This summary is based on the third quarter fiscal 2007 earnings call conducted by Zale Corp. (ZLC: chart) on May 22, 2007.
Key Investors Issues
- EPS were a loss of 6 cents per share compared to a profit of 35 cents per share a year ago.
- There was a net loss was $3.1 million compared to a year-ago profit of $16.8 million.
- Sales decreased 2.9% to $511.9 million from $526.9 million last year.
Third Quarter Highlights
The company announced a net loss of $3.1 million or 6 cents per share.
This loss includes, on an after-tax basis, a reduction of $6.9 million, or 14 cents per share due to the decline in revenue recognized from the change to a lifetime jewelry protection plan and a benefit of $1.6 million, or 3 cents per share for the net impact of derivative versus hedge accounting on its gold and silver contracts. Excluding these items, the company reported earnings of $2.2 million, or 5 cents per share.
For the same period last year, the company reported net earnings of $16.8 million, or 35 cents per share.
This included, on an after-tax basis, a benefit of $8.4 million, or 17 cents per share, resulting from the settlement of certain retirement benefit obligations partially offset by) a charge for severance of $2.2 million, or 4 cents per share and a charge of $0.9 million, or 2 cents per share, related to the closing of certain Bailey Banks & Biddle locations. Excluding these items, third quarter earnings in 2006 amounted to $11.6 million, or 24 cents per share.
Revenues were $511.9 million compared to $526.9 million last year, a decrease of 2.9%.
- Revenues recognized were $8.7 million or 1.7% less than prior year as a result of the change made in the method of amortizing jewelry protection plan sales.
- Comparable store sales for the third quarter decreased 3.4%.
The Zales brand had a mid single-digit comparable store sales decrease, due to a decline in number of transactions offset by an increase in average ticket.
This is consistent with the decline in overall mall traffic and similar to the high single-digit decline in number of transactions for other mall-based moderate brands. While the Gordon’s brand had a mid single-digit comparable store sales decrease, the company is encouraged by a positive trend post Easter, due to the arrival of improved assortments in bridal and diamond fashion. Gordon’s experienced a nice pick-up in gross margins as a result of a less promotional customer appreciation event and better coordination with the Zales brand. Gordon experienced a mid single-digit decline in comparable store sales driven by a high single-digit decline in number of transactions offset by an increase in average ticket.
Gold represents 75% of the drop in sales due in large part to consumer resistance to price increases in gold chains as a result of rising commodity costs.
The company had taken steps to increase the number of units in mid-price point chains, $59 to $199 and testing new diamond product as well. Bailey Banks & Biddle had a low single-digit comparable store sales decrease, driven entirely by a decline in average ticket. This trend has since reversed and the company is seeing good results from the new I1 solitaire program, as well as continuing strength in designer and diamond watches.
Outlet comparable store sales were essentially flat although gross margin dollars and operating earnings increased as a result of improved margin rate and mix.
A decline in number of transactions was entirely offset by an increase in average ticket. The change in average ticket is due primarily to fewer transactions under $500 and increasing sales of higher ticket products. The company continues to see particular strength in the power center stores as well as new stores that are performing substantially above plan.
Gross margin rate increased 50 basis points over last year due to direct inputting of diamond fashion and the elimination of the Canadian excise tax.
The company closed two-thirds of the Peoples II carts. The remainder of the carts will close by the end of the fiscal year. Dot Com. sales were up over 50% versus last year. Traffic was up 20% and conversion was up 30%. During April the company launched Gordon’s website and it converted to a pick-from-one-bin in the DC, resulting in a strong pick-up due to access to all brands used.
- The company generated an incremental $10 million in cash from the lifetime jewelry protection plan.
The company tested various pricing and promotion strategies at sales and it sees some opportunities for changes during the fourth quarter as the company goes into the new fiscal year and looks to optimize the gross margin dollars.
