Zale Sales Up, Earnings Down

Zale Corp., reported Thursday that fourth quarter revenues rose 6.1 percent to $456 million. Same-store sales also rose 6.1 percent for the period, ended July 31.

The Dallas-based specialty retailer of fine jewelry reported a net loss from continuing operations for the period of $4.9 million.

The loss included a benefit associated with the release of a vacation accrual of $7.7 million, net of taxes, and a gain on the sale of an unproductive asset of $3.5 million. The earnings for the fourth quarter of fiscal 2007 included a benefit of $1.1 million, for the net impact of derivative versus hedge accounting on the company’s gold and silver contracts and a net tax benefit of $6.7 million primarily related to a decision to indefinitely reinvest certain undistributed foreign earnings.

“In the fourth quarter, we exceeded our expectations for sales, earnings and inventory reduction,” said Neal Goldberg, chief executive officer. “We sustained the strong momentum we achieved in our third quarter as we made improvements to our core assortment and executed our clearance strategy, driving our second straight quarterly comp store increase of approximately 6 percent. This demonstrates our ability to continue to drive traffic and capture market share in a tough environment.”

The company said it repurchased approximately 3.9 million shares during the fourth quarter. Shares outstanding were approximately 32 million at July 31.

For the full fiscal year of 2008, ended July 31, Zale said revenues fell 0.7 percent to $2.14 billion. Same-store sales for the period decreased 0.7 percent.

Earnings from continuing operations for the twelve months ended July 31 were $3.7 million, compared to earnings of $48.1 million, for the twelve months ended July 31, 2007.

The company said that it repurchased approximately 17.6 million in fiscal 2008 at an average price of $18.59. This represents approximately $327 million of the $350 million stock repurchase authorization – a 36 percent reduction in actual shares in fiscal 2008.

“After a challenging start to fiscal 2008, which included a disappointing holiday season, we executed a focused agenda with clear objectives,” Goldberg said. “To improve performance over the current fiscal year and beyond, we are concentrating on improving our customer focus, enhancing operational effectiveness and maintaining financial discipline. Specific actions we are taking to achieve these objectives include differentiating our product offering by simplifying and focusing our assortment; streamlining the organization to eliminate redundancies; realizing $65 plus million in ongoing annualized savings; and permanently reducing $100 million in inventory. We believe, given the progress made against our initiatives, that we are well-positioned as we enter the new fiscal year.”

The company said it extended the service period covered under its warranty program from two years to the lifetime of product ownership in 2007. As a result, revenues are now recognized on a straight-line basis over five years as opposed to the previous pro rata recognition based on the timing of the related servicing costs. As the accounting for total warranty sales continue to normalize over the next three to four years, the company expects recognized revenues to continue to increase and trend more closely to actual total warranty sales.

For the fourth quarter, total warranty sales increased 6 percent to $26.2 million, compared to $24.7 million the prior year. For the quarter ending July 31, 2008 and 2007, revenue recognized was $11.1 million and $9.2 million while deferred revenue grew $15.1 million and $15.5 million, respectively.

For the year ending July 31, 2008, total warranty sales increased 12 percent to $120.8 million, compared to $107.9 million the prior year. For the year ending July 31, 2008 and 2007, revenue recognized was $41.6 million and $45.2 million while deferred revenue grew $79.2 million and $62.7 million, respectively.

In its fiscal 2009 outlook, Zale said same-store sales will be in the range of negative 1 percent or flat. The number of stores the company operates will be slightly down from 2008, keeping in line its plan to reduce capital spending.

The company said it expects approximately $120 million in total warranty sales. Total revenue recognized from warranty sales is expected to be $55 million for fiscal 2009, which includes $15 million from 2009 sales plus $40 million from sales made in 2007 and 2008.

Revenue adjusted for total warranty sales includes approximately $65 million in additional deferred revenue.

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