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Zale Corporation (ZLC)

F3Q10 (Qtr End 30/04/10) Earnings Call Transcript

May 26, 2010 9:00 am ET

Executives

Steve Massanelli – SVP and Treasurer

Matt Appel – EVP and CFO

Theo Killion – President and Interim CEO

Analysts

Rick Patel – Banc of America

Bill Armstrong – C.L. King & Associates

Presentation

Operator

Good morning. My name is Wess and I will be your conference operator today. At this time, I would like to welcome everyone to the Zale Corporation third quarter fiscal 2010 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions) Thank you. I’d now like to turn the conference over to Mr. Steve Massanelli, Senior Vice President and Treasurer. Please go ahead, sir.

Steve Massanelli

Good morning. Thank you for joining us for the Zale Corporation third quarter 2010 conference call. I am Steve Massanelli, Senior Vice President and Treasurer. On the call today are Theo Killion, President and Chief Executive Officer, and Matt Appel, Executive Vice President and Chief Financial Officer.

Before we begin, I will read our Safe Harbor statement. Our commentary and responses to your questions in this conference call will contain forward-looking statements, including statements relating to our future 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 January 31, 2010.

I will now turn the call over to Matt Appel.

Matt Appel

Thank you, Steve, and good morning to everyone. Revenues for the quarter ended April 30, 2010 were $360 million compared to $379 million for the same period in 2009, a decrease of 5.1% that is due principally to year-over-year store closures. Comparable store sales decreased 2.2% compared to a decrease of 20% in the prior year.

Gross margin for the third quarter was 50.8% compared to 50.1% for the third quarter of 2009. The 70 basis point improvement was the result of significantly lower promotional activity during the 2010 quarter. Excluding a $4 million charge related to certain slow moving inventory recorded in the third quarter of 2010, gross margin would have been 52%.

SG&A expenses for the third quarter were $194 million compared to $210 million in the 2009 period. The $16 million or 8% decrease is the result of our ongoing discipline around expense levels, principally relating to field and corporate payroll costs and rent reductions primarily due to closed stores.

Our operating loss for the third quarter was $22 million compared to an operating loss of $34 million in the 2009 period, an improvement of $12 million. Operating margin for the quarter was negative 6.2% compared to negative 9.0% in the 2009 period, an improvement of approximately 280 basis points compared to last year.

In the quarter ended April 30, 2010, we reported an income tax benefit of $12 million compared to a benefit of $17 million in the comparable period in 2009. The income tax benefit for the quarter ended April 30, 2010 was primarily attributable to additional net operating loss carry-backs identified and recognized during the quarter pursuant to the Business Assistance Act of 2009.

Our net loss for the third quarter ended April 30, 2010 was $12 million or $0.38 per share compared to a net loss of $20 million or $0.61 per share for the 2009 period. During the third quarter of 2010, the Canadian dollar remained strong relative to the US dollar, with an average exchange rate of $0.97. In the third quarter of 2009, this rate stood at $0.81.

Therefore, year-over-year, the Canadian dollar was approximately 20% stronger. However, in the third quarter of 2008, the rate was $0.99. So, on a two-year basis, there has been no real impact to our profitability as a result of currency. Year-over-year impact on contribution was under $1 million as all P&L line items are nearly equally impacted.

We ended the third quarter with 1,224 fine jewelry stores and 677 kiosks for a total of 1,901 retail locations compared to 1,356 fine jewelry stores and 694 kiosks for a total of 2,050 locations at the end of the third quarter of 2009. Accordingly, we have closed a net amount of 149 retail locations since April 30, 2009. During this quarter, we opened no new retail locations and closed a total of six.

Now let’s turn to the balance sheet. Inventory at April 30, 2010 was $693 million compared to $763 million at the end of the third quarter of 2009. The decrease of $70 million is primarily related to better management of store inventory levels, store closures, and reserves recorded related to slower moving inventory.

Capital expenditures for the third quarter totaled $2 million and totaled $11 million year-to-date. With the projects we have planned for the fourth quarter, we expect to spend approximately $15 million to $20 million for the full year. Long-term debt as of April 30, 2010 stood at $299 million compared to $333 million and $368 million as of April 30, 2009 and January 31, 2010 respectively.

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