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Piercing Pagoda Deflates Zale Net

NEW YORK — Piercing Pagoda has yet to break through for Zale Corp.<br><br>Saddled with a $136.3 million pretax charge for goodwill impairment on its August 2000 acquisition of Piercing Pagoda, the Dallas-based jewelry retailer reported a net...

NEW YORK — Piercing Pagoda has yet to break through for Zale Corp.

Saddled with a $136.3 million pretax charge for goodwill impairment on its August 2000 acquisition of Piercing Pagoda, the Dallas-based jewelry retailer reported a net loss of $46.2 million or $1.44 a diluted share for the three months ended Jan. 31, compared with earnings of $95 million, or $2.70, in the year-ago quarter. Excluding the charge, net income would have decreased 5.3 percent to $90.1 million, or $2.80, matching Wall Street’s consensus estimate.

Sales for the period ticked up 1.3 percent to $908.4 million from $897.1 million a year ago, as comparable-store sales gained 1.1 percent in constant currencies.

The noncash charge was a result of Zale’s determination, as part of an annual audit of its assets, that the market value of Piercing Pagoda was lower than its carrying value, reflective of current market conditions and lower-than-expected performance. By taking the charge, Zale reduced the carrying value of Piercing Pagoda goodwill to approximately $19 million.

“While there are a number of external factors negatively impacting [Piercing] Pagoda, such as decreased mall traffic, our execution can be improved,” said chief executive officer Mary Forte in a statement. “We are intensifying our focus on merchandise assortments, especially at lower price points. As we continue to make these adjustments, growth will be slowed for Piercing Pagoda. While it may take longer than originally anticipated, we still believe there is great potential for this business.”

Overall, for the first half of the year, Zale reported a net loss of $52.9 million, or $1.63 a diluted share. That compares with last year’s profits of $132.6 million, or $3.79, which included a $3.5 million pretax gain for retiree medical curtailment and a $41.3 million aftertax gain resulting from a change in accounting principle. Excluding goodwill impairment, the firm would have reported net income of $83 million, or $2.56.

Total revenue for the period increased 1 percent to $1.32 billion from $1.31 billion a year ago, and same-store sales grew 0.6 percent in constant currencies.

This story first appeared in the February 19, 2003 issue of WWD.  Subscribe Today.