This is a summary of the second quarter fiscal 2009 earnings call as presented by Zale Corp. (ZLC) on February 25, 2009
Management:
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Vice President and Treasurer: David Sternblitz
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President and Chief Executive Officer: Neal L. Goldberg
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Interim Chief Financial Officer, Senior Vice President and Controller: Cynthia T. Gordon
Key investors Issues
- Zale Corporation reported a net loss from continuing operations of $23.6 million, or 74 cents per share
- The first phase of the Company''s cost reduction plan, which began in February of 2008, identified $175 million in inventory and cost reductions.
- Revenues were $679 million, compared to $828 million in the prior period, a decrease of 17.9%.
Second Quarter Highlights
Comparable stores sales decreased 18.1% and gross margins declined 530 basis points from the same period last year.
- A portion of this deterioration was the direct results of an aggressive promotional stance.
Originally, the firm’s strategy emphasized emotion and item specific promotions.
- As Christmas drew closer, it was clear that the deteriorating retail environment was not going to improve and the firm adjusted its strategy to emphasize store-wide discounts and more urgent calls to action.
- Because of these changes, Zale Corporation lost approximately 500 basis points in margin and negatively impacted comp store sales.
Immediately following Christmas, the firm returned back to a strategy that emphasized emotion with a promotional posture that is item specific.
- The result has been more normalized 50% plus margins along with comparable store sales improvement to trend. These comp and margin improvements have held from January through the Valentine''s Day selling period.
- All three of the objectives are important in the current environment, when maintaining financial rigor and discipline and enhancing operational effectiveness or paramount.
The first phase of the company''s cost reduction plan, which began in February, 2008 identified $175 million in inventory and cost reductions.
- In the next phase, the company has identified a $140 million in addition of inventory and cost reductions.
- It is continuing to aggressively look for efficiencies, as well as bring the expense structure inline with current business.
- As part of the cost reductions announced today, the firm eliminated a number of positions primarily in Dallas.
The clearance strategy addressed cluttered cases and inventories $100 million below last year.
- Inventory is expected to be approximately $715 million at year end, reduction of $65 million compared to last year on top of the $100 million reduction from July 2007.
- The Canadian and Puerto Rican assets have been added as collaterals to the asset-backed credit facility. This additional collateral under the credit facility enhances the firm''s flexibility.
- CapEx is expected to be approximately $30 million, which is a 65% reduction over last year. Operational effectiveness continues to be an important focus, and some of the down payments in that area are starting to bear fruit.
The firm has taken actions to reduce a number of vendors by two-thirds since the beginning of 2008.
- To enhance technology in the distribution center, Zale Corporation has created a more efficient replenishment process along real-time adjustments to sales trends, and improvements in in-stock rates which supports the inventory productivity initiative.
- These changes have led to improved customer satisfaction and increased efficiency throughout the business.
- Additionally, the field organization is moving regional directors to live in their respective markets. This will foster more in-depth geographic expertise, efficient training, and communication and improvements in store execution.
Total revenues were $679 million compared to $828 million for the prior year, a decrease of 17.9% for the second quarter.
- The average transaction, excluding the impact of the Canadian exchange rate was relatively flat compared to last year. However, transaction counts were consistent with the comparable store sales result.
- The reported revenue reflects a $2.5 million increase in recognized warranty revenues.
- These increases should continue as products accounting normalizes over the next three to four years, and revenues recognized more closely reflect actual warranty sales.
Total sales of warranty products were 36 million in the second quarter of 2009 compared to 43 million in 2008
- This was a 16% decrease, inline with the total revenue decline as the attachment rate remains flat at 47%.
- The net change in unrecognized revenues was $23 million compared to $33 million last year.
- This includes a $4 million reduction in the balance of unrecognized revenues at January 2009 related to a lower exchange rate.
- The net change in unrecognized revenues represents both the incremental cash and a positive impact on future earnings.
