Zale Turns a Profit in 4th Quarter

Zale Corp. on Thursday reported net earnings of $1.5 million for its fourth quarter ended July 31.

Earnings for the quarter included an after-tax reduction of $6.3 million due to the delay in revenue recognized from the change to a lifetime jewelry protection plan, a benefit of $1.1 million, for the net impact of derivative versus hedge accounting on its gold and silver contracts, and a net tax benefit of $6.7 million primarily related to its decision to indefinitely reinvest certain undistributed foreign earnings. Excluding these items, the company reported earnings of $20,000.

For the same period last year, the specialty jewelry retailer reported a net loss of $27.4 million.

Revenues for the fourth quarter were $488 million for the Dallas-based company, compared to $491 million last year, a decrease of 0.5 percent. Revenues recognized were $7.5 million or 1.5 percent less than the prior year as a result of the change made in the method of amortizing jewelry protection plan sales. Same-store sales for the fourth quarter decreased 0.5 percent.

“Improving sales trends post Mother’s Day combined with a focus on maximizing gross margin dollars and good expense control resulted in earnings at the high end of expectations,” said Betsy Burton, Zale Corp. chief executive officer. “Fiscal 2007 was a year in which we focused on going back to the basics. We tested investments in inventory assortments as well as in payroll and marketing. While many of these initiatives paid off, others have been pared back. We will take these learnings as well as the opportunity to refine our pricing and promotional strategy for this holiday to drive meaningful earnings improvement in our all-important second quarter of fiscal 2008. Additionally, we believe some of the organizational changes that we made will give us the ability to positively impact the business going forward. For fiscal 2008, we expect earnings improvement, a significant reduction in inventory and the continued success of our lifetime jewelry protection plans to generate approximately $125 million to $150 million in free cash flow.”

She continued, “For the past year, we have looked at many aspects of our business, from our portfolio strategy and brand positioning to opportunities to improve the core business. We believe we have a significant opportunity to drive shareholder value both near term and long-term. This strategy consists of improving productivity of our core mall business,
growth strategy centered on our brands that produce the highest returns on capital, and the migration to a more centralized, streamlined organization.”

Net earnings for fiscal year 2007 were $59.3 million. These earnings treat forward commodity contracts as derivatives under SFAS 133 and reflect the change in revenue recognition for jewelry protection plans as a result of the extended service period covered by plans during the year. The after-tax impact of derivative versus hedge accounting treatment was a $400,000 benefit, the negative impact on revenue recognized from the sale of jewelry protection plans was $22.3 million, and a tax benefit of $6.7 million primarily related to the decision to indefinitely reinvest certain undistributed foreign earnings.

Excluding these items, fiscal 2007 net earnings were $74.4 million. For the same period last year, earnings were $53.6 million.

For the full fiscal year, revenues were flat at $2.44 billion, compared to the same period last year. Full fiscal year same-store sales decreased 0.2 percent.

For the full year, the company said it expects a same-store sales increase, including its online sales, of 1 percent to 2 percent.

Zale Corp. is a leading specialty retailer of fine jewelry in North America operating approximately 2,250 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, Bailey Banks & Biddle Fine Jewelers, Peoples Jewellers, Mappins Jewellers, and Piercing Pagoda.

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