Zale Corp. on Thursday reported that second-quarter earnings fell 31 percent to $52.7 million year-over-year, which included a $2.5 million, positive impact related to derivative accounting treatment for the company’s gold and silver contracts.

Total revenues for the period, ended Jan. 31, for the Dallas-based company were $828 million, compared to $892 million in the prior year, a decrease of 7.2 percent. Same-store sales fell 7.3 percent.

“While these second quarter results are disappointing, I am convinced that Zale has a strong basis for improved performance as we again provide our value-oriented customer with an exceptional experience,” said Neal Goldberg, Zale president and chief executive officer.

“We intend to make Zale into a more nimble and efficient organization,” he added. “We remain focused on the generation of free cash flow, achieving a high return on capital and maintaining financial rigor and discipline overall. Our first step is a reduction of $100 million in excess inventory. We have conducted a detailed review by category and item and believe this product can be sold at a profit. Through fiscal 2008 we expect a negative impact on gross margin of approximately 500 basis points which is expected to be more than offset by the positive impact of the inventory reduction on free cash flow. Although we plan to make some selective investments, this $100 million reduction is not intended to be replenished. These actions are designed to ensure Zale’s success and generate value for shareholders over the long-term.”

Other highlights of the second quarter include:

• Unrecognized revenues related to warranty sales increased $33 million. This compares to an increase in unrecognized revenue of $30 million in the second quarter of last year.

• Retired 5.8 million shares during the second quarter. Anticipate retiring approximately 11 million shares in total once share repurchase program is completed.
First Half of 2008

• Total revenues for the six months ended Jan. 31, were $1.2 billion compared to $1.27 billion last year, a decrease of 5.4 percent

• Comparable store sales for the six-month period decreased 5.1 percent

• Unrecognized revenue related to warranty sales increased $47 million. This compares to an increase in unrecognized revenue of $29 million for the prior six-month period.

• Earnings from continuing operations for the six-month period were $26 million, compared to $52.4 million, for the prior six month period, which included a $2.3 million negative impact related to derivative accounting treatment for the company’s gold and silver contracts.

Zale Corp. is a leading specialty retailer of fine jewelry in North America, operating over 2,150 retail locations throughout the United States, Canada, and Puerto Rico, as well as online. Zale Corp’s brands include Zales Jewelers, Zales Outlet, Gordon’s Jewelers, Peoples Jewellers, Mappins Jewellers and Piercing Pagoda. Zale also operates online at www.zales.com and www.gordonsjewelers.com.

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