Quarterly losses declined at Signet Jewelers Ltd. but grew at Zale Corp. as the specialty jewelry retailers sought to weather the downturn by cutting costs, lowering inventories and improving margins.

This story first appeared in the November 25, 2009 issue of WWD. Subscribe Today.

Bermuda-based Signet, which operates as Kay Jewelers and Jared the Galleria of Jewelry in the U.S. and H. Samuel, Ernest Jones and Leslie Davis in the U.K., said Tuesday losses in its third quarter narrowed by more than half to $10.5 million, or 8 cents a diluted share. A year ago, it reported a loss of $23.6 million, or 18 cents a share.

In the three months ended Oct. 31, Signet’s sales fell 2.5 percent to $613.7 million from $629.3 million in the year prior. Sales at the firm’s U.K. stores slid 4.7 percent to $154.4 million while U.S. sales gave up 1.7 percent to $459.3 million. Same-store sales fell 1.9 percent in the period.

Signet’s third-quarter consolidated gross margin fell to 27 percent from 27.8 percent, but the firm said merchandise margins improved by 140 basis points in its U.S. division.

“While we’re promoting more, we’re engineering a lot of the market,” chief executive officer Terry Burman told WWD. Burman said the firm is taking advantage of lower diamond prices, among other merchandise strategies, to improve margins. “We’re passing much of our supply chain expertise onto the consumer,” the ceo added.

The firm also has concentrated on cost controls. As a percentage of sales, Signet cut selling, general and administrative expenses by 240 basis points to 32.1 percent of sales in the quarter.

The company said it expects to reduce its net debt by between $300 million and $350 million in the year versus earlier projections of $175 million to $225 million. Burman said the firm had made freeing cash flow a priority and wanted to be in position to take advantage of any upturn when it occurs.

To that end, as of Oct. 31, Signet reduced year-to-date inventories by 15.9 percent to $1.3 billion from $1.55 billion.

Looking toward the make-or-break holiday season and current quarter, Burman said the firm had increased its promotional cadence compared with last year, but the industry shouldn’t be as strained this December.

“Jewelers were at a competitive disadvantage because fashion retailers had to slash their prices,” the ceo said of 2008. “It’s unlikely that we’ll have the same pressure this year. We’re also not facing as many going-out-of-business sales.”

Whitehall Jewelers, another mall-based competitor, was in the midst of liquidating last holiday season.

Year-to-date net income rose 54.8 percent to $46.9 million, or 55 cents, while sales receded 6 percent to $2.09 billion. Comps fell 3.4 percent.

Zale Corp., meanwhile, posted a larger first-quarter loss on smaller revenues, but beat analysts’ expectations for the period.

The Dallas-based firm saw its loss grow by 19.1 percent to $57.6 million, or $1.80 a share, in the three months ended Oct. 31, from a loss of $48.4 million, or $1.52 a share, in the 2008 quarter.

Sales fell 9.6 percent, to $329.2 million from $364.1 million, and declined 6.8 percent on a comparable-store basis.

Though expanded, the loss could have been worse. Analysts polled by Yahoo Finance had, on average, expected Zale’s loss per share to total $2.02.

The firm achieved a slight gain in gross margin in the quarter to 48.6 percent from 48.5 percent and reduced SG&A as a percentage of revenue to 60.5 percent from 61.3 percent. Zale said inventories as of Oct. 31 totaled $902 million, a year-to-date reduction of about $100 million.

The company said sales and margins both improved as the third quarter progressed and that it’s positioned to improve on its holiday performance.

“We will not offer the same level of broad discounting this holiday season as we did in 2008, which will help us expand our gross margin,” said Neal Goldberg, chief executive officer.

Zale’s shares gained 47 cents, or 10.4 percent, in New York Stock Exchange trading Tuesday, ending the day at $4.97. Signet’s stock closed at $26.32, down 56 cents, or 2.1 percent.


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