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Charges Push Zale to Quarterly Loss

Zale Corp., saddled with after-tax charges totaling $23.9 million, posted a heavy loss for the fourth quarter on a 3.9 percent sales gain.

Zale Corp., saddled with after-tax charges totaling $23.9 million, posted a heavy loss for the fourth quarter on a 3.9 percent sales gain.

For the year-end period, net earnings were about half of the previous year. But the company said Thursday it was working to “deliver a solid performance” in the first quarter — the critical holiday shopping season — and is repositioning the Zale brand with greater selection and a return to merchandising the goods by product classification.

Zale, based in Irving, Tex., did not provide any updates regarding a Securities and Exchange Commission investigation of its accounting practices that was announced in April.

For the quarter ended July 31, the net loss was $26.4 million, or 55 cents a diluted share, compared with net earnings of $4.1 million, or 8 cents, in the previous year. Sales rose to $490.7 million from $472.3 million.

Excluding the charges, which include inventory write-downs, terminating an information technology initiative and an asset impairment charge, earnings were $800,000, or 2 cents a share.

For the year-end period, net earnings dropped to $54.5 million, or $1.11, from $106.8 million, or $2.05, on sales that rose 2.3 percent to $2.44 billion from $2.38 billion.

In the quarterly report, the company said it expects revenue to grow 3 to 5 percent in the 2007 fiscal year, with comparable store sales gaining 2 to 3 percent and earnings per share ranging from $1.98 to $2.08.

“Our fourth-quarter results, excluding the charges, were on plan,” Betsy Burton, president and chief executive officer, said in a statement.

Burton said during a conference call with analysts that comp store sales showed a gain of 3.5 percent and “were in line with expectations and fueled by better-than-expected top-line growth in the Zale’s brand, offset by pressure on gross margins due to increased clearance.”

Goldman Sachs analyst Adrianne Shapira said in a research note that “given the magnitude of the company’s turnaround efforts and an increasingly tougher discretionary spending environment, we remain comfortable with our $2.01 earnings-per-share forecast. However, we believe Zale is in a unique situation, irrespective of the macro environment, to post strong holiday results as they rectify last year’s strategic missteps and reintroduce key merchandising and marketing initiatives that should restore the brand image and reclaim lost market share.”

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The analyst has a 12-month price target of $26 on shares of Zale.

Burton said the retailer had a strong Mother’s Day across all brands, “resulting in low-double-digit positive comps for the events. This was led by the Zale brand, which benefited from diamond fashion and solitaire inventory that began flowing into stores in late April. The diamond fashion business was again driven by circle pendants. But we are also excited about Journey, De Beers product featured in their advertising this holiday.”

Regarding this fiscal year’s strategy for the Zale brand, Burton said, “A diamond fashion assortment needs to be both broad and deep to drive gift-giving, orders need to be placed on time to ensure holiday delivery, and discontinued inventory needs to be liquidated more aggressively.”

As a result, Burton said there will be a “renewed emphasis on diamond fashion and solitaire engagement rings.

“We will have dominant assortments in all bridal and jewelry classifications,” Burton explained. “The average store will see an increase in sku count of 750 sku’s. Assortments will be consistent across all volume levels of stores. Last year, some stores that were classified as high-end didn’t have a sufficient amount of moderately priced merchandise. That will be fixed for this year.”

Burton went on to say that there will be an increased emphasis on “promotional key items during holiday gift-giving periods and key weekend events,” and the company will enforce a “timely liquidation of unproductive inventory.

“And last, we will increase the penetration of merchandise purchased from our diamond direct-sourcing operation,” Burton added.

Burton said the visual presentation plan for Zale will “implement an enhanced element package, enabling us to increase capacity.” The company will go back to merchandising by classification, Burton said, adding that “all diamond bracelets will be in one showcase, [and] all diamond fashion hearts and crosses [will be] in one location.”