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Zale Corporation (ZLC)

F4Q2010 Earnings Call Transcript

September 27, 2010 9:00 am ET

Executives

Roxane Barry – Director, IR

Matt Appel – EVP and CFO

Theo Killion – CEO

Analysts

Rick Patel – Banc of America/Merrill Lynch

Jeff Stein – Soleil Securities Group

Dana Telsey – Telsey Advisory Group

Bill Armstrong – CL King & Associates

Presentation

Operator

Good morning. My name is Christie and I will be your conference operator today. I would like to welcome everyone to Zale Corporation’s fiscal fourth quarter and full-year 2010 results conference call. At this time, all participants are in a listen-only mode. After the speakers’ remarks, we will conduct a question-and-answer session with instructions to be given at that time.

I would now like to turn the call over to Roxane Barry, Director of Investor Relations. Please go ahead.

Roxane Barry

Thanks Christie. Good morning and thank you for joining us for the Zale Corporation’s fourth quarter 2010 conference call. I am Roxane Barry, Director of Investor Relations. On the call today are Theo Killion, 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 on 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 April 30th, 2010.

I will now turn the call over to Matt Appel.

Matt Appel

Thank you Roxane and good morning everyone. I will begin by discussing the results for the fourth quarter and full year. Revenues for quarter ended July 31st, 2010 were $345 million compared to $357 million for the same period in 2009, a decrease of 3.4%. Comparable store sales decreased 2.1% compared to a decrease of 21.2% in the prior year.

For the year ended July 31st, 2010, revenues were $1.62 billion, a decrease of 9.2% compared to $1.78 billion for 2009. Comparable store sales decreased 6.6% in fiscal 2010 compared with a decrease of 16.6% during the prior year. The decrease in revenues year-over-year for both the fourth quarter and the year ended July 31st, 2010 is primarily due to the decline in comparable store sales and year-over-year store closures, partially offset by an increase in recognized warranty revenue and appreciation of the Canadian dollar.

During the fourth quarter, the Canadian dollar remained strong relative to the US dollar, with an average exchange rate of $0.96. In the fourth quarter of 2009, this rate stood at $0.88, therefore year-over-year, the Canadian dollar was approximately 9% stronger. Note that in the fourth quarter of 2008, the rate was $0.99. So, on a two-year basis, there was no appreciable impact as a result of currency.

Impact on the 2010 quarter’s earnings was not significant as the rate differential almost equally impacted all P&L line items. Appreciation of the Canadian dollar also impacted the full year. The Canadian dollar average exchange rate was $0.95 in 2010. In 2009, the Canadian dollar exchange rate averaged $0.85, therefore year-over-year, the Canadian dollar was approximately 12% stronger for the year. While this appreciation resulted in an increase of $28 million in revenues for the full year, on a two-year basis, there was no material impact. Similar to the impact on the quarter, the year-over-year impact on earnings was not significant as all P&L line items were equally impacted.

Gross margin for the quarter ended July 31st, 2010 was 52.7% compared to 46.4% for the 2009 period. For the full year ended July 31st, 2010, gross margin was 50.4% compared to 46.7% for the full year of 2009. Gross margin improvement for both the quarter and the year was primarily due to lower levels of merchandise discounts and a higher level of warranty revenue recognition. In addition, in the fourth quarter of 2009, we reported a $13.5 million inventory impairment that was not required in 2010.

SG&A expenses for the fourth quarter ended July 31st, 2010 declined approximately $10 million or 5% to $197 million compared to $207 million in the 2009 period. SG&A expenses for the year ended July 31st, 2010 declined approximately $88 million or 9% to $846 million compared to $934 million in 2009. The decline in SG&A expenses for both the fourth quarter and the full year was primarily due to our continuing discipline around expense levels, in particular, field and corporate payroll costs as well as rent.

Operating loss for the fourth quarter was $31 million compared to an operating loss of $113 million in the 2009 period, an improvement of approximately $82 million. Operating margin for the quarter was negative 9.1% compared to negative 31.6% in the comparable 2009 period. Excluding special items, operating margin was negative 7.7% for the fourth quarter of 2010 compared to a negative 11.9% in the comparable period in the prior year. Please refer to today’s press release for details of the special items and the related reconciliations.

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