Zale Corporation (NYSE: ZLC) had net earnings of $6.7 million, or $0.21 per share, for the second fiscal quarter ended January 31, 2010, compared to a net loss of $31.8 million, or $1.00 per share, in the comparable period in fiscal 2009. Aggregate revenues were $582 million, a decrease of 14.3% compared to $679 million during the second fiscal quarter of 2009.
The Company achieved gross margin on sales of 49.8% during the quarter ended January 31, 2010 compared to 44.0% in the comparable period in fiscal 2009. The 580 basis point improvement was primarily the result of less promotional activity during the Holiday selling season. Cost of sales for the quarter ended January 31, 2010 includes a $9.2 million charge for certain slow-moving inventory, compared to $2.3 million in the comparable period in fiscal 2009, which reduced gross margin by 150 basis points. Same store sales during the second fiscal quarter decreased 11.2%, compared to a decrease of 18.1% during the 2009 period. The Company has closed a total of 187 retail locations since January 31, 2009 of which 28 were closed in the quarter ended January 31, 2010.
The Company reduced aggregate selling, general and administrative expenses by $40 million during the quarter ended January 31, 2010 compared to the same period in fiscal 2009. This reduction resulted primarily from the Company’s initiatives to reduce expenses including store closures. During the quarter ended January 31, 2010, the Company recorded a non-cash $23.3 million pre-tax charge for the impairment of certain store property and equipment. Operating margin for the second quarter of fiscal 2010 was (0.6%), an improvement of 260 basis points compared to the comparable period in the prior year.
In the quarter ended January 31, 2010, the Company had an income tax benefit of $12 million, compared to tax expense of $7 million in the comparable period in the prior year. The income tax benefit was attributable to a $17 million credit recorded as a result of recent tax law changes increasing the net operating loss carry-back period to 5 years, partially offset by $5 million of tax expense related primarily to earnings from the Company’s Canadian operations.
Inventory at January 31, 2010 was $738 million, a decrease of approximately $110 million from January 31, 2009. As of January 31, 2010, the Company had outstanding debt of $368 million compared to $390 million as of January 31, 2009. Availability under the Company’s $500 million asset-backed revolving credit facility as of January 31, 2010 was approximately $67 million.
“The Board of Directors has formed a committee of independent directors to review a wide range of financing alternatives which will be formally vetted through Peter J. Solomon Company,” said Jack Lowe, Chairman of the Board of Directors. “We are at the very initial stages of this process and I am confident that it will result in an outcome that’s in the best interest of our shareholders, our employees and our customers.”
“Our primary financial focus over the next 90 days is to strengthen our liquidity profile by attracting new capital to the business,” commented Matt Appel, Chief Financial Officer. “I am confident that we will identify options to implement a long-term capital structure from which we can fuel the recovery of the business,” added Mr. Appel.
“We have made progress year over year in gross margin, expenses, earnings per share and inventory levels,” commented Theo Killion, President and Interim Chief Executive Officer. “Our direct competitors have demonstrated that the market for mid-tier jewelers has stabilized. It is critical that we focus on retail fundamentals and the core diamond business while we leverage our brand equity, capabilities and personnel to improve top line volumes,” added Mr. Killion.
Zale Corporation is a leading specialty retailer of diamonds and other jewelry products in North America, operating approximately 1,900 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, Peoples Jewellers, Mappins Jewellers and Piercing Pagoda. Zale also operates online at www.zales.com, www.zalesoutlet.com and www.gordonsjewelers.com. Additional information on Zale Corporation and its brands is available at www.zalecorp.com.
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