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Zale (ZLC)

Q2 2013 Earnings Call

February 21, 2013 9:00 am ET

Executives

Roxane Barry - Director of Investor Relations

Theophlius Killion - Chief Executive Officer and Director

Thomas A. Haubenstricker - Chief Financial Officer and Senior Vice President

Matthew W. Appel - Chief Administrative Officer

Analysts

Jeffrey S. Stein - Northcoast Research

David Wu - Telsey Advisory Group LLC

Oliver Chen - Citigroup Inc, Research Division

William R. Armstrong - CL King & Associates, Inc., Research Division

Janet Kloppenburg

Steven J. Kernkraut - Berman Capital Management LP

Presentation

Operator

Good morning. My name is Monserat, and I will be your conference operator today. I would like to welcome everyone to the Zale Corporation's Second Quarter Fiscal Year 2013 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Ms. Roxane Barry, Director of Investor Relations. Ma'am, the floor is yours.

Roxane Barry

Good morning, and thank you for joining us. Participating in today's call will be Theo Killion, Chief Executive Officer; Matt Appel, Chief Administrative Officer; and Tom Haubenstricker, Chief Financial Officer. We have posted a slide presentation for today's call on the Investor Relations homepage on our website at zalecorp.com. Before we begin, I'll read our Safe Harbor statement.

Our commentary and responses to your questions on this conference call will contain forward-looking statements, including statements relating to our sales, margins, commodity costs and other expenses, operating and net earnings, and other goals, plans and objectives. These forward-looking statements are not guarantees of future performance, and a variety of factors could cause our actual results to differ materially from the anticipated or expected results expressed in these forward-looking statements. Additional information concerning other factors that could cause actual results to differ materially from those contained in the forward-looking statements is available in our quarterly report on Form 10-Q for the fiscal quarter ended October 31, 2012.

Also, please note that during this conference call, we may discuss certain non-GAAP financial measures as we review the company's performance. One of these non-GAAP measures is EBITDA, which is defined as earnings before interest, taxes, depreciation and amortization. A second non-GAAP measure is adjusted EBITDA, which excludes charges related to store closures. We use these measurements as part of our evaluation of the performance of the company. In addition, we believe these measures provide useful information to investors. Please refer to the Appendix within the Investor Relations presentation for a reconciliation of these non-GAAP measures to the most comparable GAAP financial measures. I'll now turn the call over to Theo.

Theophlius Killion

Thank you, Roxane, and good morning to those of you joining us on the call today as we report our second quarter fiscal 2013 results. If you're following along on the slides that we posted on our website, please direct your attention to Slide 3.

The second quarter marks the ninth straight quarter of positive comps. For the quarter, comparable store sales were up 2.8% and up 8.8% on a 2-year basis. As you will recall from our holiday sales release, we reported a 2.3% comp for November and December. The 50 basis point improvement reflects strong performance during the month of January.

As we continue to focus on both top line and bottom line improvement, we're pleased to report that we achieved an operating margin of 7.8%, a 110 basis point improvement from the prior year quarter. Net earnings for the quarter were $1.02 per diluted share, an increase of $0.25 or 32%.

Our financial results for the second quarter were anchored by the strong performance of our exclusive, branded collections. The combination of great products, supported by compelling marketing and reinforced with technical and product training for our jewelry consultants, worked very well for us. In addition to the 20,000 hours of product training that we invested in, in our relaunch of the Celebration Diamond collection last fall, we also conducted training on Vera Wang, Persona and on our Watch brands.

We've already finalized our educational agenda for our selling teams for the remainder of calendar year 2013, and we will continue to focus on product training that supports our key merchandising initiatives and technical training like Diamond Council of America. We're committed to creating a guest experience, which is highlighted by positive interactions with knowledgeable jewelry consultants who build lifetime relationships.

Now I'll turn to Slide 4, where I'll talk about some of our best-performing merchandise categories over the holiday season. Exclusive, branded product now represents approximately 10% of our Fine Jewelry merchandise mix. And as we continue to expand our current collections and introduce new ones, we believe this area of the business could grow to as much as 25% of the total assortment.

In terms of specific collections, Vera Wang LOVE continues to perform extremely well. We've added 16 new bridal styles, and we're continuously testing items to keep the collection fresh and exciting. Men's wedding bands, solitaires, pendants and earrings are currently showing encouraging results, and we'll have even more new product in test in time for Mother's Day.

In addition to growing the assortment since it was introduced in 500 stores last year, we've added another 180 stores since then. By Mother's Day, the Vera Wang LOVE collection will be represented in 745 stores in each of our Fine Jewelry brands.

As I mentioned on our last call, we relaunched our successful Celebration Diamond collection by developing a good, better, best offering. The Celebration Grand, the entry point to the collection, is our good diamond, an ideal cut that has 8 hearts and arrows, and they shine bigger and bolder. Celebration 100 in Canada and 102 in the U.S. is our better collection with 100 and 102 referring to the number of facets on each stone. This particular cut, which has almost twice the facets of a typical diamond, was introduced to our stores over 4 years ago.

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