation would allow our lenders to exercise their rights with respect to the collateral securing our revolving credit facility, which includes our merchandise inventory and credit card receivables. In addition, our revolving credit facility expires in August 2011,” Zale stated in its March 11 Securities and Exchange Commission filing.