This summary is based on the first quarter earnings call conducted by Zale Corp. (ZLC) on November 25, 2008.
Management:
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President & CEO: Neal Goldberg
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VP & Treasurer: David Sternblitz
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EVP, CAO & CFO: Rodney Carter
Key Investors Issues
- Total revenues were $364 million compared to $377 million for the prior year, a decrease of 3.5%.
- The firm realised an operating loss of $45.3 million or $1.43 per share compared to $26.7 million or 54 cents per share last year.
First Quarter Highlights
Comp stores sales decreased 3.7%, resulting in total revenues of $364 million compared to $377 million for the prior year, a decrease of 3.5%, despite a 2% increase in the average transaction.
- The reported revenue reflects $1.9 million increase in the recognized warranty revenues.
- Total sales of warranty products were $21 million compared to $24 million in 2008 with the attachment rate slightly down at 55% compared to 58%.
- The net change in unrecognized revenues was $5.4 million compared to $14 million last year, including a $3.8 million reduction to prior year’s unrecognized Canadian revenues reflected at a lower exchange rate.
- Gross margin was 48.5% of sales versus 52.5% last year, a reduction of 400 basis points, reflecting the continuation of the clearance strategy through September.
Merchandise inventory on October 21, 2008 was $985 million versus $1 billion last year due to holiday merchandise receipts brought in earlier this year.
- SG&A was approximately $219 million, essentially flat compared to the prior year and as a percent of sales SG&A was 60.2% versus 58.2% last year primarily due to the de-leverage resulting from decline in total revenue.
– The firm realised an operating loss of $45.3 million or $1.43 per share compared to $26.7 million or 54 cents per share last year, with the decrease due primarily to a higher expenses and weaker margins.
- Zale ended the quarter with 1,399 stores and 731 kiosks, opened six stores, retrofit approximately 135 stores with LED lighting and other physical improvements and closed three stores and eight kiosks.
The firm reiterated that is not shuttering the Piercing Pagoda brand and that Pagoda has been one of the strongest performers.
- Borrowings were $369 million under the line of credit, approximately $71 million higher than the prior year primarily due to the acceleration of inventory receipts.
- The firm had $39 million in cash at quarter end compared to $31 million last year.
Operational Initiatives:
- To re-engage the core customer, the firm is recognizing an improved customer experience through better merchandise presentation and selection through the aggressive clearance program.
- It liquidated a total of $174 million in excess merchandise including $47 million in the first quarter, with $100 million of this liquidation a permanent reduction.
- To improve the customer experience, the firm re-designed its case elements, adding color to capture the look and feel of the season and reduced in-store signage to streamline and focus the message.
- Additionally, the success of the clearance strategy not only helped clear the cases of clutter in order to highlight the good, better, best differentiation, but allowed the firm to reposition the assortment by injecting fresh, distinctive merchandising.
There were additional investments in diamond fashion categories and in a narrower assortment of fresh fashion product including exclusives such as Hello Kitty.
- The pay setter program has been fully operational since the month of October and has out performed the rest of the fleet by approximately 6 percentage points.
- The elimination of branch silos and numerous redundancies have resulted in a more nimble, quick and agile company.
Zale has reduced its vendor base by 2/3 and will continue to partner with vendors who are focused on best quality, best cost and best delivery.
- It has also improved communication to and from stores, integrated calendar involving merchandising, source and marketing that adds process to the entire produce life cycle from concept to store delivery, resulting in more timely orders and improved pricing.
- In maintaining financial rigor and discipline, the firm has identified an additional $10 million in expense savings bringing the total program to $75 million plus and will be relentless in looking for additional opportunities.
Key questions and answers from the first quarter earnings call conducted by Zale Corp. (ZLC) on November 25, 2008.
Lorraine Maikis (Merrill Lynch):
Can you talk about what the increase in SG&A dollars was that was partially offset by the cost reduction plan and what we should expect for the rest of the year?
Neal Goldberg: SG&A initiative we had talked about last year was described in the form of a run rate reduction. We had normal escalation in terms of rent inflationary increases and store payroll increases.
This is really driven by a variety of overall savings. The restructuring we had previously announced in terms of the alignment of brands, both field management and support center management, marketing, administrative, SG&A costs, inventory, interest expense savings from the programs that we had initiated in terms of inventory reductions.
