EX-99.1 2 a5338947ex991.txt EXHIBIT 99.1 Exhibit 99.1 Zale Corporation Announces Second Quarter Earnings Results DALLAS--(BUSINESS WIRE)--Feb. 21, 2007--Zale Corporation (NYSE:ZLC), a leading specialty retailer of fine jewelry in North America, today announced adjusted net earnings of $94.8 million or $1.94 per diluted share for the Company's second quarter ended January 31, 2007, after adjustments for derivative accounting under SFAS 133 and a change in methodology in revenue recognition for lifetime jewelry protection plans sold during the quarter. Including these adjustments, the Company reported net earnings under U.S. GAAP of $88.1 million or $1.80 per diluted share. The impact of accounting for gold and silver contracts under SFAS 133 increased net earnings by $2.5 million or $0.05 per share. In addition, during the second quarter the Company expanded its jewelry protection plan sold to customers to cover the lifetime of the product rather than the two year period previously covered. As a result of the change in the underlying commitment, the Company changed from a percentage-of-cost-expected-to-be-incurred to a straight-line method of revenue recognition for new sales. The impact of the change was a reduction in revenue recognized of $14.9 million or $0.19 per diluted share compared to the revenue that would have been recognized by applying the percentages historically utilized to a comparable portion of the received amount. In addition to the $14.9 million, the Company generated an additional $8.8 million in sales of the product for a total of $23.7 million in additional deferred revenue in the second quarter. This revenue recognition change has no impact on cash flow or comparable store sales for the Company. For the same period last year, the Company reported net earnings of $96.7 million, or $1.96 per diluted share excluding special items. In last year's second quarter, the Company recorded, on an after-tax basis, (1) a charge of $15.1 million or $0.30 per diluted share related to the Bailey Banks & Biddle store closings, (2) a tax benefit of $11.5 million or $0.23 per diluted share from repatriated Canadian earnings under the American Jobs Creation Act and (3) a $5.3 million, or $0.11 per diluted share, severance charge in conjunction with an executive management change. Including these items, the Company reported second quarter earnings last year of $87.8 million or $1.78 per diluted share. Total revenues for the quarter ended January 31, 2007 were $1.004 billion compared to $979 million last year, an increase of 2.6%. Last year's total revenues exclude the results of the Bailey Banks & Biddle stores that were closed during the second fiscal quarter of 2006. Including these store closures, total revenues this year increased 1.1% compared to last year's total revenues of $994 million. Comparable store sales for the second quarter increased 1.4%. Year-to-date total revenues, excluding the store closures, increased 2.9% to $1.437 billion, compared to $1.397 billion for the same period last year. Including the store closures, year-to-date total revenues increased 1.1% compared to $1.421 billion for the same period last year. Year-to-date comparable store sales, which exclude the store closures, increased 1.1%. Year-to-date net earnings totaled $61.7 million or $1.26 per diluted share. Included in these earnings are the adjustments for derivative accounting under SFAS 133 and change in methodology in revenue recognition for jewelry protection plans sold during the quarter. The net impact of derivative versus hedge accounting treatment was a $2.3 million loss, or $0.05 per diluted share and a reduction in revenue recognized of $14.9 million or $0.19 per diluted share. Excluding these items, year-to-date net earnings were $73.2 million, or $1.50 per diluted share. For the same period last year, net earnings were $64.2 million, or $1.28 per diluted share. These prior year earnings include, on an after-tax basis, (1) costs related to the closing of Bailey Banks & Biddle stores of $20.3 million, or $0.40 per diluted share, (2) a tax benefit from repatriated Canadian earnings of $11.5 million, or $0.23 per diluted share, and (3) severance payments of $5.3 million, or $0.11 per diluted share. Excluding these items, the Company reported year-to-date net earnings of $78.3 million last year, or $ 1.56 per diluted share. "While not reaching our original expectations for the quarter, I'm pleased with the progress we've made," commented Betsy Burton, Chief Executive Officer. "At the Zales brand, we had our first comparable store increase in three years and our first increase in operating earnings in four years. Customers reacted favorably to our expanded assortment in our core diamond fashion and bridal categories as well as our marketing repositioning." Ms. Burton continued, "While we gave back margins due to aggressive pricing and increased promotional activity at Holiday, in January we changed our focus to maximizing gross profit dollars. In the second half, we will continue maximizing gross profit dollars as well as focus on expense reduction, particularly those investments in payroll and marketing that did not generate sufficient sales gains to justify. We are focused on driving shareholder value over the long-term and believe the Company is being positioned to achieve that goal." Current earnings guidance incorporates current sales and margin trends as well as ongoing payroll investments in the business. The Company projects a third quarter comparable store sales decrease of 2% to 3% and earnings per diluted share in the range of $0.00 to $0.04 and for the fiscal fourth quarter comparable store sales of flat to slightly positive and earnings per diluted share in the range of ($0.05) to ($0.01). The Company expects full year fiscal 2007 diluted earnings per share in the range of $1.46 to $1.52. The Company's guidance excludes the impact of derivative accounting and the change to its jewelry protection plan offering and related revenue recognition. The impact of derivative accounting is not quantifiable because it is market dependent and the expected impact from a change to its jewelry protection plan is approximately ($0.15) in the third quarter and ($0.14) in the fourth quarter. A conference call will be held today at 9:00 a.m. Eastern Time. Parties interested in participating should dial 706-643-7467 five minutes prior to the scheduled start time. A webcast of the call, as well as a replay, will be available on the Company's Web site at www.zalecorp.com. For additional information, contact Investor Relations at 972-580-5047. Zale Corporation is a leading specialty retailer of fine jewelry in North America operating approximately 2,350 retail locations throughout the United States, Canada and Puerto Rico, as well as online. Zale Corporation's brands include Zales Jewelers, Zales Outlet, Gordon's Jewelers, Bailey Banks & Biddle Fine Jewelers, Peoples Jewellers, Mappins Jewellers and Piercing Pagoda. Zale also operates online at www.zales.com and www.baileybanksandbiddle.com. Additional information on Zale Corporation and its brands is available at www.zalecorp.com. This release contains forward-looking statements, including statements regarding the Company's turnaround initiatives and their effects, and sales and earnings guidance for the third and fourth quarters of fiscal year 2007. Forward-looking statements are not guarantees of future performance and a variety of factors could cause the Company's actual results to differ materially from the results expressed in the forward-looking statements. These factors include, but are not limited to: if the general economy performs poorly, discretionary spending on goods that are, or are perceived to be, "luxuries" may not grow and may even decrease; the concentration of a substantial portion of the Company's sales in three, relatively brief selling seasons means that the Company's performance is more susceptible to disruptions; most of the Company's sales are of products that include diamonds, precious metals and other commodities, and fluctuations in the availability and pricing of commodities could impact the Company's ability to obtain and produce products at favorable prices; the Company's sales are dependent upon mall traffic; the Company operates in a highly competitive industry; changes in regulatory requirements or in the Company's private label credit card arrangement with Citi may increase the cost of or adversely affect the Company's operations and its ability to provide consumer credit and write credit insurance; acquisitions involve special risks, including the possibility that the Company may not be able to integrate acquisitions into its existing operations. For other factors, see the Company's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended July 31, 2006. The Company disclaims any obligation to update or revise publicly or otherwise any forward-looking statements to reflect subsequent events, new information or future circumstances. (Tables and reconciliations to follow) ZALE CORPORATION AND SUBSIDIARIES CONSOLIDATED SELECTED FINANCIAL INFORMATION (Unaudited, Dollars in thousands, except per share amounts) Three Months Ended Six Months Ended January 31, January 31, ------------------- --------------------- 2007 2006 2007 2006 ---------- -------- ---------- ---------- Total Revenues 1,004,495 993,749 1,436,983 1,421,388 Comparable Store Sales % 1.4% 1.4% 1.1% 0.6% Cost of Sales 495,151 495,094 702,615 703,905 ---------- -------- ---------- ---------- Gross Margin 509,344 498,655 734,368 717,483 % of Revenue 50.7% 50.2% 51.1% 50.5% Selling, General and Administrative Expenses 346,639 357,155 583,614 594,409 % of Revenue 34.5% 35.9% 40.6% 41.8% Cost of Insurance Operations 1,562 1,591 3,109 3,417 Depreciation and Amortization Expense 15,646 14,569 30,497 29,863 Derivative (Gain)/Loss (1,332) --- 7,228 --- ---------- -------- ---------- ---------- Operating Earnings 146,829 125,340 109,920 89,794 % of Revenue 14.6% 12.6% 7.6% 6.3% ---------- -------- ---------- ---------- Interest Expense, Net 5,637 2,881 10,893 5,237 ---------- -------- ---------- ---------- Earnings Before Income Taxes 141,192 122,459 99,028 84,557 Income Taxes 53,132 34,644 37,362 20,403 ---------- -------- ---------- ---------- Net Earnings 88,060 87,815 61,665 64,154 ========== ======== ========== ========== Basic Earnings Per Common Share: Net Earnings Per Share $1.81 $1.80 $1.27 $1.29 Diluted Earnings Per Common Share: Net Earnings Per Share $1.80 $1.78 $1.26 $1.28 Weighted Average Number of Common Shares: Basic 48,567 48,797 48,389 49,698 Diluted 48,962 49,301 48,807 50,258 ---------------------------------------------------------------------- Reconciliation of GAAP Information to Non-GAAP basis 2nd Quarter FY07, diluted: Three Months Ended Six Months Ended January 31, 2007 January 31, 2007 ------------------- --------------------- Per Amount Share Amount Per Share ---------- -------- ---------- ---------- Net Earnings Per Above $88,060 $1.80 $61,665 $1.26 Impact of Derivatives (1) (2,535) (0.05) 2,256 0.05 Change in Revenue Recognition 9,305 0.19 9,305 0.19 ---------- -------- ---------- ---------- Adjusted Net Earnings $94,830 $1.94 $73,226 $1.50 ========== ======== ========== ========== ---------------------------------------------------------------------- (1) The Company does not utilize hedge accounting for its derivatives. As a result, changes in the fair market value of derivatives and the settlement of derivative contracts are recorded directly to earnings. This adjustment shows the impact on net earnings had hedge accounting been utilized. Reconciliation of GAAP Information to Non-GAAP basis ( 2nd Quarter FY06, diluted) Three Months Ended Six Months Ended January 31, 2006 January 31, 2006 ------------------ ---------------- Per Per Amount Share Amount Share ------------ ------ -------- ------ Net Earnings Per Above $87,815 $1.78 $64,154 $1.28 BBB Closing Expense 15,090 0.30 20,323 0.40 Repatriation Tax Impact (11,465) (0.23) (11,465) (0.23) Executive Severance 5,295 0.11 5,295 0.11 ------------ ------ -------- ------ Adjusted Net Earnings $96,735 $1.96 $78,307 $1.56 ============ ====== ======== ====== ZALE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DATA (Unaudited, Dollars in thousands) Difference January 2007 vs January 31, January 31, January 2006 2007 2006 Amount Percent ----------- ----------- --------- ------- ASSETS Current Assets: Cash and Cash Equivalents $32,282 $37,465 $(5,183) -13.8% Merchandise Inventories 1,118,176 957,356 160,820 16.8% Other Current Assets 95,346 80,214 15,132 18.9% ----------- ----------- --------- ------- Total Current Assets 1,245,804 1,075,035 170,769 15.9% Property and Equipment, Net 299,612 289,328 10,284 3.6% Goodwill, Net 93,385 95,533 (2,148) -2.2% Other Assets 37,225 34,529 2,696 7.8% ----------- ----------- --------- ------- Total Assets $1,676,026 $1,494,425 $181,601 12.2% =========== =========== ========= ======= LIABILITIES AND STOCKHOLDERS' INVESTMENT Current Liabilities: Accounts Payable and Accrued Liabilities $408,184 $449,333 $(41,149) -9.2% Deferred Tax Liability, Net 64,190 56,068 8,122 14.5% ----------- ----------- --------- ------- Total Current Liabilities 472,374 505,401 (33,027) -6.5% Non-current Liabilities 45,023 34,180 10,843 31.7% Non-current Tax Liability, Net 12,860 4,067 8,793 216.2% Long-term Debt 232,729 120,004 112,725 93.9% Long-term Accrued Rent 32,764 30,512 2,252 7.4% Commitments and Contingencies Stockholders' Investment: Common Stock 490 534 (44) -8.2% Additional Paid-In Capital 131,836 95,238 36,598 38.4% Accumulated Other Comprehensive Income 27,426 35,098 (7,672) -21.9% Accumulated Earnings 870,524 819,391 51,133 6.2% ----------- ----------- --------- ------- 1,030,276 950,261 80,015 8.4% Treasury Stock (150,000) (150,000) 0 0.0% ----------- ----------- --------- ------- Total Stockholders' Investment 880,276 800,261 80,015 10.0% ----------- ----------- --------- ------- Total Liabilities and Stockholders' Investment $1,676,026 $1,494,425 $181,601 12.2% =========== =========== ========= ======= CONTACT: Zale Corporation Vice President and Treasurer: David H. Sternblitz, 972-580-5047