ZALE CORPORATION 
By Zale Corporation (NYSE: ZLC), a leading specialty retailer of fine jewelry in North America, today reported net earnings of $1.5 million, or $0.03 per diluted share for the Company's fourth quarter ended July 31, 2007. Earnings for the quarter include, on an after-tax basis, (1) a reduction of $6.3 million, or $0.13 per diluted share due to the delay in revenue recognized from the change to a lifetime jewelry protection plan, (2) a benefit of $1.1 million, or $0.02 per diluted share for the net impact of derivative versus hedge accounting on its gold and silver contracts, and (3) a net tax benefit of $6.7 million, or $0.14 per diluted share primarily related to a decision to indefinitely reinvest certain undistributed foreign earnings in accordance with APB 23. Excluding these items, the Company reported earnings of $0.0 million, or $0.00 per diluted share.
For the same period last year, the Company reported a net loss of $27.4 million, or $0.57 per share. This loss included a mostly non-cash after-tax charge of $23.9 million, or $0.50 per share, primarily consisting of impairments and store closure charges. The Company also recorded an increase in accrued percentage rent of $1.5 million after-tax, or $0.03 per share, related to prior periods, a $1.9 million, or $0.04 per share tax charge related primarily to Canadian earnings and an after-tax impact of derivative versus hedge accounting treatment of a $1.0 million loss, or $0.02 per share for its commodities contracts. Excluding these items, the Company reported earnings of $1.0 million, or $0.02 per diluted share.
Revenues for the quarter ended July 31, 2007 were $488 million compared to $491 million last year, a decrease of 0.5%. Revenues recognized were $7.5 million or 1.5% less than prior year as a result of the change made in the method of amortizing jewelry protection plan sales. Comparable store sales for the fourth quarter decreased 0.5%.
?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,? commented Betsy Burton, Chief Executive Officer.
Ms. Burton continued, ?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.?
Ms. Burton concluded, ?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, a growth strategy centered on our brands that produce the highest returns on capital, and the migration to a more centralized, streamlined organization.?
Fiscal 2007 Results
Net earnings for fiscal year 2007 were $59.3 million or $1.21 per share. 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 $0.4 million benefit, or $0.01 per share, the negative impact on revenue recognized from the sale of jewelry protection plans was $22.3 million, or $0.46 per share and a tax benefit of $6.7 million, or $0.14 per share primarily related to the decision to indefinitely reinvest certain undistributed foreign earnings in accordance with APB 23. Excluding these items, fiscal 2007 net earnings were $74.4 million, or $1.52 per share.
For the same period last year, earnings were $53.6 million, or $1.09 per share. These prior year earnings include, on an after-tax basis, (1) impairments and store closure charges of $45.1 million, or $0.92 per share, (2) severance payments of $7.5 million, or $0.15 per share, (3) a $1.0 million, or $0.02 per share impact of derivative versus hedge accounting treatment and (4) a $1.5 million, or $0.03 per share charge for percentage rent related to prior years; which were partially offset by (5) a tax benefit primarily related to repatriated Canadian earnings under the American Jobs Creation Act of $9.5 million, or $0.19 per share, and (6) an $8.4 million, or $0.17 per share, benefit resulting from the settlement of certain retirement benefit obligations. Excluding these items, the Company reported earnings of $90.9 million last year, or $1.85 per share.
For the full fiscal year, revenues were flat at $2.44 billion, compared to the same period last year. Full fiscal year comparable store sales decreased 0.2%.
Change in Comparable Store Methodology
Beginning in fiscal 2008, the Company will include online sales in its comparable store sales calculation. This approach is consistent with the Company's goal of improving its multi-channel experience and leveraging the best of its real estate footprint with the growth in online sales. Comparable store sales for 2007, including online sales, increased 0.5%. The quarterly breakdown of comparable store sales for fiscal 2007 including online sales is attached as a table at the back of the press release.
Warranty Deferred Revenue
The Company's decision to offer a lifetime jewelry protection plan has been well received by its customers, generating an increase of $33 million in cash sales of warranties in fiscal 2007 over the prior year. Actual cash sales of all warranty plans were $111 million in fiscal 2007 and are projected to exceed $130 million in fiscal 2008. Despite this cash sales increase, the amount of unrecognized, or deferred revenues will also increase. During fiscal 2007, the Company provided the impact of the change to a lifetime product by estimating what revenue would have been under the prior pricing and at prior recognition rates. This was consistent with initial guidance. Going forward, the Company will discuss the impact on earnings relative to the change in unrecognized revenues on the balance sheet, which also reflects the incremental cash collected and the future positive impact to earnings. The Company feels this will be clearer to the shareholder and readily quantifiable.
Excluding the impact of APB 23, GAAP earnings are expected to increase approximately 5.0% in fiscal 2008 over prior year. On an adjusted basis, excluding the change in revenue recognition from warranty sales, the Company's growth in fiscal 2008 is expected to be approximately 15.0%. Earnings growth is expected to accelerate to approximately 30% per annum in 2009 through 2011 as the Company recognizes incremental revenues each year and the deferred revenue continues to increase. Approximately one-half of this growth is expected to be directly related to the change in the warranty plans and related revenue recognition. In order to estimate a more normalized year-over-year growth upon maturity of the product, the Company believes the increase in the unrecognized revenue is the appropriate measure.
The increase in unrecognized revenues on the balance sheet was $62 million in fiscal 2007 and is anticipated to be approximately $80 - 90 million in fiscal 2008. In contrast, the increase from fiscal 2005 to fiscal 2006 prior to the product change was $4 million. Had the product been offered for five years, the Company believes these amounts are indicative of what would have been recognized on an after-tax basis and the after-tax impact would be a net $0.78 per share in 2007 and projected to be approximately $1.00 per share in fiscal 2008. The incremental impact of these unrecognized amounts is expected to begin to decline in fiscal 2009 through 2011, as the amount of revenue recognized becomes comparable to cash sales of the plans.
Fiscal 2008 Guidance
The Company also provided its annual forecast for its fiscal year ending July 31, 2008. For the full year, the Company expects a comparable store sales increase, including its online sales, of 1% to 2%. GAAP earnings are expected to be in the range of $1.11 to $1.16 per share. Excluding the $6.7 million or $0.14 per share impact from the adoption of APB 23, fiscal 2007 earnings would have been $1.07 per share. These earnings do not reflect the longer term earnings impact of the lifetime warranties. Including the impact of the increase in the unrecognized revenues on the balance sheet, earnings would be expected in the range of $2.11 ? $2.16 in fiscal 2008 compared to $1.85 in fiscal 2007. This reflects earnings growth in the mid-teens, consistent with our long-term targets. Over time, the lifetime warranties will accelerate our GAAP earnings while the change in unamortized revenues on the balance sheet declines.
A conference call will be held today at 9:00 a.m. Eastern Time. Parties interested in participating should dial 706-643-7467 five minutes prior to the scheduled start time. A webcast of the call, as well as a replay, will be available on the Company's Web site at www.zalecorp.com. For additional information, contact Investor Relations at 972-580-5047.
The Company also announced that it will be presenting at the Goldman Sachs Retailing conference on Thursday, September 6, 2007 at 9:30 a.m. Eastern Time. The presentation will be available on the Company's Web site at www.zalecorp.com.
Zale Corporation 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 Corporation's brands include Zales Jewelers, Zales Outlet, Gordon's Jewelers, Bailey Banks & Biddle Fine Jewelers, Peoples Jewellers, Mappins Jewellers and Piercing Pagoda. Zale also operates online at www.zales.com, www.gordonsjewelers.com and www.baileybanksandbiddle.com. Additional information on Zale Corporation and its brands is available at www.zalecorp.com.
This release contains forward-looking statements, including statements regarding the Company's turnaround initiatives and their effects, sales and earnings guidance for fiscal year 2008 and the anticipated impact of deferred revenue recognition. Forward-looking statements are not guarantees of future performance and a variety of factors could cause the Company's actual results to differ materially from the results expressed in the forward-looking statements. These factors include, but are not limited to: if the general economy performs poorly, discretionary spending on goods that are, or are perceived to be, "luxuries" may not grow and may even decrease; the concentration of a substantial portion of the Company's sales in three, relatively brief selling seasons means that the Company's performance is more susceptible to disruptions; most of the Company's sales are of products that include diamonds, precious metals and other commodities, and fluctuations in the availability and pricing of commodities could impact the Company's ability to obtain and produce products at favorable prices; the Company's sales are dependent upon mall traffic; the Company operates in a highly competitive industry; changes in regulatory requirements or in the Company's private label credit card arrangement with Citi may increase the cost of or adversely affect the Company's operations and its ability to provide consumer credit and write credit insurance; acquisitions involve special risks, including the possibility that the Company may not be able to integrate acquisitions into its existing operations. For other factors, see the Company's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended July 31, 2006. The Company disclaims any obligation to update or revise publicly or otherwise any forward-looking statements to reflect subsequent events, new information or future circumstances.
| ZALE CORPORATION AND SUBSIDIARIES | ||||||||||||
| CONSOLIDATED SELECTED FINANCIAL INFORMATION | ||||||||||||
| (Unaudited, Dollars in thousands, except per share amounts) | ||||||||||||
| Three Months Ended | Twelve Months Ended | |||||||||||
| July 31, | July 31, | |||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||
| Revenues | $ 488,226 | $ 490,695 | $ 2,437,075 | $ 2,438,977 | ||||||||
| Comparable Store Sales % | -0.5 | % | 3.5 | % | -0.2 | % | 1.6 | % | ||||
| Cost of Sales | 234,051 | 257,370 | 1,187,601 | 1,215,636 | ||||||||
| Gross Margin | 254,175 | 233,325 | 1,249,474 | 1,223,341 | ||||||||
| % of Revenue | 52.1 | % | 47.5 | % | 51.3 | % | 50.2 | % | ||||
| Selling, General and Administrative Expenses | 241,226 | 251,700 | 1,070,478 | 1,087,458 | ||||||||
| % of Revenue | 49.4 | % | 51.3 | % | 43.9 | % | 44.6 | % | ||||
| Cost of Insurance Operations | 1,619 | 1,684 | 6,798 | 6,699 | ||||||||
| Depreciation and Amortization Expense | 15,940 | 14,973 | 61,887 | 59,771 | ||||||||
| Benefit from Settlement of Retirement Plan | --- | --- | --- | (13,403 | ) | |||||||
| Derivative Loss | 111 | 1,681 | 7,184 | 1,681 | ||||||||
| Operating (Loss) Earnings | (4,721 | ) | (36,713 | ) | 103,127 | 81,135 | ||||||
| % of Revenue | -1.0 | % | -7.5 | % | 4.2 | % | 3.3 | % | ||||
| Interest Expense | 3,730 | 3,500 | 18,969 | 11,185 | ||||||||
| (Loss)/Earnings Before Income Taxes | (8,451 | ) | (40,213 | ) | 84,158 | 69,950 | ||||||
| Income Taxes | (9,988 | ) | (12,851 | ) | 24,906 | 16,328 | ||||||
| Net Earnings/(Loss) | $ 1,537 | $ (27,362 | ) | $ 59,252 | $ 53,622 | |||||||
| Basic Earnings Per Common Share: | ||||||||||||
| Net Earnings Per Share | $ 0.03 | $ (0.57 | ) | $ 1.22 | $ 1.10 | |||||||
| Diluted Earnings Per Common Share: | ||||||||||||
| Net Earnings Per Share | $ 0.03 | $ (0.57 | ) | $ 1.21 | $ 1.09 | |||||||
| Weighted Average Number of Common Shares Outstanding: | ||||||||||||
| Basic | 49,031 | 48,131 | 48,694 | 48,808 | ||||||||
| Diluted | 49,210 | 48,427 | 48,995 | 49,211 | ||||||||
Reconciliation of GAAP Information to Non-GAAP basis 4th Quarter and full year FY07, diluted: | ||||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Twelve Months Ended | |||||||||||||||||||||||||||||||||||||||
| July 31, 2007 | July 31, 2007 | |||||||||||||||||||||||||||||||||||||||
| Amount | Per Share | Amount | Per Share | |||||||||||||||||||||||||||||||||||||
| Net GAAP Earnings Per Above | $ 1,537 | $ 0.03 | $ 59,252 | $ 1.21 | ||||||||||||||||||||||||||||||||||||
| Impact of Derivatives (1) | (1,051 | ) | (0.02 | ) | (411 | ) | (0.01 | ) | ||||||||||||||||||||||||||||||||
| Change in Revenue Recognition | 6,276 | 0.13 | 22,296 | 0.46 | ||||||||||||||||||||||||||||||||||||
| Tax Adjustments (2) | (6,742 | ) | (0.14 | ) | (6,742 | ) | (0.14 | ) | ||||||||||||||||||||||||||||||||
| Net Earnings | $ 20 | $ 0.00 | $ 74,395 | $ 1.52 | ||||||||||||||||||||||||||||||||||||
(1) The Company does not utilize hedge accounting for its derivatives. As a result, changes in the fair market value of derivatives and the settlement of derivative contracts are recorded directly to earnings. This adjustment shows the impact on net earnings had hedge accounting been utilized.
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(2) The tax adjustments include a benefit of $6.7 million primarily associated with our decision to indefinitely reinvest certain undistributed foreign earnings in accordance with APB 23. | ||||||||||||||||||||||||||||||||||||||||
Reconciliation of GAAP Information to Non-GAAP basis 4th Quarter and full year FY06, diluted: | ||||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Twelve Months Ended | |||||||||||||||||||||||||||||||||||||||
| July 31, 2006 | July 31, 2006 | |||||||||||||||||||||||||||||||||||||||
| Amount | Per Share | Amount | Per Share | |||||||||||||||||||||||||||||||||||||
| Net GAAP (Loss) Earnings Per Above | $ (27,362 | ) | $ (0.57 | ) | $ 53,622 | $ 1.09 | ||||||||||||||||||||||||||||||||||
| Impairments and Store Closure Charges | 23,879 | 0.50 | 45,105 | Share
© Business Wire - 2007
Zale Corporation, through its wholly owned subsidiaries, is a retailer of fine jewelry in North America. The Company operates in three segments: fine jewelry, kiosk jewelry and all other. As of July 31, 2012, the Company operated 1,124 specialty retail jewelry stores and 654 kiosks located mainly in shopping malls throughout the United States, Canada and Puerto Rico. The Company's fine jewelry segment consists of five brands: Zales Jewelers, Peoples Jewellers, Zales Outlet, Mappins Jewellers, and Gordon's Jewelers The Company's kiosk jewelry operates under the brand names Piercing Pagoda, Plumb Gold, and Silver and Gold Connection (collectively, Piercing Pagoda) through mall-based kiosks. The Company provides insurance and reinsurance services for various types of insurance coverage, which is marketed primarily to its private label credit card guests, through Zale Indemnity Company, Zale Life Insurance Company and Jewel Re-Insurance Ltd.
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