Zale Shares Jump on Guidance, Q4 Strength

Quarterly loss substantially below analysts' expectations.

Shares of Zale Corp. surged more than 20 percent Thursday after the jewelry retailer reported a fourth-quarter loss far below analysts’ expectations and laid out 2009 guidance well above them.

This story first appeared in the August 29, 2008 issue of WWD.  Subscribe Today.

For the three months ended July 31, the Dallas-based firm reported a net loss of $4.9 million, or 15 cents a diluted share, against net income of $1.5 million, or 3 cents, in the year-ago quarter. Accelerated by the company’s plan to reduce inventory, sales were up 6.1 percent to $456.2 million from $430 million in the year-ago quarter and were up 6.1 percent on a same-store basis, reducing the company’s year-end same-store sales decline to 0.7 percent.

Eliminating a series of one-time benefits and charges, including a provision for a change in its warranty period to the lifetime of product ownership from two years, the net loss came in at 32 cents a share, 25 cents better than the average of a 57-cent loss expected by analysts. Zale also handily beat the quarterly revenue estimate of $448.9 million, according to Yahoo Finance.

“After a challenging start to fiscal 2008, which included a disappointing holiday season, we executed a focused agenda with clear objectives,” said Neal Goldberg, chief executive officer. “To improve performance over the current fiscal year and beyond, we are concentrating on improving our customer focus, enhancing operational effectiveness and maintaining financial discipline.”

After spiking more than 22 percent in morning trading and hitting a new 52-week high of $28.29, shares ended Thursday’s New York Stock Exchange session at $27.92, up $4.77 or 20.6 percent. Standard & Poor’s retail analyst Pearl Wang upgraded Zale shares to “hold” from “sell” based on “greater cost efficiencies” and “better-positioned” product offerings focused on diamonds and private brands.

Gross margin in the fourth quarter declined to 47.3 percent of sales from 53 percent in the year-ago period. For the full year, the metric fell to 49 percent from 52.2 percent.

Goldberg told analysts on a morning conference call, “We expect to recapture a majority of the gross margin dollars we lost last year due to the clearance strategy, but recognize the external environment could impact this to some degree. From a financial standpoint, we will continue to be disciplined, focused both on the generation of free cash flow and identification of efficiency in our business.”

Year-end inventories were valued at $780 million, nearly $242 million below the $1.02 billion level at the conclusion of fiscal 2007. Although $153 million of this reduction was attributable to the company’s divestiture of Bailey Banks & Biddle last year, $87 million was tied to continuing operations, Rodney Carter, executive vice president and chief financial officer, said on a conference call with analysts. Zale is looking for permanent contractions in average inventory levels of $100 million.

Zale slipped badly during the 2007 holiday season, finishing its second quarter with a 7.3 percent decline in same-store sales. Goldberg was named ceo in December and since then has initiated programs to reduce store count, generate at least $65 million in annual savings, improve and simplify store presentation and differentiate the company’s merchandise.

A plan to close 105 stores and cut 20 percent of headquarters staff was unveiled in February.

For the full year, Zale’s net income dropped 81.8 percent to $10.8 million, or 25 cents a diluted share, from $59.3 million, or $1.21, in fiscal 2007. Profits included $7.1 million from discontinued operations in the just-concluded year and $11.1 million in 2007. Sales receded 0.7 percent to $2.14 billion from $2.15 billion.

E-commerce revenues reached $55 million in 2008 and were up 30 percent for the year and 50 percent in the fourth quarter, according to Goldberg.

Zale, which operates 2,130 stores and kiosks, provided 2009 guidance of earnings of $1.10 to $1.25, versus the analysts’ consensus estimate of 90 cents. Same-store sales are expected to be flat to down 1 percent.