Zale Sales Down 17.9%

Jewelry retailer Zale Corp. reported Wednesday that revenues for the second quarter of fiscal 2009 declined 17.9 percent year-over-year to $679 million and same-store sales for the period decreased 18.1 percent. The company also unveiled the second phase of a cost savings and inventory reduction plan that it says will result in an additional $140 million in savings.

Total warranty sales for the quarter were $36 million, compared to $43 million in the prior year. Adjusted for total warranty sales and other special items, the net earnings from continuing operations was $19.1 million, compared to net earnings from continuing operations of $72.6 million for the comparable quarter in fiscal 2008.

The Dallas-based company also reported a loss from continuing operations of $23.6 million for the second quarter ended Jan. 31.

The loss includes approximately, on an after-tax basis:
* Charges related to store impairments of $5 million;
* Charges related to goodwill impairments of $5.0 million, or $0.16 per share; and
* An $18.6 million charge, related to a valuation reserve on foreign tax credits resulting from its decision to revoke its election under Accounting Principles Board No. 23, “Accounting for Income Taxes – Special Areas.”

Excluding these charges, earnings for the second quarter were $5.1 million, Earnings from continuing operations for the prior year period was $52.7 million, or $1.16 per share, the company said.

“Our operating results were negatively impacted by the extremely weak macro-economic environment,” said Neal Goldberg, Zale Corp. chief executive officer. “Additionally, in response to the continued deterioration in the business, we aggressively promoted store-wide discounts during our holiday sales season. We believe these discounts decreased gross margin by approximately 500 basis points.”

Goldberg continued, “We have identified key factors to improve our results. Immediately following Christmas, we returned to a strategy that emphasized emotion with a promotional posture that is item-specific. The result has been more normalized 50 percent plus merchandise margins, along with comparable store sales improvement since the trends at holiday. These comparable store sales and margin improvements have held from January through the Valentine’s Day selling period. Furthermore, we have identified additional inventory and expenses to drive out of the business. The plan will phase in savings intended to rationalize the size and scale of the organization to sales trends.”

The first phase of the company’s cost reduction plan, which began this month, identified $175 million in inventory and cost reductions. In the next phase announced Wednesday, the company has identified $140 million in additional inventory and cost reductions, consisting of the following:
• Approximately $34 million in SG&A through fiscal 2010 from the closure of approximately 115 underperforming stores at lease maturity;
• $21 million in savings from staff reductions throughout the organization. The staff reductions occurred in February 2009 and included 245 associate positions, of which approximately 75 were open positions;
• $10 million through store-level and in-store efficiencies, bringing the estimated total cost savings to $65 million; and
• An additional $75 million in inventory reductions from increased productivity through fiscal 2010.

Zale said it will continue its focus on “financial rigor and liquidity during the current economic environment.”

Merchandise inventories as of Jan. 31were approximately $100 million lower than the prior year. This month, Zale said its Canadian and Puerto Rican assets were added to the company’s $500 million asset-backed credit facility to increase collateral under the facility.

“The company will look aggressively for further opportunities to operate the business more effectively while maintaining the financial disciplines to drive value for shareholders over the long-term,” Zale said in its statement.

Zale Corp. is a leading specialty retailer of diamonds and other jewelry products in North America, operating more than 2,080 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.