The Irving, Texas, jeweler, which operates 2,300 jewelry stores in malls and outlets in the United States, Canada and Puerto Rico, is trying to get back to its roots: Selling affordable jewelry to the average American mall shopper.

The company tried going upmarket a couple of years ago but failed. Tiffany & Co. might be able to sell flawless pink diamonds surrounded by 102 hand-set round diamonds, but Zales didn't quite have the same polish.

Recently, three hedge funds _ Citadel Investment Group, SAC Capital Advisors LLC and Breeden Partners _ bought more than 18 percent of Zale's stock and talked to management about its strategy. The funds think the stock is undervalued and the company's capable of generating good cash flow, though much depends on Zale's success in the upcoming holiday season.

"If you take it in a bigger picture, mall traffic has been declining well over a year, gas prices are up 20 percent ... People are nervous about the job market and mortgage rates adjustments," said KeyBanc Capital Markets analyst Jeffrey Stein.

That consumer sentiment hasn't helped the stock, which is trading around $23, valuing the company at $1.1 billion. Shares hit a year low of $19.89 on Aug. 28, well below the 52-week high of $31.72 reached last November.

The company has too much inventory and has lost its market-leading position to British jeweler Signet Group PLC, the operator of U.S. store Kay Jewelers. The company also has several store brands _ Zales, Gordon's, Zales Outlet, Peoples Jewelers and Mappins Jewelers _ which complicates plotting a broad, cohesive strategy.

History also isn't on Zale's side. Between 2002 and 2005, Chief Executive Mary Forte tried to introduce silver and gold high-fashion jewelry to compete with the likes of Tiffany. Consumers weren't having it. Holiday sales suffered and Forte, among others, was forced to quit.

Zale's vice president and treasurer, David Sternblitz, says the company aims to keep only brands that meet or exceed corporate average returns. He declined to discuss any potential asset sales, but with high-end business Bailey Banks & Biddle already sold, another candidate could be kiosk brand Piercing Pagoda, which some say doesn't fit the company's new portfolio revisions.

In August, Zale said fourth-quarter sales at stores open at least a year fell 0.5 percent. It's pledging net income of between $1.11 to $1.16 a share for its fiscal year ending July 2008, down from the $1.21 a share, or $59.3 million, the company earned in its 2007 fiscal year, including items. Revenue for the year was flat at $2.44 billion.

The stock got a lift in August when Zale shook up its senior ranks, cutting various brand president posts. It appointed Steve Lang to group senior vice president to centralize merchandising and is looking for a chief operating officer.

Two other factors may prop up the stock for a while yet: the whiff of a deal _ Signet Group pushed for talks with Zale in the spring of 2006 _ and the presence of those three hedge funds.

It isn't clear exactly what the hedge fund investors might press Chief Executive Mary "Betsy" Burton to change. Since the beginning of September, Citadel, SAC Capital and Breeden Partners have each reported a stake more than 5 percent in the company _ and altogether the funds reported holding more than $125 million in Zale stock at current values.

Breeden Partners, run by former Securities and Exchange Commission Chairman Richard Breeden, reported holding 3.8 million shares for a 7.72 percent stake in Zale. The firm has a history of activism, and last month persuaded shareholders at H&R Block Inc. to unseat three board members in favor of three Breeden Partners nominees, signaling support for Breeden's proposal to streamline the company.

Spokesmen for Breeden Partners and SAC Capital declined to comment on their firms' investments in Zale. Citadel representatives didn't return calls for comment.

Zale executives said an unspecified new product line will be launched in time for the holidays. The company is reissuing the popular "Journey" diamond pendant, which rival De Beers sells versions of at higher prices.

Management also wants to whittle down its $50 million inventory, part of which is discounted jewelry, by offering more price cuts in stores and online during the holiday season. That inventory has grown almost every quarter as its high-priced counterparts have failed to attract customers.