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Zale (ZLC)

Q4 2011 Earnings Call

August 31, 2011 9:00 am ET

Executives

Theo Killion - Chief Executive Officer, President and Director

Matthew Appel - Chief Administrative Officer, Chief Financial Officer and Executive Vice President

Roxane Barry - Director of Investor Relations

Analysts

Rick Patel - BofA Merrill Lynch

David Wu - Global Crown

Jeffrey Stein - Ticonderoga Securities LLC

Janet Kloppenburg - JJK Research

Presentation

Operator

Good morning. My name is Nicole, and I will be your conference operator today. I would like to welcome everyone to Zale Corporation Fourth Quarter Fiscal 2011 Results Conference Call. [Operator Instructions] I would now like to turn the call over to Roxane Barry, Director of Investor Relations. Please go ahead.

Roxane Barry

Thanks, Nicole. Good morning, and thank you for joining us in the Zale Corporation Fourth Quarter Fiscal 2011 Conference Call. I'm Roxane Barry, Director of Investor Relations. On the call today are Theo Killion, Chief Executive Officer; and Matt Appel, Chief Administrative Officer and Chief Financial Officer.

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 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. Some of these 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 30, 2011.

Also please note that during this conference call, we will discuss certain non-GAAP financial measures as we review the company's performance. One of these non-GAAP measures is adjusted EBITDA, which is defined as earnings before interest, taxes, depreciation and amortization adjusted to exclude charges related to store closures. We use this measurement as part of our evaluation of the performance of the company. In addition, we believe this measure provides useful information to investors. Please refer to the Financial's drop-down within our Investor Relations section on our website for a reconciliation of this non-GAAP measure to the most comparable GAAP financial measure.

I'll now turn the call over to Matt.

Matthew Appel

Thank you, Roxane, and good morning, everyone. Let me apologize in advance for the quality of my voice. I'll try to speak more slowly so that everybody can understand what I'm saying.

I'm going to begin by discussing our results for the fourth quarter and full year. Revenues for the quarter ended July 31, 2011 are $377 million, an increase of $32 million or 9.4% compared to $345 million for the same period in the prior year.

For the year ended July 31, 2011, revenues were $1.74 billion, an increase of 7.8% compared to $1.62 billion for 2010. The increase in revenues for both the fourth quarter and full year is primarily due to higher same-store sales and increase in revenues recognized on our warranty products and appreciation of the Canadian dollar, partially offset by revenues attributable to year-over-year store closures.

Comparable store sales for the fourth quarter increased 9.8% compared to a decrease of 2.1% in the prior year. The increase in comparable store sales reflects a 4% increase in the number of customer transactions as well as a 7% increase in average transaction price in our fine jewelry stores.

At constant exchange rates, which exclude the effect of Canadian currency translation, comparable store sales increased 8.4% for the quarter. For the year ended July 31, 2011, comparable store sales increased 8.1% compared to a decrease of 6.6% in fiscal year 2010. The increase in comparable store sales for the full year reflects a 3% increase in the number of customer transactions, along with a 6% increase in average transaction price in our fine jewelry stores. At constant exchange rates, comparable store sales increased 7.1% for the year.

During the fourth quarter, the Canadian dollar strengthened approximately 8% relative to the U.S. dollar with an average exchange rate of $1.03 compared to $0.96 in the prior-year quarter. The impact on the 2011 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 $1.01 for 2011. In 2010, the Canadian dollar exchange rate averaged $0.95. Therefore, year-over-year, the Canadian dollar was approximately 6% stronger. Similar to the impact on the quarter, year-over-year impact on earnings was not significant.

Despite the significant increase in commodity costs, we achieved gross margin for the quarter ended July 31, 2011, of 51.3%, our highest individual quarterly result of fiscal year 2011. This compares to 52.7% for the prior-year period. The 140 basis point differential in gross margin is attributable to higher merchandise costs, which is exemplified by a $5 million year-over-year increase in last in, first out, or LIFO inventory charges, offset by higher margin performance on our warranty products and a lower level of markdowns associated with our improved inventory quality.

Excluding LIFO inventory charges of $7.9 million and $2.9 million for the quarters ended July 31, 2011, and July 31, 2010, respectively, gross margin would have been 53.4% and 53.5% for the 2011 and 2010 quarters.

I want to stress that our gross margin performance for the quarter was largely achieved without the benefit of the bulk of our price increases. While we began taking certain price increases early in the third quarter, the majority were implemented during the month of July.

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