By  on February 22, 2008

Jewelry retailer Zale Corp. posted a 31 percent drop in second-quarter earnings, which were hurt by sluggish holiday sales.

But results beat Wall Steet's expectations. Earnings fell to $60.8 million, or $1.34 a diluted share, from $88.1 million, or $1.80, in the year-ago period as sales for the quarter plunged 7.1 percent to $827.8 million from $891.5 million. Same-store sales declined 7.3 percent. Earnings per share results were 24 cents above analysts' consensus estimates, according to Thomson Financial.

For the six-month period, earnings plummeted 47 percent to $32.5 million, or 69 cents a diluted share, from $61.7 million, or $1.27 a share last year. Sales decreased 5.4 percent to $1.21 billion from $1.27 billion.

"We intend to make Zale into a more nimble and efficient organization," said Neal Goldberg, president and chief executive officer. "We remain focused on the generation of free cash flow, achieving a high return on capital and maintaining financial rigor and discipline overall."

The company said it plans to reduce $100 million in excess inventory, which it will not restock. The excess inventory is expected to negatively impact gross margins by 500 basis points over the next two quarters, but should be offset by the positive impact on free cash flow.

"We expect Zale shares to trade down as gross margins should deteriorate over the course of the year," said Adrianne Shapira, research analyst at Goldman Sachs, in a research note to clients. "Fundamentals remain challenging with further estimate cuts on the horizon. As such, given rich valuation, we remain firmly on the sidelines until we see signs of improvement materialize."

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