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Zale (ZLC)

Q2 2012 Earnings Call

February 22, 2012 9:00 am ET

Executives

Roxane Barry - Director of Investor Relations

Theo 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

Rick B. Patel - BofA Merrill Lynch, Research Division

David Wu - Telsey Advisory Group LLC

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

Janet Kloppenburg

Presentation

Operator

Good morning. My name is Christie, and I will be your conference operator today. At this time I would like to welcome everyone to the Zale Corporation Second Quarter Fiscal 2012 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Roxane Barry, Director of Investor Relations. Please go ahead.

Roxane Barry

Good morning, and thank you for joining us today. I'm Roxane Barry, Director of Investor Relations. Joining on the call today 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, 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 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 those 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, 2011.

I'll now turn the call over to Theo.

Theo Killion

Thank you, Roxane, and good morning, everyone. The second quarter results that we're reviewing today represent tangible evidence of the progress we're making and executing our turnaround plan as we continue our focus on returning the business to profitability.

For those of you following along with the slides that we posted on our website, please direct your attention to Slide #3. For the quarter, comparable store sales increased 5.8%. As you may recall from our holiday sales release, we reported comp store sales up 10.1% in November and 4.2% in December. The results that we're reporting today incorporate a strong January performance. Importantly, our 2-year comp is up 14.3%, and we're reporting our fifth straight quarter of positive results. The journey that we've been on has been characterized by discipline and focus, sticking to our plan and executing against it. Even with the challenges in the North American economy and pressure from commodity cost increases, we continue to build business momentum.

Our sales results were primarily driven by initiatives that we've discussed in the past including improved core inventory and alternative credit program in the United States, a new marketing campaign, and integrated online and traditional store infrastructure, and strong execution by our customer-facing teams.

I will highlight more specifically how each one helped us deliver our second quarter results. The first initiative is our ongoing discipline of maintaining the core at 80% plus. During the holiday season, we were actually at 85% core with an average in-stock rate of 96%. The work that we've done in re-architecting the core allows us to continually edit and refine it while testing new product introductions and concepts.

You'll recall that for the holiday, we expanded our Persona bead collection to more than 900 stores. When you combine that with the Camilla program we have in our Mappins brand, we have beads in nearly all of our Fine Jewelry stores, and the category is performing nicely. We also introduced proprietary collections from Vera Wang and Jessica Simpson.

The Vera Wang LOVE collection has resonated with our guests, and we will continue to grow the collection as a foundational part of our wedding business. However, the Jessica Simpson test did not meet our performance hurdles, and we will not be continuing the program.

Turning to Slide 4. You'll see our best-performing holiday categories. In Wedding, it was bridal, solitaires, men's and women's wedding bands and solitaire jewelry. Since July 2010, the wedding categories have consistently performed, and they are a critical pillar to our aspiration of being the Diamond Store.

In fashion, colored diamonds have performed well. And as I mentioned previously, the charm bracelet category, led by our partnership with Neil Travis at Persona, has been a strong sales and margin contributor.

Another initiative that contributed to our results in Q2 and will continue to pay dividends in the future is the alternative credit program. By offering financing options to guests who don't qualify for our primary city program, we've effectively opened the aperture and provided greater access to our brands.

The third initiative that contributed to our revenue improvement is our marketing campaign, which is highlighted on Slide 5. As I have said before, we will never have the loudest voice, but when we speak, we want people to listen. Our integrated marketing approach in Q2 achieved our objectives of leveraging multimedia, being efficient and effective, building emotional affinity to the Diamond Store in Zales and Peoples and supporting the introduction of our proprietary brands.

The investment that we've made in new production will continue to be leveraged in the future, and importantly, the focus in investment that we've made in the Zales brands returned an 8.9% comp in our U.S. Fine Jewelry business for the second quarter. Rich Lennox and our partners at GSD&M have tapped into an emotionally rich vein, which will continue to be mined and we'll continue to develop it.

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