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Zale Earnings Call, Fourth Quarter 2008
Author: Maclintosh Kuhlengisa
Last Update: 6:45 AM ET September 04 2008


The specialty jewelry retailer reported a loss of $4.9 million or 15 cents a share, down from income of $700,000 or 1 cent a share in 2007 despite a 6% increase in sales to $456 million. The lower earnings position was driven by lower margins. To improve performance over the current fiscal year and beyond, Zale is concentrating on improving customer focus, enhancing operational effectiveness and maintaining financial discipline.

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This summary is based on the fourth quarter fiscal 2008 earnings call conducted by Zale Corp. (ZLC) on August 28, 2008.


- President & CEO: Neal Goldberg
- EVP, CAO & CFO: Rodney Carter
- VP & Treasurer: David Sternblitz

Key Investors Issues

- Revenues were $456 million compared to $430 million last year, an increase of 6.1%.
- Net loss was $4.9 million or 15 cents per share, down from net income of $700,000 or 1 cents in earnings per diluted share in 2007.
- The firm repurchased approximately 3.9 million shares for $80.4 million.

Full Year Highlights:

- Revenues were $2.14 billion compared to $2.15 billion last year, a decrease of 0.7%.
- Net income was $10.8 million or 25 cents per diluted share, down 82% from $59.3 million or $1.21 per diluted share last year.
- The firm repurchased 36% of shares outstanding for a total of $327 million at an average price of $18.59.

Fourth Quarter Highlights

Comparable store sales increased 6.1% which follows a 5.8% third quarter increase As the clearance strategy represented 20% of sales and drove increased traffic across the entire assortment.

- Total revenues were $456 million compared to $430 million last year, an increase of 6.1% though the average transaction was down slightly at $166 compared to $172 last year.
- The customer continues to respond favorably to the lifetime warranty product and total sales of warranty products increased to $26.2 million compared to $24.7 million in 2007.
- The firm extended the service period for the warranty plan offered to customers from two years to the lifetime of product ownership while simultaneously raising the retail price.

Gross margin was 47.3% of sales versus 53% last year, a reduction of 570 basis points in line with expectations.

- SG&A excluding the cost of insurance operations was 47.2% versus 50.6% last year as a percentage of revenue.
- SG&A includes a $12.6 million benefit from the release of a vacation accrual; of the benefit $11 million represents an accounting change in the liability and not an ongoing save.
- This loss includes the gain of $12.6 million related to the change in vacation policy and other income is a $3.5 million gain on the sale of an unproductive asset which generated additional cash for reinvestment.

Net loss was $4.9 million or 15 cents per share, down from net income of $700,000 or 1 cents in earnings per diluted share in 2007 as results were negatively impacted by a lower margin.

- The company ended the year with 2,135 locations consisting of 1.396 stores and 739 kiosks.
- It closed 48 stores while opening 43 for a net reduction of five and closed 58 kiosks and opened four.
- The firm repurchased $80.4 million or 3.9 million shares during the period.
- At July 31, borrowings amounted to $326 million under the line of credit compared to $227 million last year and it had $66 million in cash compared to $38 million last year.

Strategic Thoughts:

- The firm captured market share with its second straight quarter of 6% comp increases, demonstrating continued ability to drive traffic and acquire new customers in a tough environment.
- Zale is focused on a new plan which centers on leveraging strength as the major value player in the jewelry industry.
- The plan consists of three parts; reengaging the core customer, enhancing operational effectiveness and maintaining financial rigor.
- The focus on the core customer centers on merchandise, marketing and the establishment of the pacesetter store, with a strategy targeted at a $100 million reduction in inventory.

This planned $100 million permanent reduction along with a 40% reduction in SKUs is critical in creating a cleaner statement and making it easier for customers to shop.

- The success of the clearance strategy also allows the firm to reposition its assortment that much faster with additional investment.
- The new product will further highlight the good, better, best differentiation with less inventory cluttering the cases.
- The firm designed marketing campaigns that elevate emotion and resonate more strongly with the customer.
- Direct marketing and catalogues reflect the brand positioning, tie into the emotion of jewelry and are more focused with less items per page.

Besides enhancements being made such as LED lighting and new carpet, the firm also increased the diamond and customer service education for associates in these stores.

- Within the new organizational structure, the firm has strengthened the distinct roles of the merchandising and sourcing organizations.
- It has reduced the vendor base by two-thirds since the beginning of this process and by partnering with select vendors it is giving them more timely purchase orders, with longer lead times, further supporting the initiative to receive better quality product and improved cost efficiencies.
- To ensure new standards are being met the quality assurance team is carrying out inspections earlier in the process entailing doing pre-inspections in factories as well as monitoring the production process.
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Sources: Data collected by and from company press releases, filings and corporate websites.
Market data: BATS Exchange. Inc.

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