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Zale Corp. Reports Operating Results (10-Q)

March 10, 2011 | About:
10qk

10qk

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Zale Corp. (ZLC) filed Quarterly Report for the period ended 2011-01-31.

Zale Corp. has a market cap of $134.9 million; its shares were traded at around $4.2 with and P/S ratio of 0.1.

Highlight of Business Operations:

During the six months ended January 31, 2011 and 2010, the Canadian currency rate appreciated by approximately five percent and eight percent, respectively, relative to the U.S. dollar. The appreciation in the Canadian currency rate for the six months ended January 31, 2011 resulted in a $7.5 million increase in reported revenues, substantially offset by an increase in reported cost of sales and selling, general and administrative expenses $3.6 million and $2.7 million, respectively. The appreciation in the Canadian currency rate for the six months ended January 31, 2010 resulted in an $8.7 million increase in reported revenues, substantially offset by an increase in reported cost of sales and selling, general and administrative expenses of $4.2 million and $3.1 million, respectively.

Interest Expense. Interest expense as a percentage of revenues for the six months ended January 31, 2011 and 2010 was 6.8 percent and 0.4 percent, respectively. Interest expense increased by $60.8 million to $64.8 million for the six months ended January 31, 2011 as compared to the same period in prior year. The increase is primarily due to a charge totaling $45.8 million associated with the first amendment to our Term Loan on September 24, 2010. In accordance with ASC 470-50, Debt-Modifications and Extinguishments, the amendment is considered a significant modification, which required us to account for the Term Loan and related unamortized costs as an extinguishment and record the amended Term Loan at fair value. The charge consisted of $20.3 million related to the unamortized discount associated with the warrants issued in connection with the Term Loan, a $12.5 million amendment fee, $10.3 million related to the unamortized debt issuance costs associated with the Term Loan and $2.7 million related to the prepayment premium and other costs associated with the amendment. The remaining $15.0 million increase in interest expense is due primarily to interest related to the Term Loan totaling $11.4 million and an increase in the weighted average effective interest rate associated with the revolving credit agreement to 3.6 percent as compared to 1.6 percent for the same period in the prior year.

Net cash used in operating activities increased from $31.5 million for the six months ended January 31, 2010 to $54.7 million for the six months ended January 31, 2011. The $23.2 million increase is the result of: (1) a $73.9 million increase in inventory; (2) a $15.2 million payment related to the Term Loan amendment; (3) a $15.0 million increase in interest payments primarily related to the Term Loan; and (4) an $11.1 million decrease in federal tax refunds. The increase in cash used in operating activities was partially offset by: (1) a $32.4 million decrease related to the timing of vendor payments; (2) a $16.7 million decrease in cash payments related to lease terminations associated with closed stores; and (3) an increase in cash generated from operations.

On May 10, 2010, we entered into an agreement to amend and restate various terms of the revolving credit agreement with Bank of America, N.A. and certain other lenders. The Amended and Restated Revolving Credit Agreement (the Revolving Credit Agreement) consists of two tranches: (a) an extended tranche totaling $530 million, including seasonal borrowings of $88 million, maturing on April 30, 2014 and (b) a non-extending tranche totaling $120 million, including seasonal borrowings of $20 million, maturing on August 11, 2011. The commitments under the agreement from both tranches total $650 million, including seasonal borrowings of $108 million. Borrowings under the Revolving Credit Agreement are capped at the lesser of: (1) 73 percent of the cost of eligible inventory during October through December and 69 percent for the remainder of the year (less certain reserves that may be established under the agreement), plus 85 percent of eligible credit card receivables or (2) 87.5 percent of the appraised liquidation value of eligible inventory (less certain reserves that may be established under the agreement), plus 85 percent of eligible credit card receivables. The rate applied to the appraised liquidation value was 90 percent prior to January 1, 2011. The Revolving Credit Agreement also contains an accordion feature that allows us to permanently increase borrowings up to an additional $100 million, subject to approval by our lenders and certain other requirements. The Revolving Credit Agreement is secured by a first priority security interest and lien on merchandise inventory, credit card receivables and certain other assets and a second priority security interest and lien on all other assets. At January 31, 2011, we had borrowing availability under the Revolving Credit Agreement of $177.4 million.

On September 24, 2010, we amended the Term Loan with Z Investment Holdings, LLC. The amendment eliminated the Minimum Consolidated EBITDA covenant and our option to pay a portion of future interest payments in kind subsequent to July 31, 2010. As a result, all future interest payments will be made in cash. In consideration for the amendment, we paid Z Investment Holdings, LLC an aggregate of $25.0 million, of which $11.3 million was used to pay down the outstanding principal balance of the Term Loan, $1.2 million was a prepayment premium and $12.5 million was an amendment fee. The outstanding balance of the Term Loan after the amendment totaled $140.5 million. In accordance with ASC 470-50, DebtModifications and Extinguishments, the amendment is considered a significant modification, which required us to account for the Term Loan and related unamortized costs as an extinguishment and record the amended Term Loan at fair value. As a result, we recorded a charge to interest expense totaling $45.8 million in the first quarter of fiscal year 2011. The charge consists of $20.3 million related to the unamortized discount associated with the warrants issued in connection with the Term Loan, the $12.5 million amendment fee, $10.3 million related to the unamortized debt issuance costs associated with the Term Loan and $2.7 million related to the prepayment premium and other costs associated with the amendment.

During the six months ended January 31, 2011, we invested approximately $0.4 million in capital expenditures to convert three stores to different nameplates and open one store in Fine Jewelry. We also opened six stores in Kiosk Jewelry. We invested approximately $4.0 million to remodel, relocate and refurbish five stores in Fine Jewelry and to complete store enhancement projects. We also invested $1.1 million in infrastructure, primarily related to our information technology. We anticipate investing approximately $10 million in capital expenditures for the remainder of fiscal year 2011, including $5 million in existing store refurbishments and approximately $5 million in capital investments related to information technology infrastructure and support operations.

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10qk
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